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Petitioner: AVARI HOTELS LTD. VS Respondent: HILTON INTERNATIONAL COMPANY
Court Name: Sindh High Court Judge(s): Saeeduzzaman Siddiqui Title: AVARI HOTELS LTD. vs HILTON INTERNATIONAL COMPANY Case No.: Suit No. 314 of 1984 Date of Judgment:1984-06-16 Reported As: PLD 1984 Karachi 488 Result: Order accordingly
Judgment ORDER ' By this order I propose to dispose of the two pending applications namely C. M. As. Nos. 2481/84 and 3088/84. The first noted application is filed by the plaintiff under, Order XXXIX, rules 1 and 2 read with section 151, C. P. C. For a temporary injunction against the defendant in the following, terms "In the above matter, it is prayed on behalf of the plaintiffs that for reasons disclosed in the accompanying affidavit, this Hon'ble Court may be pleased to restrain the defendants; their servants, agents or' representatives and assigns and all those claiming through or under them, from : (i) interferring or inter-meddling with the plaintiffs' management and control of Hotel Hilton International, Lahore, directly or indirectly, (ii) operation of Bank Accounts, (iii) remitting of any funds, and issue direction enabling plaintiffs to operate all accounts and give such other directions that the Court may deem fit and expedient in the circumstances of the case. ' It is further prayed that interim orders in terms of the prayer may be passed pending disposal of the application." The second application is filed by the defendant under section 34 of the Arbitration Act for stay of the proceedings in the suit. ' I will first deal with the application under section 34 of the Arbitration Act, 1940, filed by the defendant for stay of the suit. It is alleged by the defendant that in the Management Agreement executed between the parties , which, is the basis of present suit, Article XV thereof, provides for reference of all disputes in connection with the agreement to the Arbitration. The execution of the above agreement and the existence of arbitration clause therein is not disputed by the learned
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counsel for the plaintiff. The plaintiffs are however opposing the application under section 34 of the Act and their learned counsel has urged the following grounds in support of their opposition :- (I) That the application under section 34 of the Arbitration Act filed by the defendant does not sufficiently make out the dispute which is to be referred to the arbitrator and as such the application is vague and liable to be dismissed; (ii) That there being allegations of fraud and misrepresentation against the defendant the application for stay of the suit is liable to be dismissed ; and (iii) That the Management Agreement executed between the parties is void ab laid under the provisions' of the Companies (Managing Agency) Order, 1975 and, therefore, the arbitration clause does not exist in law and as such the proceedings of the present suit cannot be stayed under section 34 of the Arbitration Act. ' Before considering the above contentions raised by the learned counsel for the plaintiff it will be of advantage to reproduce here the arbitration clause contained in the Management Agreement which reads as under :- "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 or more arbitrators appointed in accordance with said rules." ' The above arbitration clause, it is admitted by the learned counsel for the parties, was amended by virtue of clause 12- of the Supplementing Management Agreement which reads as follows :- "12. In supplementation of Article XV of the Management Agreement, the parties agree that any arbitration in accordance with the provision of the said article shall be held in Pakistan." A reading Of the arbitral clause amended as aforesaid, will show that the parties have agreed to refer all disputes arising in connection with the -Management Agreement for settlement under the Rules of Arbitration of the International Chamber of Commerce by one or more. Arbitrators appointed in accordance with the said rules and the venue for such arbitration is Pakistan. The above arbitration clause is apparently very wide in its scope and embraces reference of all kinds of disputes arising in connection with the Management Agreement to arbitration. I need not emphasise her that it is settled principle of 1st that ordinarily, party which has enter into a contract of which an arbitral clause forms an integral part should no receive the assistance of the Court when it seeks to resale from it. Keeping in view this grinding principle