Full Judgment Text & Judicial Ruling

2014 C L D 132

[Sindh]

Before Nadeem Akhtar, J

ENGRO FERTILIZERS LIMITED---Plaintiff

Versus

FEDERATION OF PAKISTAN through Secretary, Ministry of Industries, Government of Pakistan, Islamabad---Respondent

Suit No.684 of 2003, decided on 21st October, 2013.

(a) Arbitration Act (X of 1940)---

----Ss. 17 & 30---Award challenged partially---Effect---Undisputed portion of award would be liable to be made rule of court straightaway, while objections regarding its disputed portion could be heard and decided according to law.

(b) Arbitration Act (X of 1940)---

----S. 30---Application for setting aside of award---Duty of applicant stated.

The applicant is required to first point out/show the efforts from the award itself, as the court cannot first look into the material used by the Arbitrator and then compare it with the reasoning given in the award in order to discover the error in the award. If applicant succeeds in pointing out/showing such an error from the award itself, the burden will have still be on the applicant to show that the findings of Arbitrator are contrary to the evidence produced before him. The applicant is also required to show that the error of law or fact in relation to the proceedings or the award is floating on the surface, which cannot be ignored, and if it is left outstanding, it shall cause grave injustice or it shall violate any express provision of law or the law laid down by the Superior Courts.

President of Islamic Republic of Pakistan v. Syed Tasneem Hussain Naqvi and others 2004 SCMR 590; Muhammad Ramzan v. Additional District Judge, Multan and others 2005 SCMR 1542; Federation of Pakistan through Secretary, Ministry of Food, Islamabad and others v. Messrs Joint Venture Kocks K.G./RIST, PLD 2011 SC 506; Mian Corporation through Managing Partner v. Messrs Lever Brothers of Pakistan Ltd. through General States Manager, Karachi PLD 2006 SC 169; Ashfaq Ali Qureshi v. Municipal Corporation, Multan and another 1984 SCMR 597; S. G. Rayon Mills (Pvt.) Limited v. Fida Hussain and Associates 2002 CLC 353; Al-Abdullah Constructors (Pvt.) Ltd. v. Pakistan Water and Power Development Authority through Chief Engineer 2008 CLC 798; Friends Corporation v. Airport Development Agency and another 1997 CLC 626; Messrs Abdullah Traders through Partner Mukhtar Ahmed v. Trading Corporation of Pakistan Ltd. through Chairman, Attorney, Principal Officer and 2 ohers 1999 CLC 2047; Messrs Joint Venture KG/RIST through D. P. Giesler G.M., Bongard Strasse 3,4000, Dusseldorf-30, Federal Republic of Germany, C/o 15 Shah Charagh Chambers, Lahore and 2 others PLD 1996 SC 108; Trustees of the Port of Karachi v. Messrs Iftikhar Brothers 1993 CLC 1491; Messrs Gandhara Consultants (Pvt.) Ltd. v. Pakistan Defence Officer's Housing Authority, Karachi 2010 CLC 506; Razo (Pvt.) Ltd. v. Pakistan Steeel Mills Corporation (Pvt.) Ltd. 2009 MLD 1399; Ghee Corporation of Pakistan Ltd. and others v. Multan Chemicals Ltd. and others 2000 YLR 253; Messrs Waseem Construction Co. v. Government of Sindh and others PLD 1987 Kar. 575; Messrs Ibad and Co. v. Province of Sindh through Secretary to the Government Communication and Works Department and 2 others PLD 1980 Kar. 207; Haji Abdul Hameed and Co. v. Insurance Company of North America and others 1999 YLR 1213; Rais Chiragh-ud-Din v. Muhammad Aslam 2001 YLR 2162; Saifullah Khan and others v. Karachi Customs Agents Association and others 2011 YLR 202; Civil Aviation Authority, Quaid-e-Azam International Airport, Karachi v. AER Rainta International Pakistan (Pvt.) Ltd., Karachi 2003 YLR 1523; Chairman, WAPDA and another v. Messrs Syed Bhais (Pvt.) Ltd. and another 2011 CLC 841 and The Federation of Pakistan, Chamber of Commerce and Industry, Karachi v. Messrs Al-Farooq Builders 2001 MLD 99 ref.

(c) Arbitration Act (X of 1940)---

----S. 30--- Award, setting aside of--- Scope--- Findings given by Arbitrator on merits could not be challenged by applicant or interfered with by court---Well reasoned findings of Arbitrator would not call for interference by Court---Court while deciding objections could neither act as a court of appeal nor reappraise evidence.

