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Petitioner: UM CORPORATION VS Respondent: KARACHI METROPOLITAN CORPORATION
Court Name: Sindh High Court Judge(s): Munib Akhtar Title: UM CORPORATION vs KARACHI METROPOLITAN CORPORATION Case No.: Suit No,1362 of 2013 Date of Judgment:2015-02-09 Reported As: PLD 2015 Sindh 369 Result: Award made Rule of Court
Judgment ORDER ' MUNIB AKHTAR, J.---By this suit, the plaintiff, a Malaysian company, seeks enforcement of an award made in its favour by a sole arbitrator on 26-9-2013. The defendant is the Karachi Metropolitan Corporation (KMC), successor to the erstwhile City District Government, Karachi (CDGK). It appears that a contract was entered into between the parties on 1-3-2006 (and was almost immediately thereafter modified by a supplemental agreement dated 2-3-2006) (together "the Agreement") for construction of an elevated expressway running along Shahra-e-Faisal from Quaidabad intersection to Jinnah bridge. The contract was preceded by a letter of intent (LOI) issued by CDGK on 17-2-2006. The project envisaged two stages. Phase I required the plaintiff to undertake a feasibility study. The feasibility had to satisfy the parameters as specified in or under the Agreement. Upon successful completion of the first phase, the plaintiff would become entitled to the award of the actual construction of the project (i,e,, Phase II). The "Total Project Cost" was defined in the Agreement, and was found to be USD 350,000,000/-. It is the plaintiff's case that it successfully carried out the feasibility study but Phase H never materialized. It therefore, as 'permissible under the Agreement, terminated the same and claimed 10% of the total project cost, i,e,, USD 35,000,000/-. The claim not having been settled, the plaintiff petitioned this Court (through JM 35/2010) under S.8 of the Arbitration. Act 1940 for appointment of an arbitrator. By order dated 22-11-2012, the learned sole arbitrator was appointed and ,after the proceedings in the reference made the present award in favour of the plaintiff. The award is for a sum of USD 35,000,000/- plus interest at the rate of 12% from 12-2-2010. Certain incidental amounts have also been awarded. 2. Although as many as ten issues were framed by the learned, arbitrator, only two matters were taken up before me by learned counsel for the defendant as objections to the award. The first
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ground was that the Agreement was invalid and unenforceable for reasons shortly to be stated. The second was that the learned arbitrator had materially misread the relevant part of the record, being the minutes of a meeting held between the parties on 3-6-2011. It was contended that the conclusion drawn from these minutes, that certain admissions had been made by CDGK, was palpably mistaken and incorrect. It was contended that the award therefore ought to be set aside. (I will hence forward refer to both CKGK and KMC, as appropriate, as the defendant.) 3. Elaborating the first ground, learned counsel for the defendant referred to the Pakistan Engineering Council Act, 1976 ("1976 Act") and certain bye- laws notified thereunder. It was submitted that the work (if any, which itself was disputed) done by the plaintiff under the Agreement (i,e,, the feasibility study under Phase I) constituted "professional engineering work" as defined in S.2(xxv) of the 1976 Act. However, no person could carry out such work without being appropriately registered under the 1976 Act. It was an admitted position that the plaintiff was not, and never had been, so registered. Learned counsel relied on S.27 of the 1976 Act (reproduced below) to contend that this meant that the Agreement was invalid and unenforceable. Reliance was also placed on the Pakistan Engineering Council (Conduct and Practice of Consulting Engineers) Bye-laws, 1986 ("1986 Bye-laws") notified under SRO 809(1)/86 dated 24-8-1986. Learned counsel relied in particular on Bye-laws 6, 8 and 9, with particular reference to registration of foreign entities that intended to engage in professional engineering work. Learned counsel submitted that since the plaintiff had violated the law and was not registered as required, the Agreement was invalid and unenforceable. It was submitted that the 'learned arbitrator had erred materially in coming to the contrary conclusion. The learned arbitrator had been strongly influenced by the definition of "applicable laws" as given in the Agreement, which according to him, excluded any application of the provisions of (and under) the 1976 Act. Learned counsel submitted that this was incorrect. In any case, the terms of the LOI stood incorporated in the Agreement and these required that the plaintiff be in compliance with all applicable laws. It was submitted that the LOI had overriding effect. This therefore meant, insofar as presently relevant, that the plaintiff had to be registered under the 1976 Act. The 1986 Bye-laws laid down a specific procedure in this regard. This registration was never obtained. It was contended that the purpose of registration under the 1976 Act was to ensure that engineering projects were carried out only by duly qualified engineers. Reference was also made in particular to subsection (5) of S.27. It was contended that the Agreement was rendered illegal by reason of the non- registration and hence could not be enforced. An award based on the same was equally invalid and had to be set aside. 