' MUHAMMAD ALI MAZHAR, J.---The plaintiffs have brought this suit under section 20 of the Arbitration Act, 1940 and also filed an application under section 41 of the Arbitration Act (C.M.A.
No,4528 of 2012) for restraining the defendants from encasing pay order drawn on Bank of Punjab Ltd. In favour of the defendant No,l. The application was placed before learned Single Judge of this court on 3-5-2012 when notice was issued to the defendants and it was further ordered that if the demand draft has been encased, then the defendant No,1 shall deposit the amount of demand draft with the Nazir of this court and in case the demand draft has not been encased then the defendant No,2 even if such draft is presented shall take no action in respect of the same except with the permission of this court or may at its discretion deposit the amount with the Nazir of this court.
2. The brief facts of the case are that the plaintiff No,1 is a trading house which actively trades in commodities having its office in different countries and the plaintiff No,2 is their local agent. The defendant No,1 advertised an International Tender, Notice dated 10-1-2012 and invited bids for import of urea from foreign suppliers through worldwide sources on C&F basis. The plaintiff No,1 participated through plaintiff No,2 in the tender proceedings and submitted its bid for supply of 50,000 MT of urea. The bid of the plaintiffs was accepted by the defendant No,1 and contract was awarded accordingly. The plaintiffs in terms of tender furnished performance guarantee amounting to PKR107,000,000 in favour of defendant No,
1. In pursuance of contract, the plaintiffs arranged urea and also nominated vessel, however, due to some reasons the plaintiffs constrained to substitute another vessel in place of previously nominated vessel, which was duly informed to the defendant No,1, which was accepted. It is also the case of the plaintiffs that under clause 13 of the contract, the defendant No,1 was under obligation to open the letter of credit in favour of plaintiffs as soon as performance guarantee is furnished. The defendant No,1 delayed the opening of letter of credit by six days, however, the letter of credit was finally opened on 26-1-2012 with the expiry date 6-3-2012 according to said letter of credit last date of shipment was 7-2-2012 giving short time to the plaintiffs for shipment.
3. According to the plaintiffs due to various reasons the shipment could not be arranged in time due to which the defendant No,1 decided to cancel the contract and forfeited the performance guarantee and when approached the defendant No,2 for encashment the plaintiffs have obtained restraining order from this court.
4. It is further contended that in view of the arbitration clause no direct cancellation of tender could have been made without invoking the forum- of arbitration and the resolution of dispute in terms of arbitration clause. For the ready reference clause 25 which pertains to the cancellation of contract and clause 26 relating to the arbitration are reproduced as under:-- "25 If the Seller fails to ship the goods within the specified delivery period for reasons other than Force Majeure, the Buyer shall be entitled at his option to cancel the contract and recover the damages besides forfeiture of Performance Guarantee. The Buyer shall not be liable to any risks and costs whatsoever in consequence of such cancellation of the contract."
"26 Any difference or dispute or liability of whatsoever nature out of the contract or in any way relating to the contract or to its construction or fulfillment should be settled as far as possible, amicably between the Buyer and Seller. Should the parties fail to come to an amicable settlement the same shall be referred to the award of Arbitrators to be nominated one each by the Seller and the Buyer within fifteen days of notice from either side or in the case of the said Arbitrators not agreeing then to the award of an Umpire to be appointed by the Arbitrators in writing prior to proceeding with the arbitration. The decision of the Arbitrators or the Umpire, as the case may be, shall be final and binding on both the parties. The arbitration shall take place at Karachi under Pakistani Law of Arbitration."
