Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: MESSRS BARISONS (PAK.) LTD., KARACHI VS Respondent: PAKISTAN THROUGH SECRETARY, JUDGMENT
Court Name: Sindh High Court Judge(s): Ghulam Rasool K. Shaikh Title:MESSRS BARISONS (PAK.) LTD., KARACHI vs PAKISTAN THROUGH SECRETARY,
JUDGMENT
Reported As: 1980 CLC 470 Result: Order accordingly Judgment JUDGMENT ' This is an application under section 14(2) of the Arbitration Act, 1940 and rule 282(1) of the Sind Chief Court Rules (Original Side) made by the Arbitrator by filing the award. ' The Government of Pakistan invited tenders for the erection of Clifton Sewage Pump-Power Station, the machinery of which was, however, to be imported. The tender offered by Messrs Barisons (Pakistan) Ltd., Karachi (hereafter called the claimants) on behalf of Messrs M. A. N. (Maschinenfabrik Augsburg Nuernberg) of West Germany (hereafter called the Principals) was accepted by the Government, as per conditions of contract embodied in Forms PS-35 and PS-38 of the Government of Pakistan Ministry of Industries, Department of Supply and Development (Purchase Branch). The contract was entered into on 20th February, 1962. ' Clauses 14 and 15(d) of the contract are relevant for the purpose of the present litigation and the same read as under :- "14. Payment.-A confirmed, irrevocable, transferable and divisible letter of credit for the total contract value in U. S. Dollars will be established permitting part payments for part consignment upto 90% value of the contract on production of shipping documents ; Inspection Certificate to be issued by Director of Inspector, West Germany together with Insurance Policy/Cover Note or Insurance Certificate and D. I. F. Supplier's Certificate (specimen copy enclosed). The balance 10 % will be payable on submission of an authorization letter issued by the Director-General, Supply and Development, Government of Pakistan, Karachi after the plant has been erected, inspected, tested and taken over at site.
---
## Page 2
' The letter of credit will be established in favour of Messrs Maschinen Fabrik Augsburg-Nuernberg A.-G., Augsburg (West Germany). Insurance shall be arranged by the contractor through Messrs Pakistan Insurance Corporation, Karachi. Insurance charges are included in the total turn-key price stipulated in this contract. ' 15(d) The 'turn-key' prices stipulated in this contract are firm and final for the duration of the contract whatever is the time taken in installation and erection. The 'turn-key' prices have been calculated including custom-duty at 12.1-2%. In case of reduction in customs duty, the benefit will be the purchase account. In case of increase the extra cost will be borne by K. D. A. Direct. Documentary evidence shall be produced to verify the customs duty charges. Sales tax, if any, shall be to the account of contractors. The contract price includes erection charges and all other local charges." ' The meaning of the term 'turn-key' as given in para. 3 of the Schedule reads as under :- ``Turn-key job means manufacture and supply . Of the equipment according to the requirements stipulated, payment of all internal taxes including customs duty, sales tax (if any) K. M. C. Taxes if any, forwarding, erection, working including payment to erection, labour (skilled and unskilled) both foreign and local, procurement of erection tools and equipment, etc. And working of plant for the specified period and handing over to the consignee." ' Originally, the total consideration was for an amount of U. S. A. Dollars 41,310.97 but subsequently the value of the contract was increased to 43,9231.47 amending the A./T., on account of additional machinery in connection with the work. In pursuance of clause 14 Letter of Credit for the required amount was opened by the Government. ' Subsequently, it was apprehended by the claimants that since the total value of the contract did not show the cost of equipment and cost of installation separately, the custom authorities would insist in charging customs duty, sales tax, clearance etc. On the total cost of contract in accordance with the A/T and, therefore, they suggested to the Principal by a telegram dated 1-6- 1963 and to the Government by a letter of the same date, to effect the necessary changes in the contract and the Letters of Credit, to enable the Principals to claim C. I. F. Cost and installation charges separately. This was accepted by the Principals by their letter dated 5-6-1963 and confirmed in another letter dated 2-7-1963. ' Again it was found that since the project was undertaken on the basis of U. S. A. Aid from D. L. F. Funds, the loan agreement precluded use of dollars to finance local currency costs, the Chase Manhattan Bank, holding the Letters of Credit refused to make full 90% payment of the contract value but instead allowed a part payment to the Principals covering 90% of cost of equipment and Marine insurance as the remaining items of cost included in the contract value, such as, clearance, customs duty, sales tax, erection, erection insurance