4. During the course of submissions, and on the basis of the case put forward by learned counsel as above, certain queries were put by me with regard to S.11 of the Contract Act, 1872. Learned counsel submitted, with reference to this provision as also sections 10, 18 and 23 of the Contract Act that the Agreement, being illegal on account of the violations of the 1976 Act, was void and the award a nullity. Learned counsel submitted that what had been awarded to the plaintiff was a sum not by way of a quantum meruit payment (which could, perhaps, be something to which it might be entitled if the facts so established), but rather on a straightforward application of a contractual term. That term was however illegal and unenforceable. Hence, the award had to be set aside. As regards the second ground, learned counsel submitted that the learned arbitrator had failed to appreciate that the defendant's officers had made no admission at the meeting of 3-6-2011 and this was clear when the minutes were read as a whole. There was thus a material misreading of the record. What the learned arbitrator mistook to be an admission was merely a proposal or suggestion, and nothing more. Furthermore, even as proposed at the meeting, the costs and expenses incurred by the plaintiff had to be determined. For this purpose, there was nothing on the record but a report prepared by the chartered accountants tasked with this assignment. Therefore
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the conclusions that the learned arbitrator arrived at were not warranted and the award was bad on the face of it. It was liable to be set aside. 5. Learned counsel for the plaintiff prayed for a decree in terms of the award. It was submitted that the 1986 Bye-laws now sought to be relied upon were never produced before the learned arbitrator and no reference had been made to them. Rather, as was clear from the award what had been relied upon were the Construction and Operation of Engineering Works Bye-laws, 1987 ("1987 Bye- laws"), notified as SRO 568(1)/87 dated 8-7-1987. (I may note that the number of the notification is inadvertently mistyped in the award as "586".) The 1987 Bye-laws were amended in 2010, but what was relevant (and was considered by the learned arbitrator) were the Bye-laws as they stood prior to that date. In particular, reliance was placed on Bye-laws 1(2)(b), which provided that the Bye- laws did not apply to the sort of engineering works therein specified. It was contended that the Phase I feasibility study came within this category. In 2010 the exclusionary provision was omitted. However, that did not affect the plaintiff's position or its claim. Learned counsel also submitted that the learned arbitrator had rightly concluded that S.27 of the 1976 Act did not apply. It was submitted that subsections (1) and (2) thereof respectively imposed criminal sanctions on the engineer and the employer in equal terms, but no prosecution could be launched except on a complaint by the Council itself. It was submitted that subsection (5) had to be read harmoniously with these provisions and therefore the bar therein contained could not apply unless the Council raised such an issue or objection. In the present case, there was nothing of the sort. 6. Continuing with his submissions, learned counsel emphasized that the amount awarded the plaintiff was only in relation to the Phase I feasibility study, which was properly carried out and undertaken. The amount payable was fixed in the Agreement and the relevant clause provided for a minimum and a maximum. What the plaintiff had claimed was the minimum (i,e,, 10% of the total project cost). In the alternative, learned counsel submitted that this would in any case be the amount that would be awarded as a quantum meruit claim. Learned counsel submitted that there had been no misreading of the evidence by the learned arbitrator. The minutes had been correctly and properly understood and applied. The plaintiff was entitled to the sum that had been awarded. Learned counsel prayed accordingly. 7. I have heard learned counsel as above, considered the award and seen the case specifically relied upon by learned counsel for the defendant (a decision of the Indian Supreme Court, Mulamchand v. State of Madhya Pradesh AIR 1968 SC 1218). I begin by setting out S.27 of the 1976 Act, which as presently relevant is as follows: "27. Penalties and procedure.--(1) After such date as the Federal Government may, after consultation with the Council, by notification in the official Gazette, appoint in this behalf, whoever undertakes any professional engineering work shall, if his name is not for the time being borne on the Register, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both, and, in the case of a continuing offence, with a further fine which may extend to two hundred rupees for every day after the first during which the offence continues. (2) After the date appointed as aforesaid, whoever employs for any professional engineering work any person whose name is not for the time being borne on the Register shall be punishable, on first conviction, with imprisonment for a term which may extend to six months, or with fine which may extend to five thousand rupees, or with both, and on a second or subsequent conviction, with imprisonment for a term which may extend to one year, or with fine which may extend to ten thousand rupees, or with both. (5) No person undertaking any professional engineering work shall, unless he is registered under this Act, be entitled to recover before any court or other authority any sum of money for services rendered in such work.