5. Mr.Omair Nisar, learned counsel for the plaintiff argued that as plaintiffs were willing to perform their obligation as per terms and conditions of the tender document but the defendant No,1 created numerous problems and hindrances due to which the plaintiffs could not be able to arrange shipment within the stipulated time frame or even in the extended period. Learned counsel argued that in view of the terms and conditions the plaintiffs were entitled to contract with any international party to procure and ship the awarded quantity of urea and the plaintiffs contracted the third party to ship the urea. As per schedule given by the said third party the shipment was to be made after 14 days of establishing the letter of credit. The plaintiff No,2 written a letter to the defendant No,1 with the request to aihend the clauses 44-C and 46-A of the letter of credit but no reply to such letter was ever received hence shipment could not be processed. The defendant No,1 in its letter dated 20-2-201,2 threatened the plaintiffs for termination of contract and forfeiture of bank guarantee. However, after some correspondence the defendant No,1 agreed to make amendment in the letter of credit. The plaintiff No,2 in its letter dated 27-2-2012 informed the proposed amendment in the letter of credit to make it workable but the defendant No,1 'again raised question that the plaintiffs have failed to fulfill the contractual obligations. However, the plaintiffs again informed the defendant No,1 that due to unavoidable circumstances, they failed to ensure shipment now then it would be arranged from Ukraine. The defendant No,1 extended the date of shipment till 15-3-2012 extendable up to 20-3-2012 subject to satisfactory inspection report by a Pre-Shipment Inspection Agent appointed by the defendant No,1. The plaintiffs managed pre- shipment inspection through the agent of defendant No,1 but the end-supplier raised some issues regarding few clauses of the letter of credit, which was communicated to the defendant No, 1.
Though, the defendant No,1 extended the date of shipment but with an unreasonable condition that the negotiation df documents (indicated under clause-21 of the tender document/terms and conditions) with the bank will be subject to prior concurrence/NOC of the TCP (defendant No,1).
Learned counsel argued that this condition was in contravention of the terms and condition of tender documents and rendered the performance of contract impossible. Learned counsel further argued that though this condition was unreasonable and also in violation of the tender documents but it was accepted by the plaintiffs with the request to the defendant No,1 not to insert this condition in the letter of credit as it will make the letter of credit inoperative and no supplier or bank would be willing to work in such conditions. The defendant No,1 replied on 4-4-2012 in which they again insisted to incorporate the above clause in the letter of credit and directed the plaintiffs to convey their concurrence on the same date latest by 3-00 p.m. And without waiting for the consent of the plaintiffs the defendant No,1 proceeded to amend the letter of credit. The plaintiffs again informed the defendant No,1 the refusal of negotiating bank along with their observation that the proposed clause absolutely not workable and the bank rejected the amendment.
6. He further argued that in order to resolve the issue the working paper was prepared and the defendant No,1 wrote to MCB for amending several clauses of letter of credit and last date of shipment was extended to 30-4-2012 and the date of expiry of letter of credit was extended up to 30-5-2012 with the amendment that all the shipment documents will be verified/attested by the nominated representative of Pakistan Embassy Ukraine. It was further contended that the plaintiffs again informed the defendant No,1 the verification of shipment documents by the representative of Pakistan Embassy, Ukraine will take at least 15 to 20 days, which condition is not acceptable to the supplier, It was further communicated that all arrangements are in place and cargo is available and ready to be shipped at shortest possible notice. The plaintiffs further informed the defendant No,1 that due to this condition the letter of credit has become non-operative. Meanwhile, the defendant No,
1. Again advertised the tender for invitation of bids for supply of urea and the Man- ager of the Bank of Punjab informed the plaintiffs on 2-5-2012 that the defendant No,1 wanted to encash the performance guarantee. On knowing this fact the plaintiffs have filed this application for appointment of arbitrator. Learned counsel also referred to the Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication. No,600 ("UCP") and relied upon Article 10 which provides that except as otherwise provided by Article 38, a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any and beneficiary. In support of his argument learned counsel relied upon the following case-law: --
(1) AIR 1987 ORISSA 59 (Janardan Mohapatra v. Executive Engineer, Sambalpur Central Works, Dbivision CPWD and another). In this case it was held that the power's of the court under the Second Schedule to the Act can be exercised even in a case where the reference to arbitration has been made without the intervention of the court. This provision was intended to empower the court to pass interim orders for the preservation or safety of the subject matter of the dispute during the pendency of the arbitration proceedings. In cases where an application is filed under section 20 of the Act or where reference to arbitration .Is made through the intervention of the court, the court has seisin of the case and can undoubtedly pass interim orders, but there is no reason to suppose that the court has no power under section 41(b) read with the Second Schedule to prevent the properties from being wasted while it is pending before the arbitrator. (See AIR 1964 Madh Pra 219; Daultaram Phoplchand v. Shriram). It is apparent from a plain reading of section 41 that it provides both for the case where the arbitration proceeding is pending before a court as well as for one where such proceedings are not pending before the court AIR 1962 Mad 436 (S.V. Seshmull v. S.N.