etc. Involving Rupees expenditure could not be paid to to Principals in Foreign Exchange. So a further amendment of A/T was suggested by the claimants by their letter dated 27-8-1963 to the Government. Since no reply was received a reminder dated 1-10-1963 was sent. The proposal was accepted by the Government by letter dated 7-1-1964. As a result of the correspondence, between the Claimants and the Government, a formula was suggested by the Claimant by the letter dated 5-2-1964 to the Government as under :- {{TABLE}} (i) Net C & F Cost of Equipment, cost of Marine Insurance and cost of Foreign Erection, payable to the Suppliers in foreign currency : $ 3,19,663.66Customs duty, Clearance and Forwarding charges, cost of Erection Insurance, cost of Local Erection, cost of Overheads and our commission, etc., payable to us in local currency :1,19,567.81 Total $ 4,39,231.47 {{TABLE}}
---
## Page 3
' To this, the Government agreed by letter dated 18-2-1964. As a result of this arrangement between the Claimants and Government, it was necessary to contact the Principals to obtain their approval. So there was correspondence with the Principals but they, by their letters dated 23-6-1964, 9-7- 1964 and 18-8-1964 and a few others rejected the allocation of $ 119,567.81 payable in local currency and agreed to an amount of $ 92,000 payable in Pakistani currency for customs duty, clearance charges, local erection costs and local insurance costs. They complained that the proposed amendments were not correct and the claimants had proceeded in a one sided manner contrary to the internationally accepted rules about Letters of Credit. They also complained that the claimants had failed to furnish the details of the various local expenses although a clarification was sought as to how the figure was arrived at. It appeared to them that claimant had attempted to secure the monetary funds, i,e, especially commission to which, on the basis of the contractual agreement, they were not entitled. They also proceeded to make it clear that the commission was an internal affair between the supplier and his agent, governed by the respective internal' agency contract, and it was not obligatory to pay the commission in Pakistani currency. ' In view of the aforesaid refusal, the Government revoked the arrangement made by the Claimants and amended clause 14 of the contract as under : "The payment of the local turn-key value of the contract amounts to $ 438,231.41 which includes expenditure in Pakistani currency amounting to $ 89,617.87 will be made as under." ' It appears that by that time the amount of $ 89,617.87 instead of $ 92,000 was available with the Government to enable them to make payment in local currency. ' Since there arose a dispute between the parties, the last consignment was not cleared by the Claimants. This caused delay and K. D. A. Had to clear the goods from Customs by paying a sum of Rs, 2,04,242 as demurrage in addition to custom duty, extra duty, K. P. T. Wharf age charge, and agency commission of clearing agent for clearing the goods. This amount works out to Rs, 45,180.76 as indicated in the letter dated 11th March, 1965 written by the K. D. A. To the Government. In this letter it was also stated that the K. D. A. Had been out of pocket by amount of Rs, 7,50,180.76 as earlier a sum of Rs, 3 lacs was deposited to be paid to allow the Claimants for making clearance and pay customs duty on the stores covered by the supply order. In addition C & F cost in U. S. A. 90 % without any condition and 10% under counter L/C had also been paid by K. D. A. ' Eventually arbitration clause was invoked. Originally Mr. A. H. Qarni, C. S. P., Managing Director, National Investment Trust, Karachi was appointed as also arbitrator, but subsequently, this was superseded by letter dated 24th April, 1965 and Dr. Nazir Ahmed, Ex-Chairman Tarrif Commission, Karachi, was appointed as sole arbitrator. This letter reads as under : "I am directed to say that the Government of Pakistan is pleased to appoint Dr. Nazir Ahmed, Ex- Chairman, Tarrif Commission, Mitha Chambers, 93, Nicol Road, Karachi, as Sole Arbitrator, in the above matter vice Mr. A. H. Qarni, C. S. P., Managing Director, National Investment Trust, Karachi, resigned. ' You are, therefore, requested to contact him for fixing time, date and venue for proceeding in the matter." ' The venue of the meeting shall be at Karachi. On the receipt of this letter the Claimants wrote letter dated 17th May, 1965 to the arbitrator which reads as under : "We invite your kind attention to the above letter appointing you as the Sole Arbitrator vice Mr. A. H. Qarni, C. S. P., retired, in the above matter and request you to enter upon the Reference as well as fix the date for filing of the Statement of Claims. As far as the particulars of Reference, the same will be embodied in the Statement of Claims submitted by us. ' It is our earnest desire that all the disputes arising between the parties on account of the subject contract may be resolved once and for all through this arbitration."
