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Petitioner: AVARI HOTELS LTD VS Respondent: HILTON INTERNATIONAL COMPANY
Court Name: Sindh High Court Judge(s): Abdul Hayee Qureshi, Abdul Razzaq A. Thaim Title: AVARI HOTELS LTD vs HILTON INTERNATIONAL COMPANY Case No.: High Court Appeals Nos. 39 and 43 of 1984 Date of Judgment:1985-01-09 Reported As: PLD 1985 Karachi 425 Result: Order accordingly
JUDGMENT
JUDGMENT ' ABDUL HAYEE KURESHI, C. J.-High Court Appeals bearing No, 39 1984 and No, 43;1984, are being disposed of by this single judgment, as the parties in both the appeals are the same, and these arise out of a single order passed by the learned Single Judge in Suit No, 314/1984 filed on the original side of this Court. ' The suit in question was filed by Messrs Avari Hotels Limited, wherein Hilton International Company, incorporated in the State of Delawara of the United States of America, was arrayed as a /single defendant. For the purposes of convenience, the plaintiff are hereinafter referred to as "Avaris", and the defendant as "Hilton". The Avaris were represented before us by Mr. Ali Ahmad'Fazeel, Mr. Naseem Farooqi, Wajihuddin Ahmad and Mr. Abdus Shakor, whereas Hilton was represented before us by Mr. Parvez Hassan, Mr. Zakiuddin Paul, Mr. Naeem Bokhari and Mr. Saleem Baig. ' The averments in the plaint were to the following effect :- ' Avari, the plaintiff, is a Company that owns the land and building, where Hilton Hotel at 'Lahore is, housed. It seems a lease agreement has initially been entered into, providing for lease of the said Hotel in favour of Hilton, but, on 2-12-1976, such lease agreement was superseded by a management agreement with the Hiltons for an initial period of twenty years, and renewable for the next thirty years. It is the case of Avaris that their investment was-Rs, 13,49,94,000 and it is common case before us that all the/financial investment is made by Avaris. This was so stated before us by 'the learned Advocates of the parties. The salient features of this management agreement are that Hiltons were to make available to the Avaris technical assistance services, which are detailed in Appendix 'A' to the agreement, and such technical assistance services consisted in providing to the architect, contractors, engineers and decorators the expertise and
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experience of Hiltons in the design and planning of hotels in the matter of architectural, international design, mechanical installations, kitchen and laundry equipments, other hotel equipments, lighting, graphic and other design work and project co-ordination. It was provided film Avaris will maintain full title for the Hotel, and they were also to advance to Hiltons a fixed sum for starting the said hotel. The Hiltons were to use the hotel solely for operation of a hotel under comparable standards to those prevailing in Hilton Hotels all over the world, but subject to local character and conditions. The Hiltons were to have absolute control and discretion in the operation of the hotel, A management fee was provided, and that was an amount equal to five per cent of the revenue, and ten per cent of gross operating profit. The term "gross operating profit" was defined in section 2 of Article 5 of the agreement. Hiltons had to maintain the hotel in good repair and condition with the exception of ordinary wear and tear, and they had a right to make alterations, additions, or, improvement in the hotel, but, if any fundamental changes in the character of the hotel were involved, written approval of Avaris was necessary, and, in that case, the cost on such alterations, additions and improvements was to be charged to current expenses, or, was to be capitalized in the books of accounts. The agreement also provided for Avaris providing sufficient funds for inventories of foods, beverages and other consumable items. The Avaris were to provide insurance, but Hiltons were to provide public liability 'insurance, workmen compensation insurance, the insurance for use and occupancy, etc. The agreement also provided 'a definition of "default" in Article X11, and provided for a method to cure the default. In that article, a clause was inserted, providing as follows :- "Notwithstanding the foregoing, neither party' shall be deemed to be in default under this agreement if a bona fide dispute with respect to any of the foregoing events of default has arisen between the Parties and such dispute has been submitted to arbitration." ' Article X1V provides for arbitration, and this article reads as follows :- "All disputes arising in connection with this Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one of more arbitrators ,appointed in accordance with said rules." ' Although the initial period of the management agreement was twenty years, yet Article 15 provided, for Hiltons having a. Right to extend the operating term for three successive periods of ten years each, but subject to the conditions that Hilton was