I will now examine the contentions raised -b the learned counsel for the plaintiff. ' The first objection of the plaintiff is that the application under section 34 of the Arbitration Act has failed to maim out sufficiently the dispute between the parties and as such it is vague and liable to be dismissed. The plaintiff in its plaint has alleged rescision of Management Agreement which was executed between the parties. The defendant in their application under section 34 of the Arbitration Act have clearly spelt out the dispute by challenging the right of plaintiff to terminate the Management Agreement. Paragraphs 4 to 6 of the application under section 34 of the Arbitration Act sufficienly set out the dispute which has arisen between the parties. I therefore, see no substance in the submission of the learned counsel that the dispute which is required to be referred to arbitration is not set out in sufficient details in the application under section 34 of the Arbitration Act. This objection of plaintiff accordingly fails. ' The next objection taken by the plaintiff is that the Management Agreement between the plaintiff and the defendant was allegedly brought as a result of fraud and misrepresentation by the defendant and, therefore, it is a fit case in which the Court should refuse to stay the proceedings. To support his contention the learned counsel referred to the following cases :- ' Firm Jawahir Singh v. Flemming Shaw & Co. Ltd. AIR 1937 Lah. 851 ; ' Johurmull Parasram v. Louis Dreyfus & Co. Ltd. AIR 1949 Cal. 179 ; ' Abdul Kader v. Madhav Parabhdir AIR 1962 SC 406 ;
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' Narain Parshad Boobna v. Dhanji Mills A 1 R 1943 Pat. 53 ; ' Planta Parashed v. Sagar Mal AIR 1952.Pat. 352 and ' Bengal Jute Mills Co. Ltd. v. Lakhand AIR 1963 Cal. 405. ' It is however not necessary to examine here in detail all the above cases which in turn are based on an English decision teported as Russell v. Russell (1). Russell v. Russell has been considered by our Supreme Court In the case of Haji Soomar v. Muhammad Amin Muhammad Bashir Ltd. (2) and 1 can do no better than to reproduce here the following observations in the above, case which appears at page 130 of the report :- "(6) We have carefully considered this contention and gone through the above-noted judgments all of which involved the same question as in the case in hand. We noticed that the basic principle has been laid down by the Chancery Division of the High Court of England in Russell v. Russell (which has been summarised as follows in the judgment as reported in 42 L T R 112 : ' Where a partnership deed contains an arbitration clause, and disputes occur between the partners, the mere fact that one partner makes a charge, of actual fraud against his co-partner is not sufficient to prevent the co-partner from insisting on a reference to arbitration and the Court, having regard to the discretion given by the Common Law Procedure Act, 1854. Section I , ought in the exercise of that discretion to allow the matters which have been expressly agreed to be referred to arbitration to be so referred, but not, if the partner charged with fraud desires a public examination into the truth of the stigma endeavoured to be cast upon him. (7) According to the above-noted rule, in a case covered by an arbitration clause Courts would ordinarily be inclined to stay a suit on the application of the party against whom fraud is alleged and allow the dispute to be settled through arbitration, unless that party itself wants the matter to be decided through a public inquiry by a Court of law. If, however, that party does not wish the dirty linen to be washed in the {{FOOT NOTE}} (1) 14 Ch. D 471 (2) 1981 SCM R 129 {{FOOT NOTE}} ' public, the proceedings in the trial should be stayed. But even in such cases where a prima facie case of fraud is made out, the case may be allowed to proceed in a civil Court." (The underlining* is my own) ' Mr. A. A. Fazeel, the learned counsel for the plaintiff relied on the above underlined portion in paragraph 7 of the judgment to contend that since the plaintiff has alleged fraud and misrepresentation in the plaint which has not been denied specifically by the defendant, therefore, a prima facie case of fraud is made out against defendant and the Court in these circumstances should reject the application under section 34 of the Arbitration Act filed by the defendant for stay of the suit. The contention of the learned -counsel does not appear to be correct. Firstly the defendant who have pleaded existence of arbitration clause