Rashid Anwar for Plaintiff.

Mrs. Tabassum Ghazanfar, Standing Counsel.

Dates of hearing: 20th December, 2012 and 14th October, 2013.

JUDGMENT

NADEEM AKHTAR, J.---This judgment will dispose of the objections filed by the defendant to the Award rendered on 16-3-2001 by the learned Sole Arbitrator, Hon'ble Mr. Justice (Retired), Fakhruddin G. Ebrahim, former Judge of the Supreme Court of Pakistan.

2. The dispute between the parties, which was referred to and was decided through the Award by the learned Sole Arbitrator, had arisen out of an Agreement entered into on 16-12-1964 ("the Agreement") between Esso Standard Eastern Inc. and the defendant. There were two claimants before the learned Sole Arbitrator, Exxon Chemical Pakistan Limited (claimant No.1), which was formed and incorporated under the laws of Pakistan; and, Exxon Corporation (claimant No.2), which owned 75% shares of claimant No.1, and was the assignee of Esso Standard Eastern Inc. under Article 8.01 of the Agreement. Vide paragraphs 12 and 13 of the Award, the learned Sole Arbitrator struck off the name of claimant No.2 from the matter before him, on the ground that claimant No.2, not being a party to the Agreement, was unnecessarily joined as a party in the proceedings. Accordingly, the entire claim was examined by the learned Sole Arbitrator with respect to claimant No.1 as the sole claimant.

3. On 20-12-2012, the learned counsel for the plaintiff informed the Court that, in pursuance of an order passed by this Court in Jail Miscellaneous No.42 of 2009, the name of Exxon Chemical Pakistan Limited (original claimant No.1) had been changed, and all the rights and interests therein now vest in Engro Fertilizers Limited. It was prayed by the learned counsel that the name of the original claimant No.1/plaintiff be treated and read in these proceedings as Engro Fertilizers Limited. With the consent of the learned Standing Counsel, it was ordered accordingly.

4. The relevant facts giving rise to the dispute between the parties were that in pursuance of the Agreement, a plant was established by the plaintiff at Daharki, District Sukkur ("the plant"), for production of fertilizer ("Urea"). The plant commenced operation on 15-12-1968. The price of Urea and other matters incidental thereto, were to be dealt with in accordance with the terms and conditions of the Agreement. The dispute that was referred by the parties to the learned Sole Arbitrator pertained to certain claims made by the plaintiff against the defendant and the rights and liabilities of the parties arising therefrom under the Agreement. After examining the claim and the material on record, the learned Sole Arbitrator opined that the claims of the plaintiff may be broadly sub-divided into two groups; namely, "(a) Claim for marketing markup/incidentals", and "(b) Refund of amounts charged by way of Development Surcharge". The plaintiff's claims under the above two groups were further segregated by the learned Sole Arbitrator under various heads and were examined by him in depth. In order to appreciate the objections filed by the defendant, it is necessary to briefly discuss the findings of the learned Sole Arbitrator and the reasons of such findings given by him.

5. (a) Claim for marketing markup/incidentals: These claims comprised of marketing markup/incidentals for the year 1985 and for the period from 1-1-1986 to 19-5-1986 ("the relevant period"). They included claims for storage losses and other costs, regional office charges, foreign exchange loss on regional office charges, donations, excess of interest income over expense, dispatch monies earned, profit on sale of fixed assets, and rounding off of Paisas by the defendant. While dealing with the above claims, the learned Sole Arbitrator examined and referred to all the relevant Articles; namely, 3.01, 3.03, 4.01, 4.02, 5.01, 5.03, 7.10 and 7.11 of the Agreement, which have also been reproduced by him in the Award. In paragraphs 14 and 15 of the Award, it was observed by the learned Sole Arbitrator that the term "marketing markup" had a very wide scope under Article 5.01 of the Agreement; in terms of the said Article, during any period when fertilizer prices were not controlled or subsidized by the Government, the plaintiff was entitled to charge its dealers the price of Urea calculated at a sum of transfer value plus marketing markup in accordance with the said Article; the figure for marketing markup for any given year (except the first year) was to be arrived at by dividing the total cost of distributing and marketing incurred during the preceding year of plant operation by the metric tons of fertilizer sold during the preceding year of plant operation; and, the plaintiff was also entitled to receive marketing profit equal to 2% of the applicable transfer value. In paragraph 16 of the Award, it was observed by the learned Sole Arbitrator that under Article 5.03 of the Agreement, if fertilizer prices were controlled or subsidized by the Government, the plaintiff could charge its dealers prices of Urea equal to the controlled or subsidized price less the dealer's margin; and, if the price of Urea so calculated was less than the sum of transfer value plus marketing markup, the Government was bound to pay to the plaintiff an amount equal to the difference. In view of his above observations, the learned Sole Arbitrator held in paragraph 17 of the Award that the plaintiff was entitled to charge or receive, as the case may be, the price of Urea equal to the sum of the transfer value plus marketing markup, irrespective of whether the price of Urea was controlled or subsidized by the Government in any given year.