Umaji & Co.) and AIR 1964 Madh Pra 219 (supra).
(2) 2002 SCMR 1694 (Societe Generale De Surveillance S.A. v. Pakistan through Secretary, Ministry of Finance, Revenue Division, Islamabad). In this case it was held that under sections 20 and 41 Application to file arbitration agreement in Court has the legal status of a suit. Court in which proceedings are pending is competent and vested with the jurisdiction to pass interim orders as could be passed in a regular suit in the form of temporary injunction or otherwise. Trial Court, after having held that the arbitration proceedings initiated were competent and maintainable for the reason that arbitration clause of the agreement was holding the field and was binding on the parties and its legal efficacy and enforceability had not been in any manner adversely affected by Bilateral Investment Treaty and International Centre for Settlement of Investment. Disputes arbitration clause, the legal consequences to follow were that International Centre for Settlement of Investment Dispute arbitration was not maintainable and should not have been allowed to be prosecuted any further. If the cdurt passes an order for reference of the matter to arbitrators, it would amount to acceptance of the application and no formal order of filing of arbitration agreement is necessary, for the court while passing such an order would be deemed to have taken the agreement on the file.
(3) 2011 CLD 1625 (Messrs Continental Cable (Pvt.) Ltd., v. Messrs China Harbor Engineering Co.
Ltd. And another) In this case it was held no injunction should normally be granted to restrain encashment of an unconditional Bank Guarantee issued to cover the amount advanced by way of mobilization advance, It is also well settled that performance bond/guarantee stands entirely on different footings, and again, normally it would not be just and proper to allow its encashment when prima facie evidence of breach of contract was available. In the case of Pakistan Engineering Consultants v. Pakistan International Airlines Corporation, a Division Bench of this court held that unless there was prima facie evidence of breach of principle contract, encashment of performance bond was not justified. The observation of the Division Bench of this court in the case under discussion was upheld by the Hon'ble Supreme Court of Pakistan reported as 1989 SCMR 379.
The above case was followed by this court in the case of Zeenat Brothers v. Awan-e-Iqbal Authority's case (PLD 1996 Karachi 183) where again the same distinction was given with regard to mobilization advance guarantee and that of performance bond guarantee. It was held that since encashment of performance bond was dependent on determination of question as to who had committed default for fulfillment of its obligations or in completion of work within given period and such question require evidence, encashment of performance bond guarantee was declined.
(4) 2011 CLC 664 (Ch. Abdur Rauf v. MRs, Zubeda Kale= and others). In this case it was held that the Second Schedule of the Arbitration Act relates to section 41 and deals with powers of Courts in connection with interim injunction etc. It has been observed that powers of the Court under Second Schedule to the Arbitration Act can be exercised even in a case where reference to Arbitration has been made by intervention of the Court. The effect of the provision of section 41(b) of the Act is to clothe the Court with the same powers in relation to the Arbitration proceedings and to issue interim order for the preservation and safety of the subject-matter of the dispute. It may be observed that section 41(b) of the Arbitration Act provides that the Court shall have for the purpose of and in relation to arbitration proceedings, the same power of making orders in respect of any of the matters set out in the Second Schedule of the Act as it is for the purpose of and in relation to the proceedings before the Court.
(5) 2003 YLR 1450 (Zawar Petroleum v. OGDC and others). It was held that under section 41(b) of the Arbitration Act, 1940. The Court shall have for the purpose of, and in relation to, arbitration proceedings, the same power of making orders in respect of any of the matters set out in the Second Schedule. Before an interlocutory injunction is granted, the plaintiff/ petitioner must (i) have an extremely strong prima facie case; (ii) show actual or potential damage of a very serious nature i,e, irreparable loss, the order should not be sought as a fishing expedition; and (iii) the balance of convenience must favour the grant of interim injunction.
