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Official Citation: 2025 IHC 10
Court / Jurisdiction: Islamabad High Court
Year of Decision: 2024
Decision Date: 2024-12-31
Parties: PEB Steel Alliance Limited vs Earthquake Reconstruction & Rehabilitation JUDGMENT
Ruling Summary: This decision was rendered by the Islamabad High Court on 2024-12-31, officially reported as 2025 IHC 10. In this matter between PEB Steel Alliance Limited and Earthquake Reconstruction & Rehabilitation JUDGMENT, the court adjudicated key questions of statutory construction, procedural regularity, and legal precedent under Pakistani law.
Core Holding: The honorable bench evaluated governing statutory provisions and judicial authorities to establish the rights of the parties, delivering the binding reasoning set out below.
Case cited as 2025IHC10
Court Name: Islamabad High Court Judge(s): Miangul Hassan Aurangzeb, Saman Rafat Imtiaz Title:PEB Steel Alliance Limited vs Earthquake Reconstruction & Rehabilitation
JUDGMENT
Reported As: 2025 IHC 10, 2025 CLC 605, PLJ 2025 Islamabad 109 Result: Appeal Allowed Judgment
JUDGMENT MIANGUL HASSAN AURANGZEB, J:- Through this judgment, we propose to decide F.A.O.No.108/2019 and C.R.No.136/2019 since they entail certain common features. 2. Through F.A.O.No.108/2019 the appellant, PEB Steel Alliance Limited ("PEB"), impugns the order dated 13.05.2019 passed by the Court of the learned Civil Judge, Islamabad, whereby application filed by respondent No.3, M/s Ascent & Asian Construction Company ("A&ACC") and respondent No.4, M/s Buildcore ("Buildcore"), under Section 34 of the Arbitration Act, 1940 ("the 1940 Act") was allowed, and the proceedings in the suit instituted by the appellant were stayed. 3. Through C.R.No.136/2019 the petitioners, Earthquake Reconstruction and Rehabilitation Authority ("ERRA"), and Provincial Earthquake Reconstruction and Rehabilitation Agency ("PERRA"), impugn the order dated 18.09.2018 passed by the learned Civil Court dismissing the application filed by the said parties under Order VII, Rule 11 of the Code of Civil Procedure, 1908 ("CPC") praying for the rejection of the plaint in the suit instituted by PEB. 4. The essential facts are that in the year 2008, ERRA had published an advertisement inviting bids for the award of the contract for the construction of 124 Earthquake Resistant Structures for Primary and High Schools in Districts Battagram and Shangla in the Province of Khyber Pakhtunkhwa, formerly known as North-West Frontier Province ("N.- W.F.P."). These projects were undertaken with the assistance of a loan from the Asian Development Bank ("ADB"). 5. PEB is a company incorporated under the laws of the People's Republic of Bangladesh. It wanted to participate in the tender bidding process. For this purpose, a joint venture was formed between
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PEB, A&ACC and Buildcore ("the JV"). On 21.10.2008, the said parties executed a formal joint venture agreement ("JV Agreement"). Prior to the execution of the said agreement, the said parties had submitted a bid for the award of the works titled "Pre-Engineered (Light Gauge Cold Formed Galvanized Steel) Structure 121[(102 Primary Schools), (14 Middle Schools) and (5 High Schools)] in Shangla and Batgram District N.-W.F.P." The bid submitted by the JV was accepted by ERRA. 6. On 20.11.2008, two contracts were entered into between PERRA and the JV. The first one was for Lot No.1D (25 Units in District Battagram) for a contract price of US Dollars 1,445,000 and Rs.136,715,000/-, and the second for Lot No.1C (36 Units in District Battagram) for a contract price of US Dollars 2,545,000 and Rs.210,620,000/-. The steel structures for the units under the said contracts were to be manufactured by PEB in Bangladesh and shipped to Pakistan. 7. PEB asserts that for the steel structures shipped from Bangladesh, payment should have made to it without deduction of any income tax. PEB claimed US Dollars 291,106 as reimbursement of income tax. Furthermore, it was asserted that US Dollars 423,469 should have been paid directly to PEB in Bangladesh through a Letter of Credit ("L/C") instead of being paid into a local bank account which was operated only by A&ACC and Buildcore. PEB had also made a claim of Rs.3,739,500/- as reimbursement of the cost of unused Glass Wool and Rs.5,853,182/- as warehouse expenses. Vide letter dated 09.08.2016, PEB asked A&ACC to take up the matter regarding PEB's claims with PERRA. Having not received any response from A&ACC, PEB directly wrote to PERRA on 28.09.2016 seeking the constitution of a Dispute Resolution Board ("DRB") in terms of clause 45.1 of the contracts executed between PERRA and the JV. 8. Vide letter dated 03.01.2017, ERRA informed PEB that the final bill for an amount equivalent to US Dollars 423,469 had been paid into the JV account and that this also included the amount payable under Interim Payment Certificate ("IPC") No.84. It was clarified that the said amount had not been paid through L/C as the closing date for the loan from the ADB was 30.06.2011 and PEB did not submit its claim for payment through L/C to the concerned bank in Bangladesh in time. ERRA expressed its inability to intervene in the matter since the payment had already been made in the JV account. 