6. It was the plaintiff's case before the learned Sole Arbitrator that on account of excess supply of fertilizer in the year 1984, the plaintiff was compelled to incur increased marketing and distribution costs to promote sales of Urea; the dealers were obliged to carry out marketing campaign for increased use of Urea by the farmers; the plaintiff was obliged to sell Urea on credit basis and to deliver the same at the farmers' doorstep; and, the controlled price fixed by the defendant for the said year was unreasonably high which further contributed to excess supply in the domestic market. The above assertions were denied by the defendant by alleging that there was no excess supply of fertilizer during the said period; the plaintiff itself contributed to the alleged excess supply by increasing its annual capacity in violation of Article 1.03 of the Agreement; the alleged marketing allowance paid by the plaintiff to its dealers was in fact commission, which was increased by the plaintiff without authorization, without the defendant's consent and in violation of the Agreement; the commission paid by the plaintiff to its dealers covered all necessary marketing expenses; and, despite the defendant's requests, the plaintiff had failed to provide detailed information of the actual payments made by it to its dealers. The above allegations made by the defendant were denied by the plaintiff by clarifying that the production of Urea had tripled within a short span of four year as three plants approved by the defendant had gone into production; the control price fixed by the defendant was unrealistically high; there was a sharp decline in agriculture production during the said period resulting into suppression in domestic demand of Urea; and, the supply and availability of Urea far exceeded its domestic demand during the said period.

7. After closely examining the figures/tables produced by P.W.1 in support of this particular claim, the learned Sole Arbitrator, in paragraphs 24 and 25 of the Award, came to the conclusion that the same were supported by the official figures released by the Federal Directorate of Fertilizer Imports, Government of Pakistan. In paragraph 26 of the Award, it was particularly noticed by the learned Sole Arbitrator that D.W.1 did not question the said tables produced by P.W.1, and despite the fact that D.W.1 stated that he would confirm whether the figures given in the said two tables were in accordance with FDFI reports or not, no questions were put to him in this regard in his re-examination. In paragraph 27 of the Award, it was further noticed by the learned Sole Arbitrator that D.W.1 had admitted that the supply far exceeded the demand during the relevant period due to the permission granted by the defendant for setting up fertilizer production plants and by agreeing to give guaranteed returns to the producers; on account of excess supply in the years 1984-85, the defendant allowed Urea to be exported; and, there was increase in the control price of Urea, but the same was due to the reason that Urea prices had increased with the increase in support price of major crops. In view of the un-rebutted evidence produced by the plaintiff and admissions made by D.W.1, the learned Sole Arbitrator held that in a situation where supply far exceeded the demand of Urea, the plaintiff was justified, indeed obliged, to take extra measures for marketing and distribution of Urea, and thereby to incur increased cost for the same; and, the auditors had duly certified such costs, and the plaintiff could not be denied reimbursement of the same. On the basis of his above findings, the learned Sole Arbitrator opined that it was for the manufacturer/plaintiff to decide as to what steps were needed to market its product in a given situation, and if the steps taken had nexus with the product and its sale, the wisdom of the manufacturer in taking such steps was not open to question.