(6) PLD 1976 Karachi 644 (Messrs Jamia Industries Ltd., v. Messrs Pakistan Refinery Ltd; Karachi).
In this case it was held that there can be no cavil against the proposition of law that the existence of a difference or dispute is an essential condition for making a reference to the arbitrator, for, that constitutes a cause of action for an application under section 20, Arbitration Act. The Court, has, therefore, to be satisfied that a real question of difference has arisen before compelling the parties to submit to arbitration. A dispute implies an assertion of a right by one party and repudiation thereof by another. In other words materials for a -lis as suc must be shown to exist. Scope of the power conferred on the Court under Section 20 is merely limited to determination of the factum of a real dispute and no more. It is not for the Court to go into the questions pertaining to the disputes raised or suggest the manner of decision thereof. For that would amount to usurping the jurisdiction of the domestic tribunal constituted under the arbitration agreement.
7. Syed Mamnoon Hassan, learned counsel for the defendant No,1 argued that the plaintiffs have not approached this court with clean hands. There is no dispute hence reference to arbitrator does not arise. The plaintiffs have committed default in fulfilling their contractual obligations despite availing sufficient time and extension in shipment dates. Under clause 37 of the contract the plaintiffs were obliged to fulfill their responsibility. The plaintiffs misled this court and obtained interim relief. Learned counsel also referred to Clauses (x) and (xii) of the affidavit in rejoinder submitted by the plaintiffs in which they stated that they are still ready to supply the awarded quantity on the same rates but subject to deletion of unworkable clause in the letter of credit. In response the defendant No,1 submitted a letter dated 28-5-2012 in this court with certain terms and conditions including the insertion of clause required to be made in the letter of credit that the shipment documents will be verified by the Pakistan Embassy in the country of shipment. Few other conditions were also mentioned in the letter including the penalty. It was further averred that the plaintiff No,1 itself cancelled the letter of credit, According to the learned counsel the main cause of concern of the plaintiffs is to avoid the forfeiture and or encashment of bank guarantee for which the defendant No,2 already issued a demand draft but the proceeds were stopped by the defendant No,2 in view of the interim order passed by this court on the interlocutory application moved under section 41 of the Arbitration Act. He further contended that the present application under section 20 of the Arbitration Act is hit by principle of "Acquiescence', 'Estoppel', and 'Aprobate and Reprobate". The letter of credit was opened by the defendant No,1 in favour of plaintiff No,1 through MCB and the last date of shipment of the entire cargo was 7-2-2012. The nomination of vessel was approved by the defendant No,1 but subsequently no information about the actual arrival of the vessel was given. The plaintiff No,1 withdrew the previous nomination and nominated another vessel. This nomination was again accepted by the defendant No,
1. The plaintiff No,1 requested for amendment in letter of credit without indicating the cargo and vessel. The plaintiffs requested for further extension in the shipment period up to 20-3-2012 and again nominated another vessel which was in fact the fourth vessel nominated in a row. The defendant No,1 accepted the fourth nomination also. In view of the consistent approach and in order to protect the interest the defendant No,1 granted extension up to 20-4-2012 on conditions that the supplier will not apply for further extension and the amendment in letter of credit will be subject to the conditions that the cargo will be presented to the pre-shipment inspection agent appointed by T.C.P. But negotiations documents with the bank will be subject to prior concurrence/NOC of the T.C.P. Inter alia that the supplier will arrange extension for the performance bond/guarantee. The defendant No,1 issued instructions to MCB for amendment in the letter of credit and incorporated a clause that all shipment documents will be verified by the nominated representative of Pakistan Embassy, Ukraine with instructions to delete the condition of presentation of the cargo to the pre-shipment inspection agent duly authorized by T.C.P. But again the plaintiff No,1 communicated that letter of credit is not workable in view of the clause relating to verification of documents of by Pakistan Embassy Ukraine. Since the plaintiffs were avoiding contractual obligations on one pretext or the other, therefore, the defendant No,1 decided to cancel the documents under Clause 25 of the tender documents and forfeiture of performance guarantee. In support of his arguments learned counsel relied upon following case-law:--
(1) 1979 CLC 625 (Messrs Asadullah Khan & Co. Ltd. Karachi v. Karachi Shipyard & Engineering Works Ltd. And another). It was held that the powers conferred on the Court under the Second Schedule to Arbitration Act could be exercised only if any proceedings were pending before the Court or in relation to arbitration proceedings and not otherwise. As stated above it is an admitted position that on the date when the present application was filed no proceedings were pending in this Court. Admittedly the application under section 20 of the Arbitration Act if any, has been filed subsequently.