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(6) No court shall take cognizance of any offence punishable under this Act save on complaint made by, or under the authority of, the Council. ..." ' As noted above, the first ground taken is that since the plaintiff was admittedly not registered under the 1976 Act, the Agreement is invalid and unenforceable. The submission is that since sanctions have been imposed by subsections (1), (2) and (5) of S.27 against the undertaking of any professional engineering work without registration under the 1976 Act, the Agreement is illegal and cannot be enforced. Any award based on, or awarding any amount on the basis of, such an agreement is equally invalid, cannot be enforced and must be set aside. 8. Section 23 of the Contract Act provides that if the consideration or object of an agreement is unlawful, it is void. The section itself specifies the cases in which the object or consideration is unlawful. Three of those cases could be relevant for present purposes: where the consideration or object is (a) forbidden by law, (b) "is of such a nature that, if permitted, it would defeat the provisions of any law", or (c) is opposed to public policy. When the Agreement is considered, it is clear that neither the consideration for the same nor its object (i,e,, its, scheme or design) falls into any of the three cases. Therefore, S.23 does not, strictly speaking, apply to the present. Circumstances. Nonetheless, even if an agreement does not fall foul of S.23, it may yet be unenforceable. Such type of contract is described in Pollock & Mulla on the Indian Contract Act (14th ed., 2012, Vol. I, pg. 112) as being "valid in all respects, but may not be sued upon by the parties". In my view, the objection taken by learned counsel for the defendant really amounts to this: since the plaintiff was not registered under the 1976 Act, it cannot sue upon (i,e,, enforce) the Agreement by reason of S.27. It is in this sense, i,e,, on account of the sanctions imposed by a statutory provision, that the Agreement is said to be illegal. Now, the position of coptracts that are rendered unenforceable by reason of such illegality has been explained in Chitty on Contracts (13th ed., 2008, "Chitty") as follows (Vol. I, pg. 1176; internal citations omitted): "16-142. Unenforceability by statute and common law distinguished.--The illegality which renders a contract unenforceable at common law may arise by statute. Unenforceability by statute on the other hand, arises where a statute itself on its true construction deprives one or both of the parties of their civil remedies under the contract in addition to, or instead of, imposing a penalty upon them. If the statute does so, it is irrelevant whether the parties meant to break the law or not. A significant distinction between cases of contracts which are unenforceable at common law because they were entered into with the object of committing an act illegal by statute and of contracts which are rendered illegal by statute is that in the former case one has to look to see what acts the statute prohibits; it does not matter whether or not it, prohibits a contract; if a contract is deliberately made to do a prohibited act that contract will be unenforceable. In the latter case one has to consider, not what acts the statute prohibits, but what contracts it prohibits; but one is not concerned at all with the intent of the parties; if the parties enter into a prohibited contract that contract is unenforceable and ignorance by the parties of the law does not make it the less so." ' This passage accords with what was said by a learned Division Bench of this Court in Sultan Textile Mills (Karachi) Ltd. v. Muhammad Yousuf Shamsi PLD 1972 Kar. 226 (see at pp. 232 et. Seq.). Reference may also be made to the following passages from Chitty (again, internal citations omitted): "16-154 Unlicensed transactions.--Where a statute or statutory instrument prohibits the doing of work otherwise than under a licence, a contract under which unlicensed work is carried out will generally be unenforceable...." "16-158 Statute: one party only affected.-- Statutes which prohibit certain contracts often impliedly recognize, for example by punishing only one of the parties, that the parties are not