8. The plaintiff's claim of marketing markup/incidentals was considered, analysed, discussed and decided by the learned Sole Arbitrator by sub-dividing the said claim in the following manner and under the following heads:--

9. A. Marketing Allowance for the relevant period:

Rs.41,886,000.00 plus Rs.8,788,000.00

The plaintiff had pleaded before the learned Sole Arbitrator that the least expensive method in the marketing and sale of Urea was adopted during the relevant period. It was observed by the learned Sole Arbitrator that no doubt the plaintiff had the option to enlarge its own marketing facilities, but doing so would have permanently increased the marketing cost; since the excess supply was admittedly considered to be temporary, the decision of the plaintiff of giving marketing allowance to its dealers, was understandable; if, on the other hand, the plaintiff had simply increased the commission payable to the dealers, it would have found it difficult to backtrack once the situation had improved; the dealers' commission was to meet a normal sale while the marketing allowance was in the nature of ad hoc assistance to the dealers to enable them to undertake expenditure for promoting sales in a situation where there was excess supply. It was noticed by the learned Sole Arbitrator in paragraph 32 of the Award that there was nothing in the Agreement to prevent the plaintiff from paying a marketing allowance to the dealers. It was once again observed by the learned Sole Arbitrator that the judgment of the manufacturer in this context must prevail. The defendant's contention that the dealers actually sold the Urea at a price lower than the control price, was rejected by the learned Sole Arbitrator in paragraph 33 of the Award on the ground that such contention was not supported by any evidence. The contention of the defendant that the plaintiff had failed to provide details of the expenditure incurred by the dealers, was also rejected in paragraph 34 of the Award on the ground that the same was irrelevant as, under the Agreement, the claimant was required only to show that it had incurred particular costs in relation to marketing of Urea, and no further details were to be provided by the plaintiff. The objection raised by the defendant regarding increase of the Urea production in the year 1985 by the plaintiff beyond the designated capacity of 173,000 metric tons per annum, was dealt with by the learned Sole Arbitrator in paragraphs 35 to 38 of the Award. It was held by the learned Sole Arbitrator that the plaintiff should have obtained express permission from the defendant for the increased production in accordance with the Agreement, and in the absence of express permission, the plaintiff could not rely either on the BMR facilities granted by the defendant or the defendant's alleged failure in objecting to the increase production. It was further held that the additional cost of marketing allowance could not be foisted upon the defendant in respect of Urea produced by the plaintiff in excess of the agreed designated capacity. On the basis of his above findings, the plaintiff was awarded Rs.34,906,210.00, as against its claim of Rs.41,886,000.00, towards marketing allowance for the year 1985 at the rate of Rs.201.77 per metric tons for 173,000 tons. The entire amount of Rs.8,787,886.00 claimed for the period from 1-1-1986 to 19-5-1986, was also awarded to the plaintiff.

10. B. Regional Office Charges: Rs.693,000.00 plus Rs.239,000.00

This claim made by the plaintiff was dealt with in paragraphs 40 to 43 of the Award. It related to the charges of allocation of Regional Headquarters, Hong Kong, which included the foreign exchange loss for the year 1985. The basis of this claim was that the nature of advisory assistance provided by the Regional Headquarters necessitated a 50:50 devisor. It was observed by the learned Sole Arbitrator that it was an admitted position that the plaintiff used to allocate its overhead cost in the ratio of 60:40 between manufacturing cost and the marketing and distribution cost, and the overhead cost of the Regional Headquarters was a sum of costs incurred in respect of marketing and costs incurred in the marketing and distribution activities of the plaintiff. It was held by the learned Sole Arbitrator that if the plaintiff had sought to alter the ratio of 60:40 to 50:50, it ought to have produced evidence to justify such alteration; in the absence of any evidence that 50% of the overhead cost incurred at Regional Headquarters was in relation to the marketing and distribution activities, there was no reason to alter the 40% allocation made by the defendant; and, the defendant had not acted unreasonably in maintaining the 60:40 ratio. This claim was rejected by the learned Sole Arbitrator in view of his above findings.

11. C. Marketing of Imported Fertilizer: Rs.2,524,000.00 plus Rs.911,000.00

This claim, which was dealt with in paragraphs 44 to 46 of the Award, was in relation to the cost incurred by the plaintiff in marketing and distributing imported fertilizer. It was observed by the learned Sole Arbitrator that the plaintiff had not denied that the total marketing and administrative overhead cost claimed by it included Urea manufactured by it at the plant as well as fertilizer imported or handled by it. This claim was rejected by the learned Sole Arbitrator mainly on the ground that the proceedings before him pertained only to the Urea manufactured by the plaintiff at the plant, and any claim unrelated to such Urea had to be excluded from the ambit of the said proceedings.