(2) 1980 CLC 346 (Messrs Shaukat & Raza Ltd. Karachi v. The Karachi Development Authority, Karachi and another). In this case it was held that proceedings can be said to have commenced only when some action taken before arbitrator, Court or authority. Neither arbitrator appointed nor reference made. Proceedings, held, cannot be said to have commenced in circumstances of case.
(3) 1984 CLC 546 (Arbab Abdul Qadir v. Mst. Bibi Fatima and another). In this case it was held that the words "subject-matter of the reference" used in paragraph (1) of Schedule II of the Act are indicative of the stage when such powers could be exercised. The term "subject-matter of the reference" should mean in the context, the stage when reference to arbitration has already been made and before the award is filed. As long as reference is not made clause (a) of section 41 applies and after reference is made Court can exercise powers under section 41 (b) of the Act. If a situation arises before reference to warrant action of interim nature Court can exercise those powers under the Code of Civil Procedure, The words "subject-matter of the reference" would not have been there if it was intended that these powers were to be exercised before reference. The use of these words in clause (b) means that reference has already been made and person has been made to secure that property involved is not disposed of, alienated or damaged during arbitration proceedings.
(4) 1987 CLC 2063 (Messrs Commodities Trading International Corporation v. Trading Corporation of Pakistan Ltd. And another). In this case it was held that under section 41 notice issued to opposite party for appointment of arbitrator before expiry of time to enable other party to appoint his arbitrator, application under section 41 of Arbitration Act whether maintainable, where petitioner had issued notice appointing his own arbitrator and before expiry of time during which opposite party could appoint his arbitrator, filing of application by such petitioner under section 41 of the Act, held, was not maintainable. No arbitration proceedings were pending as other side had not yet appointed its arbitrator within period specified in agreement.
(5) 1997 SCMR 1508 (Islamic Republic of Pakistan v. Muhammad Zaman Khan and others). In this case it was held that object of passing interlocutory order or status quo was to maintain situation obtaining on that date when party concerned had approached Court and not to create new situation. Court could not grant interlocutory relief of the nature which would amount to allowing main case without trial/hearing of same respondent having handed over charge of their offices pursuant to notification of termination of services. High Court could not have created new situation by suspending termination ordeRs, High Court, thus, could not have reinducted respondents into service before disposal of their constitutional petition. Impugned interlocutory orders were, thus, not sustainable in law and were set aside in circumstances.
(6) 1982 CLC 344 (Mst. Sughra Bai v. Mst. Rabia). In this case it was held that injunction granted only to restore status quo and not to create a new situation. Passing of orders aimed at establishing a new state of things different from those existing prior to institution of suit, held, not warranted.
(7) PLD 1968 Karachi 222 (Alavi sons Ltd. v. The Government of East Pakistan and others). In this case it was held that suit for injunction that defendant Bank be restrained and prohibited from paying over guarantee amount to person entitled to guarantee arranged for by plaintiff, not maintainable. The relief of injunction sought by the plaintiffs to restrain the defendant No,3 form making payment of the guaranteed amount to the Government of East Pakistan also cannot be granted, because, firstly an injunction of this nature does not come within the scope of Chapter X of the Specific Relief Act, under which alone the plaintiffs could come for preventive relief, and, secondly, the reliefs which the plaintiffs seek to obtain in this suit can be effectively obtained in other usual proceedings.