not in default, the operating term should have been extended for all prior periods, and Hiltons should have given notice to Avaris of its election to extend the operating term on, or, before 1st April of the nineteenth full calendar year of the original term, and on, or, before 1st April of the last year of any extended term. ' The Avaris alleged in the plaint that the agreement was brought about by misrepresentation made by Hiltons. The misrepresentation alleged was that Hiltons had made Avaris believe that the management agreement was similar to those agreements made by Hiltons in various projects all the world over. Reliance was placed on two letters received by Avaris from Hiltons eh 15-2-1977 and 12-6-1977. Out of the first letter, the following passage was quoted is the plaint :- "There is certainly no reason for us to operate in; Pakistan under a Management Agreement, which is not the same as that under which we operate in all other parts of the world." ' From the second letter, the following passage was reproduced in the plaint "In all of such countries, we operate on the basis of an Agreement and Lease similar to that previously entered into for Lahore and Karachi or on the basis of our standard Management Agreement, such as that which you asked us to substitute in the case of Lahore and Karachi for the pre-existing Lease Agreement." ' It is the case of Avaris that the Government of Pakistan had approved the management agreement for. The reason that the terms were similar to all such agreements, which Hiltons had entered into in respect of their projects all over the world. It is the case of Avaris that the original
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lease agreement was superseded by the management agreement, because the latter agreement, on examination by: the Government of. Pakistan, was found to be acceptable in the interest of national economy. It may here be stated that the original lease agreement had provided for 33i per cent of the' gross operating profits being paid to Hiltons. But, in the management agreement, the payments to Hiltons were reduced to five per cent of total revenues and ten per cent of gross operating profits. It seems it was the case of Hiltons that, by the management agreement, the profit in their favour had been reduced, but barring such averment, the point was not demonstrated before us. At this juncture, it may straightaway be stated that the two letters, out of which extracts have been reproduced above, were of a date subsequent to the management agreement. ' It seems that the Government of Pakistan took note of a publication in the New York Times of 23- 7-1976, which disclosed that internationally the Hiltons were managing other hotels on fee basis, so that the agreement between Avaris and Hilton was harmful to a developing country, like Pakistan, and, in such circumstances, the initial lease agreement was converted to management agreement, which, according to Avaris, should be similar to such agreements that Hiltons had, concerning the management of hotels. The Avaris then state that they assured the Ministry of Industries, Government of Pakistan, that the management agreement was in conformity with similar agreements entered into by Hiltons in their international projects. In paragraph 8 of the plaint, the Avaris have detailed five instances of the agreements which Hiltons have entered into with other parties in the rest of the world, and, in paragraph 9 of the plaint, it is stated that the terms under which Hiltons had entered into an agreement with the Avaris were different, apart from being oppressive, unfair and unconscionable. In the same paragraph of the plaint, eight circumstances have been highlighted, showing that the agreement provided for an unfair advantage to Hiltons. The plaint further states that, as from 1978 until the date of filing of the suit in 1984, Hiltons have earned a total sum of Rs, 95,43,641 as their management fee, incentive fee and group services, whereas the Avaris have received a total sum of Rs, 23,77,250 after paying the property taxes, insurance premiums, salary of staff and the telephone charges. From this amount, the Avaris deduct the charges for debt services and make an averment in the plaint that, during the period commencing 1-10-1978 and ending 31-12-1983, they had received a sum of only Rs, 6,52,809. It is also stated that the Hiltons had assured the Avaris to the effect 'that their return would not be less than fifteen per cent net of the total investment. The plaint further recites that Messrs Pannel Kerr Forster, who were public accountants, were appointed to examine the accounts, but they were only provided limited access by Hiltons to the books of account. It stated that the accountants reported that the Hiltons were guilty of fraudulent actions, misfeasance, malfeasance and maladministration, mismanagement, manipulations of accounts and illegal, unlawful and unauthorised divergence of the company funds in the course of hotel