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equally at fault, and therefore on their true construction only one of the parties to the contract is prevented from suing upon it. Accordingly, when: (.... The policy of the Act in question is to protect the general public or class of persons by requiring that a contract shall be accompanied by certain formalities or conditions, and a penalty is imposed on the person omitting those formalities or conditions, the contract and its performance without those formalities or conditions is illegal, and cannot be sued upon by the person liable to the penalties.' [Anderson v. Daniel [1924] 1 KB 138, 147] ' The other party to the contract is not deprived of his civil remedies because of the criminal default of the guilty party." ' Finally, reference may also be made to certain extracts from paras 16-147 to 152 in Chitty, where certain "aids to statutory interpretation" are set out. The learned editors state that in interpreting any statutory provision said to render a contract illegal and hence unenforceable, the "courts have ... Been reluctant to find contracts unenforceable because the illegality doctrine operates in an all a nothing way and there is no proportionality between the loss ensuing from nonenforcement and the breach of statute", and that the "courts have also been sensitive to the fact that non- enforcement may also result in unjust enrichment to the party to the contract who has not performed his part of the bargain but who has benefited from the performance by the other party" (pg. 1179). 9. Having considered S.27 in light of the foregoing, in my view a case could have been made out by the defendant of illegality, and therefore ensuing unenforceability, if the section had only contained criminal sanctions. In other words, if the section had been limited to only subsections (1) and (2) (and ancillary subsections) then the rules noted above could have applied and operated in the sense and to the extent urged by learned counsel for the defendant. However, S.27 is not so limited. It not merely provides for criminal sanctions, but also imposes a civil sanction in subsection (5). This bars the civil remedy to the extent as stated therein. In my view, this is decisive. This shows clearly that the legislative intent was not to render the contract entered into between the employer and the unregistered person wholly illegal and unenforceable, but to limit the fallout from the violation of the 1976 Act to only a bar to the civil remedy, and that too to the extent as stated in subsection (5). Obviously, the extent to which the bar operates is crucial for present purposes. This requires a closer look at the subsection. 10. The first point to note is that subsection (5) is one sided, i,e,, it operates only against the person who ought to have been registered under the 1976 Act, but is not. (For convenience, such person is hereinafter referred to as the "delinquent".) Thus, for example, it does not bar the person employing the delinquent from suing the latter, e.g., on account of any breach of the contract or in relation to the professional engineering services rendered. Secondly, even in case of the delinquent, the subsection does not bar all civil remedies. It only disentitles the delinquent from "recover[ing] before any court or other authority any sum of money for services rendered in [the professional engineering] work" (emphasis supplied). Thus, civil remedies by way, e.g., of injunctive relief are not barred. This can be of importance, as a simple example will illustrate. As is well known, in many construction or suchlike projects, the employer gives a mobilization advance to the contractor (here the delinquent) and the latter in turn posts a bond and/or gives a performance guarantee to the former. Nothing in subsection (5), would prevent the employer from, e.g., suing the delinquent for recovery of the mobilization money advanced. But equally, if the employer were, e.g., to unlawfully call the performance guarantee, the delinquent would be able (on the admittedly rather narrow grounds available in law) to sue the former and seek injunctive relief. Nothing in subsection (5) would prevent the grant of such relief. In my view therefore, the specific barring of a civil remedy in addition to the criminal sanctions imposed elsewhere therein, and the carefully circumscribed terms in which even the civil sanction is imposed, means that S.27 does not have