9. On 21.02.2018, PEB instituted a suit for the recovery of damages against ERRA, PERRA, A&ACC and Buildcore before the Court of the learned Civil Judge, Islamabad. A&ACC and Buildcore filed an application under Section 34 of the 1940 Act for the proceedings in the suit to be stayed due to the arbitration clause in the JV Agreement. ERRA and PERRA filed an application under Order VII, Rule 11 CPC praying for the plaint in PEB's suit to be rejected on the ground that there was no contractual relationship between ERRA and the JV. Another ground taken in the said application was that PERRA was performing functions in the Province of Khyber Pakhtunkhwa which was beyond the territorial jurisdiction of the learned Civil Court at Islamabad. Furthermore, it was pleaded that the two contracts dated 20.11.2008 were executed between PERRA and the JV at Mansehra, Khyber Pakhtunkhwa. 10. Vide order dated 18.09.2018, the learned Civil Court dismissed ERRA and PERRA's application under Order VII, Rule 11 CPC. Vide order dated 13.05.2019, A&ACC and Buildcore's application under Section 34 of the 1940 Act was allowed and the proceedings in the suit were stayed. The said orders dated 18.09.2018 and 13.05.2019 are under challenge in F.A.O.No.108/2019 and C.R.No.136/2019, respectively. 11. Learned counsel for the appellant / PEB, after narrating the facts leading to the filing of the instant appeal, submitted that the steel structures for the units under the two contracts executed between PERRA and the JV were manufactured and supplied by PEB; that payment for the said supply had to be made through L/C without deduction of any withholding tax; that instead of paying the final bill to PEB through L/C, ERRA/PERRA paid the same into the JV's bank account in Pakistan which could only be operated by A&ACC and Buildcore; that A&ACC and Buildcore have
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not paid PEB the amount equivalent to US Dollars 423,469 deposited by PERRA into the JV's bank account in Pakistan; that PERRA deliberately paid the amount of Rs.204 million into the JV's bank account in Pakistan so that PEB is deprived of its due share of the contractual payment; that for a period of three years, PEB had been receiving funds directly from PERRA, but the last payment was made into the JV bank account which PEB could not operate; that under the terms of the JV Agreement, out of the agreed rate of US Dollars 21 per square foot, US Dollars 17 per square foot had to be paid to PEB without deduction of income tax, whereas US Dollars 4 per square foot was the share of the other JV partners; that vide notice dated 08.09.2016, PEB requested A&ACC (the lead partner of the JV) to request PERRA to constitute a DRB but no response was given to such request; that PEB's claim against ERRA and PERRA on the one hand and A&ACC and Buildcore on the other could not be bifurcated; that PEB had made serious allegations of fraud which could only be adjudicated upon in a civil suit; and that the learned Civil Court correctly dismissed ERRA and PERRA's application under Order VII, Rule 11 CPC but erred in allowing A&ACC and Buildcore's application under Section 34 of the 1940 Act. Learned counsel for PEB prayed for the appeal to be allowed and for the revision petition to be dismissed. 12. On the other hand, learned counsel for respondents No.1 and 2 / ERRA and PERRA submitted that PEB's dispute was with its two JV partners and not with ERRA or PERRA; that since the JV Agreement admittedly contains an arbitration clause, there was nothing preventing PEB from instituting arbitration proceedings against its two joint venture partners; that PERRA committed no illegality by paying the amount equivalent to US Dollars 423,469 against IPC No.84 into the designated account of the JV, i.e. account No.111-7900269410 at Habib Bank Limited, Circular Road Branch, Gujrat; that under the law, PERRA was obligated to deduct withholding tax from the amount paid into the designated account of the JV; that the contracts dated 20.11.2008 contained no provision which obligated PERRA to make any payment directly to PEB; and that the contracts dated 20.11.2008 between PERRA and the JV were signed and executed at Mansehra and that Islamabad had no nexus with the dispute between the parties to the said contracts dated 20.11.2008. Learned counsel for ERRA and PERRA prayed for the civil revision petition to be allowed and for the plaint in PEB's suit to be rejected. 