operations. A grievance had also been made in the plaint that the Avaris had been denied full access to the books of account, vouchers and documents, With the result that they'had no means of verifying the declaration of revenue and expenses made by Hiltons. Grievance was also made that extensive unauthorised and unnecessary expenditure had been incurred. It was in these circumstances that the Avaris gave a notice to Mr. Curt R. Strand, the President of Hiltons, on 21-3-1984, through Mr. Fakhruddin, G. Ibrahim, wherein it was stated that the consent to the agreement was caused by fraud and misrepresentation, so that the Avaris have exercised the opinion of rescinding the agreement. In this notice, the report of the accountants was also referred to and the Hiltons were called upon to supply to Avaris all the documents that had been detailed in the notice. In the last paragraph of the letters it was ,stated that, in case default was made, the Avaris would take legal proceedings for appropriate, reliefs. Even in paragraph 14 of the plaint, averments have been made that the 'Hiltons had not taken Avaris into confidence in relation to any material aspect of the operation of
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the hotel, and that they were guilty of fraud. It may be stated that the notice of Mr. Fakhruddin G. Ibrahim was replied to on 4-4-1984, wherein the various allegations were denied.. It was stated that the accountants were provided all the information, which they wanted, and it was.. Stated that they had asked the Avaris to supply a copy of the report, and the same had not been supplied. In regard to lesser profits, it was stated that the fault lay with the Avaris, because they had not made necessary advances for finishing the hotel. In the penultimate paragraph of the notice, Hiltons reserved a right to raise these questions.In the arbitration proceedings, which, according to them, was the 'exclusive method for resolving all disputes, In this background, the Avaris rescinded the management agreement vide the notice of Mr. Fakhruddin G. Ibrahim. ' In the plaint, the Avaris had stated that the management agreement was void, and illegal. ab initio, as it was in conflict with Article 7 of the Company's (Managing Agency and Election of Directors) Order 11 of 1972. It was stated that the agreement created a managing agency, the creation of which was specifically barred under the Presidential Order, and that, by virtue of section 23 of the Contract Act, none of the parties could derive any right to title, or, benefit under the management agreement. It was further averred, that the management agreement was a pure and simple agreement of agency, which. The AVaris, as _principals, could revoke at will. ' In paragraph 19 of the plaint, it was stated that, in spite of rescission of the management agreement, the hotel business was being carried on by staff, who were nominees of the Hiltons and who may prevent the Avaris from running the hotel. By a letter., dated 9-5-1984, signed by Mr. Byram D. Avari, the Managing Director of Avaris, the services of Mr. Schwander were terminated, and he was directed to hand over charge to Col. Hassan Kadir Kban. ' In order to give a more clear picture in regard to the management of Hilton Hotel, it may be stated that the staff was selected, or, nominated by Hiltons, but the salary had to be paid by Avaris. This was, stated before us by both the parties. Another significant .Averment in the plaint is stated in paragraph 23 thereof in the following words :- "On 9-5-1984 when the services of the General Manager of the Hilton International, Lahore, the nominee of the defendants, were terminated and yet the defendants continued to manage the affairs of the hotel, in disregard of the rescission of the Management Agreement.'," ' In these circumstances, the plaintiffs filed the\ suit; claiming a permanent injunction to restrain the Hiltons from interfering, or, intermeddling with the plaintiffs' control and management of the hotel. Accounts and damages \were also claimed. ' An ad interim injunction was granted by the learned Single Judge to restrain Hiltons from managing the hotel. ' Immediately on the ad interim order being passed by\ the learned Single Judge, Hilton made an application under section 34 of the Arbitration Act. Reliance was placed 'on Article XIV of the, management agreement, which has been reproduced above. It was fuhher stated that a supplementary agreement had also been made to provide that such arbitration shall be held in Pakistan, and the law applicable would be the law of Pakistan. In the same application, it was also averred that the Avaris had made "wild and fanciful accusations",. It was averred that the letter, whereby the services of Mr. Schwander were terminated, was received in Lahore on 13-5-1984, when Mr. Schwander was out of the country, and it was further stated that, since there was' no privity between Avaris and Mr. Schwander, the question of termination of his service by Avaris did not arise. It was further stated that, after the learned Single Judge passed ex parte orders on 14-5- 1984 to restrain Hiltons from operating the hotel, the representatives of Avaris, armed with the order of the Court, had managed to take over the physical possession and control of the hotel. A counter-affidavit was filed by Byram D. Avari to oppose stay under section 34 of the Arbitration Act. It was stated that Mr. Schwander was an employee of Avaris, as the management agreement expressly stated that the employees of the hotel shall be employees of the first party (i,e, the