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the effect urged by learned counsel for the defendant. It does not render a contract between the delinquent and his employer wholly illegal and unenforceable. It has a more narrowly targeted effect, and it is now necessary to consider exactly what that effect is. 11. It is of course obvious that the civil remedy that subsection (5) does bar is of considerable importance: the delinquent cannot recover any sum of money for services rendered. In my view, there are three elements of subsection (5), of which two require consideration. These are: (a) what does the subsection mean when it states that the delinquent shall not "recover before" any court or any authority; and (b) what is meant by the words that relate to the state of delinquency, i,e,, "unless he is registered under this Act"? (The third element, "sum of money for services rendered", requires no special consideration here.) More precisely, do the words "recover before" bar a suit being filed at all, or do they have a narrower effect? And, does the clause "unless he is registered under this Act" mean that if the state of delinquency exists at the time of entering into the contract that is forever fatal, or can there be an ex post facto rectification? In order to address these questions certain English authorities can be usefully considered. In Dimond v. Lovell [2000] UKHL 27, [2000] 2 All ER 897, the House of Lords had to consider S.65(1) of the Consumer Credit Act 1974 ("UK Act"), which provided as follows: "An improperly executed regulated agreement is enforceable against the debtor or hirer on an order of the court only". Delivering the principal speech, Lord Hoffmann held as follows (pg.906; emphasis supplied): "Section 65(1) provides that an improperly executed agreement shall be enforceable only "on an order of the court." Section 127 gives the court power to make orders for the enforcement of agreements that are, for various reasons, improperly executed. But subsection (3) provides that a court shall not make an enforcement order for an agreement that does not comply with section 61(1)(a) unless the debtor signed a document containing all the prescribed terms." The hiring agreement in this case did not and is therefore irredeemably unenforceable." ' If I may adopt for present purposes the phrase coined by Lord Hoffman, the question is whether a contract entered into between a delinquent and his employer for the rendering of professional engineering services is "irredeemably unenforceable" on account of the delinquency, and that there is therefore a complete bar to the filing of a suit by the delinquent for recovery of any monies owed to him? In McGuffick v. Royal Bank of Scotland plc [2010] 1 All ER 634, [2009] EWHC 2386 (Comm) ("McGuffick"), Flaux J had to consider S.77 of the UK Act. This provided, in its first subsection, for the creditor to provide the information therein listed to the debtor, if demanded by the latter. Subsection (4) then provided: "If the creditor under an agreement fails to comply with subsection (1)-(a) he is not entitled, while the default continues, to enforce the agreement...". The defendant bank failed or refused to provide the information and the debtor being in default, threatened to give his name (as a defaulter) to credit reference agencies. The debtor sued for injunctive relief against such disclosure, arguing that since the agreement was unenforceable, the debtor could not be sued and hence his name could not be given to the agencies as a defaulter. Flaux, J held (at [19]) that it was a case of a temporary or redeemable unenforceability, since the disentitlement to enforce the agreement only lasted while the default, in providing the information under subsection (1), continued. He considered the effect of the applicability of subsection (4) on the underlying contract between the parties. After referring to a number of authorities, including those in which the question was as to the effect of a statutory disentitlement on "enforcing the contract" (at paras [61] to [63]), he concluded as follows (pg. 655, para [67]): "Taking the authorities as a whole, I consider that ... The better view is that the effect of unenforceability under section 65 [of the UK Act] is that the rights of the creditor and corresponding liability or obligations of the debtor do exist but are unenforceable, rather than that those rights were never acquired or that the creditor was deprived of those rights whilst the agreement was unenforceable."
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12. McGuffick was recently considered and affirmed by the Court of Appeal in Grace and another v. Black Horse Ltd. [2014] EWCA Civ 1413, another case relating to the UK Act, but this time involving a contract of irredeemable unenforceability. Having, considered Flaux J's judgment and the authorities noted by him, Brigg, LJ (with whom the remaining members of the Bench agreed) observed: "[30] It is clear that, in the analysis which I have thus far summarised, the reasoning underpinning Flaux J's conclusion that unenforceability did not deprive the contract of all effect, but rather left in place the debtor's liability under it, was not limited to cases of temporary or remediable…
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