and applied for stay of the proceedings of the suit under section 34 of the Arbitration Act have yet no opportunity to file the written statement to meet the allegations made in the plaint specifically as their application for stay of the suit is yet to be decided. Secondly, the ratio decidendi in Haji Soomar's case in my humble opinion clearly is that where a party against whom allegation of fraud is made applies for stay of suit under section 34 of the Arbitration Act the Court will ordinarily stay the suit and allow the dispute to be settled through arbitration. The underlined* observations of the Supreme Court relied by the learned counsel for the plaintiff which is apparently based on another passage from Russell v. Russell appearing at page 481 of the report of that case has to be understood in the light of the further observations of the Supreme Court in Haji Soomar's case which reads as under :-
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"We feel that wherever the parties to an Agreement expressly chose, through an arbitration clause, a forum other than a Court of law, for the settlement of their dispute, neither of them should normally be allowed to avoid that forum. The sole purpose of the Arbitration Act is to curtail litigation in Courts and to promote the settlement of the dispute amicably through persons in whom both the parties repose their trust. Therefore, the course that the Courts should generally follow is to encourage the settlement of disputes by this method wherever the parties have themselves agreed to do so. That this was also the intention of the Legislature is evident from the manner in which section 34 of the Arbitration Act is worded. To allow one side to evade and wriggle out from the agreement merely by making allegations of fraud, even though the same may not ultimately be proved or even pressed, would amount to giving a handle to that party to circumvent the arbitration clause. This apprehension was also expressed by the Chancery Division in Russell's case in the following words : ................. If the mere making of a charge of fraud would entitle the person making it to call upon the Court, in the exorcise of its discretion, to refuse to refer to arbitration, there would be a very easy Way of getting rid of all these clauses of arbitration. I am satisfied that the mere making of a charge will not do that, even in a case where the Court ought to exercise its discretion by refusing , to refer the case to arbitration........ After reading the relevant passage from Russell v. Russell and the above quoted observation of Supreme Court I am of the bumble opinion that the above-underlined observations of Supreme Court did not lay down an *[Hers in italics) ' imperative rule for the Court to reject the application for stay of suit under section 34 of Arbitration Act in all cases, where a party who alleges fraud is able to show a prima facie case to the Court. Such an interpretation will completely negate the discretion vested in the Court under the law in ordering stay of proceedings under section 34 of the Arbitration Act. I will now make a tentative examination of the allegations made by the plaintiff against the defendant to find out if they have succeeded in making out a prima facie case of fraud and misrepresentation against the defendant. It is an admitted position on record that prior to the execution of Management Agreement the parties entered into a lease. The lease agreement executed between the parties was later on substituted by the present Management Agreement at the request of the plaintiff who represented to the defendant that because of some interview given by the President of defendant the Government of Pakistan was pressing the plaintiff to renegotiate the lease agreement with the defendant. A recital in the Supplementing Agreement dated the nd December, 1976 executed between the parties clearly bears out this position. It reads as under "Whereas, Avari Hotels Ltd. (First Party and Hilton International Co. (Hilton) are parties to a certain Agreement and Lease for the Lahore Hilton Hotel, dated January 19, 1968 as amended on October 9, 1968 and supplemented on July 29, 1970 (hereinafter called the Lease Agreement) ; and ' Whereas, First Party his requested Hilton to substitute for the Lease Agreement and all prior amendments or other agreements relating thereto, a Management together with the provision of this Agreement supplementing this said Management Agreement and Hilton has agreed to such substitution." ' The main grievance of the plaintiff appears to be that the defendant at the time of entering into the present Management Agreement allegedly represented to plaintiff that the agreement executed by them is the same, under which the defendant is operating in other parts of the world. This representation of defendant according to plaintiff later on turned out to be untrue, and therefore, it amounted to a fraud on the part of the defendant. The learned counsel for the plaintiff specifically relied on the following statement made in the letter, dated 15th February, 1977 addressed by the President of the defendant to the Chairman of the plaintiff :-