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plaintiffs), and not of Hilton. It was, therefore, averred that the services of Mr. Schwander could be terminated by the Avaris. In 4th paragraph of the counter-affidavit of Byram Avari, it was stated that the Avaris had always been in possession and control of Hilton Hotel, Lahore, and only the management of the hotel'for its operation 'was given to Hiltons under the management agreement. This argument was extended further by , stating that, since M . Schwander was receiving his pay, allowances and other expenses from Avaris, and not-Hiltons', the possession and control of the hotel had always, been with the plaintiffs. It was denied that, after obtaining the ad interim order, the Avaris had managed to take over the physical possession and control of the hotel. Allegations of the agreement, being void by reason of the provisions contained in Company's (Managing, Agency and Election of Directors) Order, 1972 were reiterated. The allegations of fraud and misrepresentation Were also reiterated. Some more allegations were made, alleging fraud in the maintenance of accounts and moneys of the hotel. ' The learned Single Judge, by an order, dated 17-6-1984, granted the application made by Hiltons for stay of the suit tinder section 34 of the Arbitration Act. Since an alternate plea had also been raised by the Avaris to the effect that the management agreement, was void ab initio, the learned Single Judge adverted to that aspect of the case also, and came to the conclusion that the agreement in question was hit by the Company's (Managing Agency and Election of Directors) Order II of 1972. In any case, the learned Single Judge did state that whether the agreement. Was old, or, what was the exact nature of that document should be held to be determined at the final trial, but he stated that the management agreement was not terminable at the will of Avaris. In that result, the application under section 34 of the Arbitration Act was allowed and the ad interim orders in regard to operation of the accounts and running of the hotel were recalled. However, the Hiltons were restrained from making any remittances of income, or, funds of the hotel outside Pakistan. ' Both parties were aggrieved by the order of the learned Single Judge. The Avaris were aggrieved, because the right of Hiltons to manage the hotel was recognised by the learned Single Judge, and they were also aggrieved by the order, whereby the suit was stayed. They, therefore, filed an appeal, which' has been registered as H..C.A. No, 39/1984. Hiltons were aggrieved, because they were restrained . From remitting any amounts from Pakistan, and they filed a separate appeal, which has been registered as H. C. A. No, 43/1984. ' Along with the appeal filed by Awls, eleven documents were placed on the record. These documents had not been produced before the learned Single Judge. Hiltons made an applications under Order XLt, rule 27, C.P.C. Read with section 151, C. P. C., requesting that these documents, which had been placed on the record at such belated stage and are designed to improve the case of Avaris by making new factual assertions, may hot be placed on the record, at the appellate stage. An affidavit of Schwander was also filed, stating that these documents had been filed to patch up the weak points and fill up omissions. The documents were called non-genuine, and the production of the documents was termed to be an afterthought to build up a new case. In that regard, Hiltons also with their, ,counter=affidavit had filed some other documents, which had not been placed before he learned Single Judge. During the hearing of the case, we had passed a shortsorder on 26th November, 1984, allowing the additional documents/evidence, and we had also permitted Hiltons to place any document \on the record, which they may be advised to do. No reasons were recorded in the said order, and we had stated that the detailed reasons shall be recorded separately in the main order. We now proceed to consider the question of reception of these documents at the present stage. ' We would examine the import and significance of these documents, Although in the counter- affidavit filed by Schwander, it was stated that these documents were "non-genuine", the learned Advocate for Hiltons had not specifically stated that any of these documents were forged, -,or fake.'