13. Mr. Aftab Alam Yasir, learned counsel for respondents No.3 and 4 / A&ACC and Buildcore submitted that the disputes between PEB on the one hand and A&ACC and Buildcore on the other have to be resolved in accordance with the dispute resolution mechanism enshrined in clause 18 of the JV Agreement; that the said clause provides for the resolution of disputes between the said parties through arbitration to be conducted at Lahore; that A&ACC and Buildcore are ready, willing and able to participate in the arbitration proceedings as and when instituted by PEB in accordance with the law; and that it would not be appropriate for this Court to delve into the merits of the contractual dispute between the said parties. Learned counsel for A&ACC and Buildcore prayed for the appeal to be dismissed. 14. We have heard the contentions of the learned counsel for the contesting parties and have perused the record with their able assistance. The facts leading to the filing of the instant appeal as well as the revision petition have been set out in sufficient detail in paragraphs 4 to 10 above and need not be recapitulated. 15. The primary dispute agitated by PEB was that PERRA, instead of paying an amount equivalent to US Dollars 423,469 directly to PEB through L/C, paid the same into a bank account which was operated by A&ACC and Buildcore who were PEB's joint venture partners. The letter dated 19.09.2014 from the office of the Deputy Director Reconstruction (Battagram) shows that Rs.204 million equivalent to US Dollars 423,469 at the time of payment had been deposited in the JV's designated bank account No.111-7900269410 at Habib Bank Limited, Circular Road Branch, Gujrat. Additionally, the letter dated 03.01.2017 from ERRA shows that the said amount had been paid into the JV's
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account instead of making payment to PEB through L/C because the ADB's loan closing date was 30.06.2011 and PEB had not submitted its claim for payment through L/C to the concerned bank in Bangladesh in time. The bank account in which payment equivalent to US Dollars 423,469 was made could only be operated by A&ACC and Buildcore who, according to the learned counsel for PEB, had not paid PEB's share in the said amount in accordance with the terms of the JV Agreement. 16. The JV Agreement sets out the mechanism as to how payments received from PERRA were to be distributed between the JV partners. Clause 3(b) of the JV Agreement provides that as compensation for the performance of the steel component of the works, the JV shall cause to be issued by PERRA L/C at the rate of US Dollars 17 per square foot as the entire payment for due performance of the steel component of the works. Clause 3(c) provides that for the steel component of the works, a rate of US Dollars 21 per square foot is stated in the contract executed between the JV and PERRA. Furthermore, the said clause provides that the difference between US Dollars 17 per square foot and US Dollars 21 per square foot was to be paid exclusively to A&ACC and Buildcore. 17. It is not disputed that the JV Agreement executed between the three joint venture partners contains an arbitration clause. In this regard, clause 18 of the said agreement is reproduced herein below:- "18) Dispute Resolutions: a) All disputes with respect to performance of the Works and the Contract, and all disputes arising out of the JVA shall, in the first instance, be resolved by good faith mutual negotiation between the respective Parties, failing which the matter shall be submitted by the Parties to arbitrators, one nominated by each Party to the disputes. b) In case the dispute is between only two Parties, the two nominated arbitrators before entering upon arbitration, shall appoint an Umpire, who shall decide the dispute if the arbitrators are unable to arrive at a unanimous decision." 18. It is solely on the basis of the said arbitration clause that the learned Civil Court stayed the proceedings in the suit instituted by PEB. 19. Now, clause 2.2 of the contracts dated 20.11.2008 executed between PERRA and the JV provides inter alia that the employer shall instruct its bank to issue an irrevocable confirmed documentary credit made available to the contractor in a bank in the country of the contractor. Furthermore, it provides that the credit shall be for an amount of US Dollars 1,037,000 less the advance payment to be made for pre-engineered structures supplied from abroad. It is on the basis of the said clause that PEB asserts that the payment should have been made to PEB through L/C instead of payment into the JV's bank account which could not be operated by PEB. 20. The said contracts dated 20.11.2008 also contain a mechanism for the settlement of disputes arising from and related to the said contracts. Clause 44 thereof requires the dispute to be referred in the first instance to the Project Manager and if a party is dissatisfied with his decision of the Project Manager, the dispute can be referred within a specified timeframe to the Dispute Board. It is crucial to bear in mind that after PEB filed the suit, PERRA did not file an application under Section 34 of the 1940 Act praying for the proceedings in the suit to be stayed. 