---
## Page 4
' Thereafter, the arbitrator entered upon the reference and fixed various dates. The Claimants filed their statement of claim while the Government filed their written statement as well as statement of counter-claim. The arbitrator proceeded with the arbitration without settling the issues, but he had separately noted down the issues raised by each party. The parties did not lead any oral evidence but confined themselves to the documents produced by them. On conclusion of the arbitration proceedings the impugned award was given on 20th June, 1966. ' Taking up the award and the reasons given by the arbitrator, it was pointed out by him that on account of the difficulties experienced to defray the local expenses in view of the fact that U. S. Aid Fund did not permit any payment in local currency, the original A/T payable in U. S. Dollars was amended. Hi presumed that both the principals and Claimants expected reasonable profit for the goods supplied and for the services rendered by them. He also presumed that by an arrangement between the Claimants and the Principal, the latter were to retain their share of the amount covering the cost of machinery plus profit and foreign components of the cost of erection and remit the rest to the Claimants to enable them to meet their responsibilities, namely, payment of custom duty, sales tax, cost of local erection etc. Plus their share of the profit. According to him, this scheme had two serious flaws, as-commented upon by him. He laid great emphasis on the word "simultaneously" occurring in letter dated 18-2-1964 written by Government to the Claimants and according to him the use of this word placed the Principals and Claimants at par and further 90% of the local currency expenditure was to be made available to the Claimants on presentation of their bill supported by shipping documents to enable them to defray the expenses on account of payment of custom duty, sales tax, etc., without having to strain their financial resources. Thus, according to him it was not the responsibility of the Claimants to pay these charges in the first, instance and later recover from the Government but it was the responsibility of the Government to provide the necessary funds. This view had been expressed by him in interpreting clause 15(d) of the Contract. He further pointed out that the Claimants had already paid a total sum of Rs, 20,186.25 without receiving any payment from the Government on two consignments, although the principals had received 90 % of the C. I. F. Cost. ' The arbitrator also found fault with the Government by not complying with the amended A/T. He pointed out that in view of the restriction imposed by loan agreement prohibiting payment in local currency, he concluded that although the letter of credit, as originally contemplated, was opened in theory, yet in actual practice it was not effective until it was subsequently amended in regard to the amount payable to the principals and, therefore, it could not be said that the Government performed their entire part of the contract by opening irrevocable letter of credit under clause 14 of the A/T dated 20-2-1962. He further observed that by amendment of A/T by letter dated 18-2-1964, it was imagined that all the major obstacles were removed and henceforth there would be smooth sailing in the implementation of the contract but this was not the case to be as it would appear that the amendment dated 18-2-1964 was made without the prior approval of the Principals, who were the Chief beneficiaries of the letter of credit, and they, first by telegram and later by letter dated 23-6-1964, refused to accept the amendment and permitted the deduction of approximately U. S. $ 92,000 in local currency from the full value of the contract for the plaintiffs and not to the extent of U. S. $ 11,99,494.81 as proposed by the plaintiffs and agreed to by the Government and this represented a difference of U. S. $ 27,567 or approximately Rs, 1,35,000. Commenting upon the situation, as created, the arbitrator proceeded to observe as under : "Since an irrevocable letter of credit could not be revoked or amended without the consent of the person in whose favour it had been opened, the respondents were in a quandary. It seems to me that the best course at this stage would have been for the respondents to have asked Messrs M. A. N. Of West Germany to send a responsible representative to Karachi so that by mutual consultations the difference between the claimants and their principals could have been resolved
---