12. D. Claim related to Daharki: Rs.1,809,827.00 plus Rs.395,000.00

This claim was dealt with in paragraphs 47 to 56 of the Award. It was related to storage losses at field warehouses claimed by the plaintiff in the sums of Rs.37,000.00 and Rs.7,000.00 for the year 1985 and part of the year 1986, respectively ; and, cost relating to product movement and storage of bagged Urea at the marketing facilities at Daharki and the Urea re-bagging cost at field warehouse claimed by the plaintiff in the sums of Rs.1,772,827.00 and Rs.388,000.00 for the year 1985 and part of the year 1986, respectively. In support of these claims, the plaintiff had relied upon Exhibit 32, which were the minutes of the meeting held on 6-12-1983, wherein the then Secretary Industries had suggested that steps be taken to segregate marketing warehouses at Daharki. It was observed by the learned Sole Arbitrator that the defendant had not denied Exhibit 32, but it was questioned as to whether the Ministry of Industries was the relevant Ministry in this regard. It was held by the learned Sole Arbitrator that the allegation made by the defendant was belied by the very minutes of the meeting and the fact that during the course of arguments, the defendant's learned counsel did not demonstrate, by reference to the Rules of Business, that the Ministry of Industries was in fact not the relevant Ministry. The defendant had denied these claims on the grounds that as the same had been incurred at Daharki, the same were part of the production cost having already been duly compensated for by the transfer price and could not be claimed as marketing and distribution cost; all costs incurred at Daharki was in fact manufacturing cost; and, there was no separate marketing area or activity at Daharki. The defendant had maintained that if the said claims were allowed, it would tantamount to increasing the ex-factory price of Urea mentioned in the Agreement, which could not be done without a mutual Agreement. It was noticed by the learned Sole Arbitrator that, in his cross-examination, D.W.1 had asserted that no segregation of warehouses took place at Daharki, but no such statement was made by him in his examination-in-chief, nor was P.W.1 confronted with this allegation. It was further noticed that D.W.1 had admitted that there was no document on record to show that the defendant had alleged that the segregation referred to in Exhibit 32, did not in fact take place. It was also noticed that no document was brought on record by the defendant to contradict the said Exhibit 32. It was held by the learned Sole Arbitrator that the marketing facility at Daharki was segregated at the suggestion of the defendant, therefore, the cost incurred was part of marketing incidentals; it was the act itself, which had to determine whether it was an act relating to manufacturing or relating to marketing and distribution and not the place where the cost in relation to the act was incurred; and, the defendant had wrongly denied these claims. It was further held that the costs incurred at Daharki, could not be denied to the plaintiff, and accordingly, the entire claim of Rs.2,204,827.00 made by the plaintiff in this behalf, was allowed by the learned Sole Arbitrator.

13. E. Claim for donations: Rs.14,531.00 plus Rs.8,675.00

This claim was dealt with in paragraphs 57 and 58 of the Award. The plaintiff had pleaded that donations were given by it to improve the image of the Company, therefore, the same be treated as marketing incidentals in view of the fact that because of donations, not only the image of the Company had improved, but the magnitude of the sale of its products had also increased many times. It was held by the learned Sole Arbitrator that donations may improve the image of the Company, but may not necessarily result in increased sales, and in the absence of any evidence showing direct nexus between donations and the sale of Urea, donations could not be treated as part of marketing cost. This claim of donations was rejected by the learned Sole Arbitrator.

14. F. Adjustment of interest income: Rs.1,274,609.00 plus Rs.377,886.00

This claim was dealt with in paragraphs 59 to 61 of the Award. Justifying adjustment of interest income, it was pleaded by the defendant that interest earned should be deducted from the interest cost incurred. It was further pleaded that such adjustments had been made in the past also. The plaintiff had opposed such adjustments by stating that any earlier adjustment was insignificant. It was observed by the learned Sole Arbitrator that the excess interest sought to be adjusted by the defendant, related to interest on dividend not yet disbursed and interest on fund obtained from the defendant under the Export Finance Scheme, and none of these items had any nexus with marketing or distribution of Urea. The learned Sole Arbitrator held that it was the legality of the adjustment that needed to be examined and not its quantum; there was no provision in the Agreement for making this or any other adjustment, the adjustment could not be sustained; the defendant's reliance on Article 5.01(2) was misconceived; and, the adjustment by the defendant was unwarranted. In view of his above findings, the entire claim of Rs.1,652,495.00 made by the plaintiff in this behalf, was allowed by the learned Sole Arbitrator.

15. G. Adjustment of other income: Rs.259,489.00 plus Rs.34,698.00

This claim, which was dealt with in paragraphs 62 and 63 of the Award, was sought to be adjusted by the defendant against the claim of marketing…

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