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"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." ' The documents so far produced by the parties do not support the contention of learned counsel for the plaintiff. In so far the above-quoted statement made by the defendant in their letter, dated 15-2-1977 is concerned that does not amount to any representation on the part of defendant as is alleged by the plaintiff. The above-quoted statement cannot be read in isolation after divorcing it from its text. The letter is to be read as a whole in order to understand the context in which the above statement was made by the defendant. Secondly, by merely descriling the agreement as a standard management it does not follow necessarily, that it was represented to be exactly the same agreement under which the defendant were operating in other countries of the world. It is to be noted that the above letter was written by the defendant to the plaintiff after about two months of the execution of Management Agreement between the parties and, therefore, it could not form the basis of representation of the defendant. It will, therefore, be more appropriate to refer here to the events and correspondence, which ensued before the execution of Management Agreement between the parties. It is an admitted position that after entering into the lease agreement the plaintiff on 22nd November, 1976 wrote to the President of the defendant that he was instructed by the Government of Pakistan to renegotiate the terms of contract with the defendant. It will be advantageous to reproduce here the aforesaid letter of the plaintiff addressed to the President of defendant which reads as under :- "Mr. Curt R, Strand 22nd November, 1976. President Hilton International, New York. Dear Curt, ' Government of Pakistan has specially instructed me to renegotiate the terms Qf the contract with Hilton International. They have stressed that Lease Agreement is extremely harmful to a developing country, like Pakistan in general and Avari- Hotels Ltd. In particular. They have given me photo copy of an Aarticle published in the New York Times, dated July 23, 076 on the subject 'Management- Hilton International : Enforcing Standards'. It says very clearly as under : ' Of the 65 hotels bearing the Hilton name outside the United States, only a few are owned or leased by Hilton International. Most are managed by Hilton International for local investors on a fee basis that generally runs at 5 per cent of gross revenues plus 10 per cent of operating profits. ' I honestly admitted that you had offered me both the contracts, namely, Lease Agreement and Management Agreement but my Feasibility Consultant, Mr. C. W. Robinson, then advised me to accept the Lease Agreement. However, in view of Government of Pakistan, Ministry of Finance, insisting upon me to re-negotiate the terms I shall deem it a great personal favour if you would kindly change the terms of the Agreement with Avari Hotels Ltd. On the basis of Management for us and not on Lease basis at , a fee of 5% of gross revenue plus 10% of operating profits instead of Lease Agreement allowing you 331 % of gross operating profits. ' In this connection they have drawn my particular attention to the fact that Sheratons and Hyatts are both charging only 3% of total revenues instead of a% that you charge and they both have agreed to 10% of gross operating profits which the Hiltons are charging. ' It is also expressly understood and agreed by Sheratons and Hyatts and they want us to agree equally well that the foreign exchange earnings of our Hotel must necessarily amount to at least 50% of the annual sales of the hotel and not less. ' I shall be grateful if you would kindly incorporate this clause also in our Management Agreement showing 5% of total revenues payable , to Hiltons and 10 % of gross operating profits instead of 331% of gross operating profits. ' Thanking you in advance for your co-operation and help and with respectful regards."