## Page 5
with the respondents' help, if necessary, and the whole matter could have been amicably settled in such a way that the settlement would have taken into consideration the legitimate claims of both the parties. There is no evidence on record to show that such a step was taken, instead, just as earlier the respondents had issued the amendment to the original A/T as desired by the claimants, now they seem to have swa yed completely to the other side, and issued another amendment to the A/T dated August 22, 1964 in which they accepted the position as stated by Messrs M. A. N. Of. West Germany, and reduced the local currency expenditure to U. S. $ 89,617.87, which was even less than what Messrs M. A. N. Of West Germany were willing to concede in their letter dated 23rd June, 1964." ' The arbitrator also blamed the Government for henceforth dealing directly with the principals, thereby making their position independent and strong as a result of which they were able to press their claims, and adopt a rather stiff attitude. According to him it was desirable, if not essential, ' that the contact with a foreign firm should have been maintained and continued through the plaintiffs, being a Pakistani firm and had introduced the main contracting parties and brought about the contract or else it would weaken the position of the local firm on the one hand and would strengthen that of foreign firm on the other and this exactly happened in the present case, which could be avoided if the course suggested by him was adopted and so the plaintiffs were the aggrieved party and had a legitimate cause of complaint against the treatment meted out to them. He further observed that although according to the amendment, 90% of U. S. $ 89,617.67 in equivalent Pakistan currency should have been paid simultaneously to the Claimants but in actual fact the Principals were paid the full amount without the deduction and withholding of 10% perhaps before the issue of the certificate that the plant had been erected, inspected and taken over at site but the plaintiffs were not paid the amount due to them under the contract simultaneously and their payment of even partial amount was made in a very delayed and grudging manner. ' The arbitrator also rejected the contention of Government that it was implied that the claimants were not entitled to receive any benefit in the form of agency commission or profits and the only compensation the plaintiffs were entitled to receive were on account of payment of customs duty, sales tax, clearance and forwarding charges etc. He reached this conclusion on the ground that the plaintiffs had set up and maintained an office and carried on all the correspondence and negotiation in connection with the work and it was unreasonable to assume that they would have done all that work without expectation of any return for it. He further observed that the Claimants had introduced the principals to the Government and as a result of the partial action of the Government' by directly dealing with the principals, the opportunity of carrying through with the job to its end and of making some profits for the services rendered, was lost to the plaintiffs. According to him, since the Principals were entitled to make profit on the goods shipped by them, the Claimants were equally entitled to make profits on the service rendered by them. So, in his opinion, compensation on this account could be awarded to the plaintiffs. ' With regard to the demurrage amounting to Rs, 2,04,242 paid by the Government, it was held by the arbitrator that the claimants could not be held responsible as according to clause 15(d) of the contract, the custom duty etc. Was to be paid by the Government on mere presentation of the bill and further the delay in payment of the amount of Rs, 3 lacs deposited by K. D. A. To the Claimants to defray those expenses was delayed by the Audit Officer for one or the other reason. He also observed that when the difference could not be resolved defendants unilaterally proceeded to amend clause 15(d) of the agreement but to this Claimants did not agree and invoked clause 21 of the conditions of contract. The claimants had also offered to clear the goods without prejudice to their right to claim loss provided the balance of 90% payment of local currency expenditure was paid to them within seven days of the receipt of letter and since the record did not reveal that any
---
## Page 6
reply was given, he was inclined to conclude that the Government decided to make their own arrangement for clearing the consignment. ' The concluding portion of the award reads as under :- "I have dealt with all the important issues and am in a position to give my award. Before doing so, I would like to set down, for the sake of record, the amount demanded by the claimants, and the counterclaim made by the respondents. The claimants have claimed the following : {{TABLE}} Rs, For the loss of business 1,00,000.00 For the loss of profit 1,00,000.00 For loss of reputation and goodwill. 1,00,000.00 Total 100% local expenditure payable to the claimants in Pak currency : $ 119,569.81. 