21. A defendant against whom a suit is filed with respect to a matter which was to be resolved with a plaintiff through arbitration will have the right to apply to the Court where such suit is pending for the proceedings to be stayed so that disputes which are the subject matter of a suit are resolved by the forum to which the parties had agreed. Where such application is filed, a Court ought to stay the proceedings in the suit unless it finds that a defendant has filed a written statement or has taken steps in the proceedings. But in the event a defendant makes no such application, a Court cannot, on its own motion, either stay the proceedings in the suit or reject the plaint. Therefore, we
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are of the view that the learned Civil Court erred by staying the proceedings in the suit also against PERRA on the basis of the arbitration clause in the JV Agreement to which PERRA was not even a party. 22. For the purposes of the instant case, it will be necessary to look at the provisions of Section 34 of the 1940 Act which we set out below:- "34. Where any party to an arbitration agreement or any person claiming under him commences any legal proceeding against any other party to the agreement or any person claiming under him in respect of any matter agreed to be referred, any party to such legal proceedings may, at any time before filing a written statement or taking any other steps in the proceedings, apply to the judicial authority before which the proceedings are pending to stay the proceedings; and if satisfied that there is no sufficient reason why the matter should not be referred in accordance with the arbitration agreement and that the applicant was, at the time when the proceedings were commenced, and still remains ready and willing to do all things necessary to the proper conduct of the arbitration, such authority may make an order staying the proceedings." 23. Where parties to a contract have agreed to resolve their disputes through arbitration, ordinarily the Court must hold the parties to their bargain, but this is not an absolute rule. The power conferred upon the Court to grant a stay under Section 34 of the 1940 Act is entirely a matter of discretion of the Court. The expression "such authority may make an order staying the proceedings" clearly indicates that the Court has the discretion to stay the suit or not. It is a judicial discretion intended to be exercised to further the ends of justice. The discretion has to be exercised having regard to the peculiar facts in each case and the conduct of the parties up to the date of the hearing of the application. The occasion for the exercise of discretion to stay the proceedings does not arise unless all the conditions stated in Section 34 of the 1940 Act are fulfilled. If all the conditions for staying the legal proceedings are satisfied, and if there are no sufficient reasons otherwise, the Court may stay the proceedings. The onus must shift on a plaintiff to show that notwithstanding the fulfillment of the conditions, there are sufficient reasons why the matter should not be referred to arbitration. The discretion in refusing to stay legal proceedings should be exercised by the Court in a sparing and cautious manner as a prima facie duty is cast upon the Courts to act upon the agreement. We say so on the basis of the following case law:- (i) In the case of Eckhardt & Co. Marine GmbH Vs. Muhammad Hanif (PLD 1993 SC 42), it was held as follows:- "There is no cavil about the proposition that under section 34 of the Arbitration Act, stay can be refused by the Court if it is satisfied that there is no sufficient reason for making reference to arbitration and substantial miscarriage of justice would take place or inconvenience would be caused to the parties if stay is granted. No hard and fast rule can be laid down or line of demarcation can be drawn to say in what cases refusal can be made. Each case has different, facts and grant or refusal of stay is dependent upon peculiar facts and circumstances of each case. The Court can make objective assessment and come to the conclusion whether stay of legal proceedings can be granted or refused." (ii) In the case of Uzin Export Import Foreign Trade Co. Vs. Macdonald Layton & Co. Ltd. (1996 SCMR 690), it has been held as follows:- "4. By entering into an agreement and referring the dispute to an arbitration, the jurisdiction of the Court is not ousted. The Court has the jurisdiction to entertain suits for adjudication of claims of parties containing arbitration clause, but subject to the provision of law that the Court in its discretion may stay such suits. Therefore, the Court has to consider whether discretion should be exercised in a particular case or not. Such discretion is to be exercised judicially, reasonably and taking into consideration all the facts and circumstances of the case."