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The first document, which is marked as No, 3, and has been filed at page 133 of the record in H. C. A. No, 43/1984, is a photostat copy of a letter from the State Bank of Pakistan, Exchange Cori1ro.1 Department, dated 26th 'Agri', 1977, and concerns the management agreement between the parties. It states that, since the lease agreement had been substituted by the management agreement, the State Bank had no objection to the approval of the management agreement, provided the Department of Investment Promotion and Supplies was satisfied. This is an official document, and the several documents, which have been placed on the record, would appear to lend an assurance to the genuineness and authenticity of this document, for it is common case between the parties that the original lease agreement was substituted by management agreement, and the terms were different.. The second document, which is No, 4, and appears at page 135 of the record in H. C. A. No, 43/1984, is again a letter from the Government of Pakistan, Department of Investment Promotion and Supplies, dated 12th May, 1977 to Avaris, and the said letter states that the management agreement had been re-examined by the State Bank, who had approved the same, ...And, by this letter, the Avaris were directed to produce documentary evidence to the effect that the proposed management agreement is the same under which Hiltons operate in other parts of the world. This too is at-official document, and the contents thereof are supported.By the ether documents that have been placed on record. The next document, which is No, 5 at page 137 of the record in H. C. A. No, 43/84, is a letter from Avaris, dated 20th June, 1977, and is in reply to the document, which has been numbered as No, 4. By this letter, the Avaris have confirmed to the Department of Investment Promotion and Supplies that the manalement agreement is in the same terms as agreements under which Messrs Hiltons operate internationally. This letter carries an annexure;. Which is a letter from the President of Hiltons and addressed to Avaris. The letter from Hiltons is referred to in this document. Even this letter bears clear reference to the letter by the. President of Hiltons, and no doubts have been expressed by . The Advocate for Hiltons before us. The next at cement has been numbered as 6, and is a letter from the Investment, Promotion Bureau, dated 15th April, 1978, to Avaris, calling upon them to submit an application for exemption from the Company's (Managing Agency and Election of Directors) Order II of 1972. This letter too is an official document, and the contents 'thereof bear clear relation to the management agreement. The next document, which is No, 7, is 'a letter from Zahida Naz, the Executive Secretary, employed\at Hilton International Hotel, Lahore, and is dated 13th `May, 1984. By this letter, which is addressed to Col. Khan, who had been appointed as a care-taker of the hotel by Maris, and states that he had handed over the key of the office of Mr. Schwander, the General Manager of the Hilion Hotel, to Col. Khan. Zahida Naz is an employee at Hilton Hotel, and had written that letter on the writing pad of the same hotel. A copy thereof must be available with Hiltons. This letter too is not open to any doubt in regard to its authenticity. The net letter, bearing No, 8, is from Tariq Masood, the Acting General Manager-of Hilton Hotel, ,Lahore, and is addressed to the same gentleman Col. Khan, and is`dated 31st May, 1984. This also pertains to obtaining a key of the General Manager's office. The next three letters, bearing Nos. 9, 10 and -11, which appear at page 149 to 155 of the record in H. C. A. No, 43/1984, are letters from the A. R. C. To the Governor of the Punjab, the Ministry of foreign Affairs, Islamabad, and Ministry of Foreign Affairs, Camp Office, Lahore. These - letters are dated respectively as 13th May, 1984, 29th April, 1984 and 14th May, 1984. These are letters, concerning the use of the hiring, either by the 'Government of Pakistan or by the Government of the Punjab, of rooms and halli in Hilton Hotel, Lahore. It seems that these letters are designed to show. That the Avaris had takeriover the hotel as from 13th May, 1984. This appears to be admitted case of Hiltons also. The letters are official, and there is nothing to doubt the genuineness of the same. The next letter, which is No, 12, and appears at page 157 of the record in H. C. A. No, 43/1984, is written by Schwandtc to thaliana of America regarding some transaction.
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' It is dated 3rd July, 1983. Schwander in his counter-affidavit has not specifically denied the authenticity of this letter. The signature on this letter bears very close resemblance to the signature of Schwander, appearing on the various affidavits that have been filed by him in this appeal. The last document, which is No, 13, and appears at pages 159 to 261 of the record in H. C. A. No, 43/1984, is the audit report of Pannel Keer Forster. Even in regard to such audit report, the correspondence between the parties, earlier to…
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