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' As a result of above request of plaintiff the present Management Agreement was substituted in place of original lease agreement. It further appears that after execution of present Management Agreement, the plaintiff again by his letter, dated 9th February, 1977 forwarded a copy of letter, dated 1st February, 1977 received from the Department Promotion. And Supplies, Government of Pakistan, and requested for re-negotiation of the terms of the standard Management Agreement. The defendant replied the above letter of plaintiff on 15th February, 1977 which is as follows :- "Mr. D. 13. Avari February 15, 1977. ' Chairman, ' Avari Hotels Limited, ' Beach Luxury Hotel, ' Moulvi Tamizuddin Khan Road, ' Karachi 2, Pakistan. ' Dear Dinshaw ' This is in reply to your letter of February 9, 1977, enclosing the letter, dared February 1, 1977 from the Department of Investment Promotion and Supplies of the Government of Pakistan which frankly astonished me. ' As you will recall, you requested us to substitute our Standard Management, Agreement for the. Lease Agreement which had been previously approved by the Government of Pakistan on the grounds that the Government had itself requested this substitution on the basis of its examination of the interview with me in the New York Times describing our Standard Management. ' Under these circumstances the request that we should undertake a re-negotiation of the terms of the standard Management Agreement, including provisions which are subsequently incorporated in our Lease Agreement, appears to be completely inappropriate. There is certainly no reason for us to operate in Pakistan under a management which is not the same as that under which we operate in all other parts of the world. ' Under these circumstances I assume that we will merely allow our previously approved Lease Agreement to continue in effect. ' Warmest personal regards. Sincerely yours, (Sd.) Curt R. Strand, President." ' It is in this letter that the paragraph relied by the learned counsel for the plaintiff appears. It is quite clear from reading of-the above letter that the defendant were not willing to re-negotiate their Standard Management Agreement entered into with the plaintiff and had taken up the position that if it was not acceptable they will allow the lease agreement to continue in effect. It further appears that on 2nd June, 1977 in reply to another letter of the plaintiff, dated 12th May, 1977 the defendant expressed their surprise on the request of plaintiff to produce documentary evidence to the effect that the proposed Management Agreement executed between them is the same under which the defendant operates in other parts of the world without any exceptions. This letter prima facie shows that the defendant never accepted the position that the Standard Management Agreement executed by them was the same under which they operated in other parts of the world. The letter reads as under :- "Avari Hotels Limited, June 2, 1977. ' Moulvi Tamizuddin Khan Road, Beach Luxury Hotel, Karachi. ' Re : Management Agreements for Lahore and Karachi Hilton Hotel Projects. ' Gentlemen ' I am writing this letter in reference to the third paragraph of the letter addressed to you and dated May 12, 1977 by the Director-General of the Department of Investment Promotion and Supplies of
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the Government of Pakistan, a copy of which you have kindly furnished to us. That paragraph reads as follows : ' You are also requested to produce documentary evidence to the effect that the proposed Management Agreement is the same under which Messrs Hilton international operate in other parts of world without any exception. ' I must confess that I am somewhat surprised and puzzled by the above request since it was my understanding that you requested the conversion of our Agreement and Lease to our Standard Management Agreement pursuant to a request to that effect by the Governmental Authorities of Pakistan whose request was the result of their reading the interview with me which was published in the New York Times which described our Standard Management Agreement. In that interview I described the management agreement in exactly the same terms as are contained in the agreement entered into with you except for the modifications in the substituted agreement which carried over special provisions responding to previous specific requests of the Governmental Authorities of Pakistan. In short having obtained our agreement to what you and they requested they appear now to question their own request. None, the less I am happy to respond. ' I cannot say that our Standard Management Agreement is the same under which our company operates in all parts or the world. A substantial number of our operations are carried out under the terms of an Agreement and Lease similar to that which we had entered into with you for the hotels in Lahore and Karachi and which you and the Government of Pakistan, as previously indicated, requested us to supersede by Management Agreement. Moreover, in a few cities in Western Europe, Canada and Australia, we own hotels or have them on fixed rental terms. We do not have any such arrangement, however, in any of the countries of the rest of the world and 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 or our Standard Management Agreement, such as that which you asked us to substitute in the case , of the Lahore and Karachi for the pre-existing Lease Agreements. Such other Management Agreements and Lease Agreements, however, do not contain the many special provisions which we have agreed to in the Agreement substituting Management Agreement for Agreement and Lease and Supplementing Management Agreement which we accepted pursuant to the request of the Government of Pakistan." After reading the above correspondence between the parties it cannot be said at this stage that the defendant held out any assurance to the plaintiff which the defendant believed to be untrue. I am, therefore, of the view that the C plaintiff has failed to establish a prima facie case of fraud against the defendant at this stage. The learned counsel for the plaintiff also urged that the defendants had assured a return of 15% income to plaintiff on the investments by the plaintiff, whereas the returns received by the plaintiff are for less than that. Firstly, this contention of the learned counsel, does not find support from the documents produced by the parties so far. Secondly, mere fact that…
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