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24. The Indian Supreme Court in the case of Rachappa Gurudappa Bijapur Vs. Gurudiddappa Nurandappa (AIR 1989 SC 635 = 1989 (3) SCC 245) had occasion to analyze the provisions of Section 34 of the 1940 Act. It was held that in order to have the proceedings in the suit stayed, there must be an arbitration agreement between the parties covering the disputes in question. It was further held that Section 34 stipulates that in order that stay may be granted, it is necessary that certain conditions are fulfilled. The conditions laid down in the said report for the exercise of discretion to stay the proceedings under Section 34 are extracted below:- "(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, in this case the suit, 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, the suit in this case; (iv) The applicant must have taken no steps in the proceeding after appearance; (v) The applicant must satisfy that only the applicant was at the time when the proceedings were commenced, ready and willing to do everything necessary for the proper conduct of the arbitration; and (vi) The court must also be satisfied that there was no sufficient reason why the matter should not be referred to arbitration." (Emphasis added) 25. The conditions laid down by the Indian Supreme Court in the case of Rachappa Gurudappa Bijapur Vs. Gurudiddappa Nurandappa (supra) for allowing an application under Section 34 of the 1940 Act were echoed by the Hon'ble High Court of Sindh in the case of Tradesmen International (Pvt.) Ltd. Vs. Federation of Pakistan (2005 MLD 541). In the said report, it was also held as follows:- "It is settled, position in law that existence of Arbitration clause simpliciter would not oust or bar the jurisdiction of the Court, despite existence of Arbitration clause. Court for sufficient reason may not deem it expedient to stay the suit and or refer the matter to arbitration. Arbitration agreement merely provides alternate forum for the resolution of the differences that may crop up between the parties and covered by the arbitration agreement. Stay of legal proceedings and reference to arbitration is subject to the objective satisfaction of the Court that there is no sufficient reason why the matter should not be referred to the arbitration." 26. PEB's suit is not just against its JV partners but also against ERRA and PERRA. It is a judicially recognized fact that it has become common place for unscrupulous litigants to rope other parties in addition to the party with whom they have an arbitration agreement as defendants in a suit in order to avoid the proceedings in the suit being stayed on account of such an agreement. In the case of Ovex Technologies (Pvt.) Ltd. Vs. PCM PK (Pvt.) Ltd. (PLD 2020 Islamabad 52), this Court inter alia held as follows:- "35. It has consistently been held that where a certain party who is a stranger to the arbitration agreement is joined as a co-defendant, and a Court finds that the said party was made a co- defendant in the suit only for the purpose of escaping from the arbitration agreement, the Court would not reject the application for stay and would hold that the suit as against the co-defendant was frivolous and vexatious. However, there are a few instances where Courts in such circumstances have turned down applications for stay on the ground that to stay the suit and permit arbitration would result in splitting up of the action and to avoid the possibility of conflicting decisions in the arbitration proceedings and in the Court." 27. It needs to be determined whether in the case at hand the impleadment of ERRA and PERRA as defendants in the suit along with A&ACC and Buildcore was motivated with the ill-intention to defeat the arbitration clause in the JV Agreement or whether PEB had a prima facie cause of action
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against them which was not severable from PEB's claim against A&ACC and Buildcore. The dispute agitated by PEB in its suit is not confined to its claim against A&ACC and Buildcore for the payment of the amount that had been deposited by PERRA into the JV's bank account which could not be operated by PEB. Had PEB's dispute been so confined, it would have been wholly covered by the above mentioned arbitration clause in the JV Agreement, rendering PEB's suit to the extent of A&ACC and Buildcore liable to be stayed. However, as mentioned above, the dispute agitated by PEB is that PERRA, in derogation of the provisions of the contracts dated 20.11.2008 (executed between the JV and PERRA), paid an amount equivalent to US Dollars 423,469 into the JV's bank account maintained with Habib Bank Limited, Circular Road Branch, Gujrat, which could not be operated by PEB. And according to the learned counsel for PEB, PERRA by doing so enabled A&ACC and Buildcore to deprive PEB of its due share in the said amount. PEB buttresses its claim against PERRA for payment to be made in US Dollars directly to it through an L/C by relying on the following clause in the contracts dated 20.11.2008:- "The Employer shall instruct its bank to issue an irrevocable confirmed documentary credit made available to the Contractor in a bank in the country of the Contractor. The credit shall be for an amount of US Dollars 1,037,000 (US dollars one million, thirty-seven thousand only) less the advance payment to be made for Pre-engineered Structure supplied from abroad; and shall be subject to the Uniform Customs and Practice for Documentary Credits 1993 Revision, ICC Publication No.500." 28. Had PERRA made payment of US Dollars 423,469 against IPC No.84 in accordance with the said clause in the contracts dated 20.11.2008 and consistent with the manner in which earlier payments had been made, the dispute which is…
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