5,69,142.78 8,69,142.78 Less : Duty and clearance charges on 3rd consignment paid by the K. D. A. @ Duty 12 1/2% plus clearance 1/2% (C. I. F. Value $ 286,205.65) $ 37,206.73 Duty and clearance on 4th consignment, if to be paid by K. D. A. : C. I. F. Value Sh. 14,796.15 @ Duty 121 % plus clearance 1/2% $ 1,923.50 Total : $ 39,130.23. Less amount received on 21-5-1964 and 10-8-1964. The respondents have made the following claims :- Wrongly recovered. Customs duty. Extra duty. K. P. T. Wharfage. K. P. T. Cranning. Agency commission. Damages for the breach of contract committed by the respondents and the consequent delay of 2 years in the commencement of installation and erection work. 1,86,259.90 6,82,882.88 3,00,000.00 3,82,882.88 3,00,000.00 1,73,893.00 28,258.00 1,992.78 2,04,242.00 474.00 10,03,956.00 17,54,136.76 {{TABLE}} ' I have clearly dealt with the counter claim of the respondents and maintain that there was no wilful breach of the contract by them, but they were rather prevented from discharging their responsibilities of non-payment of funds due to them. I have also shown that the delay in the erection of machinery was primarily due to the delay in completion of the civil engineering works. In view of these reasons I do not admit the claim of any penalty or damages against the claimants by respondents. As regards the normal charges of customs duty, wharfage, etc., these had to be paid by the respondents in any case. ' As regards the claim made by the claimants, I hold that as a result of acts of omission and commission detailed in the preceding paragraphs, of the respondents, the claimants suffered loss of business, and are entitled to some compensation. I further hold that this compensation should be linked with the local currency expenditure from which the claimants expected to make reasonable profit after paying for their cost of maintaining an office and other overheads. The claimants had suggested for local expenditure the equivalent in local currency of $ 119,569.82. Their principals were willing to allow the equivalent of $ 92,000. Taking human nature into consideration, the former may be an over-estimate; while the latter may be an under estimate. Probably the
---
## Page 7
correct figures lies somewhere in-between, and I fix it at the rupee equivalent of $ 100,000. On this total amount, the claimants could reasonably expect to make a profit of 25 % which is not much, considering that they will have to give about half of it to Government in the form of taxes. I, therefore, decide that the claimants be given a compensation of the rupee equivalent of $ 25,000 which at the approximate rate of Rs, 5 to a dollar works out to about Rs, 1,25,000. The claimants have already paid Rs, 20,186.25 on account of customs duty on the first two consignments. This amount, together with the compensation of Rs, 1,25,000 should be deducted from the Rs, 3,00,000 received by the claimants from the respondents, and the balance of Rs, 1,56,814 should be returned to the respondents. These approximate figures have been worked out at the rate of Rs, 5 to a U. S. Dollar, but if the respondents so desire the exact figures may be worked at the currency official rate. I further decide that both sides should bear their own legal costs. ' Finally, both sides should pay me in equal half my fee as sole Arbitrator which had been fixed at Rs, 5,000. In addition they should pay in equal half Rs, 500 to my Stenographer for the work done by him and the actual cost of stamp papers in giving this award." ' From what has been stated, it is clear that the basis of the award is the amendment of the contract, said to have been made by letter dated 18th February, 1964, as well as the entitlement of the Claimants for compensation on account of loss of business and the expectation of making reasonable profit out of the bargain. ' The Government filed objections raising various pleas. It was asserted that the Claimants, in order to accommodate themselves, asked for making changes in the mode of payment and to this the Government showed all consideration but the Principals declined to accede to these changes. In the meantime the machinery shipped by the Principals arrived and the Claimants wrongfully did not pay the custom duty and therefore, the contract with the Claimants had to be terminated. Furthermore, the claimants wrongfully recovered Rs, 7,50,190.76 in respect of custom duty, wharfage, demurrage, agency commission, etc. Although these charges had to be borne by the Claimants as the same had been included in the trunk-key value. Claimants had also caused a loss of Rs, 10,03,946 to Government by delayed supplies. ' It was also pleaded that the arbitrator misconducted himself and the proceedings, that there were errors apparent on the face of the award, that the award was prejudicial, arbitrary and biased, that the arbitrator assumed role of Claimants and tendered unwarranted advice, that the award was perverse and introduced matters beyond the terms of the contract and reference, that in no case the law permitted any amount over and above the contracted price but the arbitrator awarded custom duty and clearance charges, etc. To the Claimants although admittedly the full amount was paid to…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.