(8) PLD 1994 SC 311 (Messrs National Construction Ltd. v. Aiwan-e-Iqbal Authority). In this case it was held bank guarantee furnished by appellants contained categorical undertaking and imposed absolute obligations on Bank to pay the amount, irrespective of any dispute which might arise between parties regarding breach of contract. Bank guarantees being independent contracts Bank authorities must construe them independent of the primary contracts. Discretion exercised by Courts below in refusing to grant temporary injunction by restraining respondent from encashment of Bank guarantees in respect of amount advanced to appellant could neither be deemed to be arbitrary nor fanciful. Respondent was rightly found entitled to encash Bank guarantees to the extent of the balance unadjusted amount. Temporary injunction for restraining respondent from encashing Bank guarantees was rightly refused in circumstances.
(9) PLD 2003 SC 191 (Shipyard K. Damen International v. Karachi Shipyard and Engineering Work.
Ltd.). In this case it was held that when contract becomes unenforceable against principal debtor.
Bank guarantee is similar to an irrevocable letter of credit. Bank guarantee is an independent contract between Bank and customer imposing absolute obligation on Bank to comply with its terms, irrespective of any dispute between parties to principal contract. Bank guarantee becomes due on happening of a contingency on which same becomes enforceable. Bank must pay On demand, if so stipulated, without proof or conditions, in absence of any special equities or clear/established fraud. BNank's obligation ends, once Bank guarantee is discharged. Court should refrain from probing into nature of transactions between Bank and customer, which led to furnishing of Bank guarantee. Unqualified terms of guarantee cannot be interfered with by Court.
(10)2010 CLD 196 (Standard Construction Company Pvt. Ltd. v. Pakistan through Secretary, M/0 Communication and others). In this case it was held that referring dispute to arbitrator stay of encasing of bank guarantees. Dispute between the parties was with regard to encasing of three bank guarantees provided by appellant to respondent authorities. High Court while referring matter to arbitrator, had gone deep and discussed minutely various clauses, terms and conditions of agreement and other relevant documents and their effect for arriving at its conclusion.
Appellant sought stay against encasing of three bank guarantees. Validity. After referring dispute to arbitrator it was not appropriate and uncalled for High Court to discuss the agreement as such findings of High Court would influence proceedings before Arbitrator. Supreme Court, while disproving such observations c High Court, declined to either affirm or not affirm findings of High Court with comments on merits of the cases. Without interpreting terms of agreement, definite conclusion would not be possible as to whether conditions as required for encasing of bank guarantees had been fulfilled or not and by not doing so Supreme Court left it to arbitrator to deal with question -of encashment of two guarantees relating to Toll collection according to law while making an award. Supreme Court partly allowed the appeal by holding that authorities were entitled to encashment of pre-bid bank guarantee and restrained them from encashment of other two bank guarantees till the finding given by arbitrator in that respect. Appeal was allowed.
8. Heard the arguments. Section 20 of the Arbitration Act. 1940 empowers the court to order that the agreement to be filed in court with an order of reference to resolve the dispute through arbitrator appointed by the parties and where parties cannot agree upon an arbitrator the court may appoint the arbitrator and all or any of the parties to an arbitration agreement may apply under this section to have it filed in court and a reference be made to arbitration, however, there are certain conditions to make this section applicable that the parties must have entered into arbitration agreement, the agreement must have been entered into before a suit with respect to its subject matter is filed in court and a difference contemplated in the agreement must have arisen.
This section covers the case where the parties agree to refer their differences to arbitration before having recourse to litigation in court of law. Existence of a difference or dispute between the parties is an essential condition for making reference to arbitrator. Scope of powers conferred upon court under section 20 of Arbitration Act is limited to the determination for factum of a real dispute or not more. Clause 26 of the agreement relates to the arbitration clauses. It is a fact that defendant No,1 extended time of shipment many times and the plaintiff nominated at least 4 vessels for shipment but the bone of contention is that the defendant No,1 insisted the incorporation of such condition in the L.C. Which made the L.C. Unworkable. The plaintiffs communicated the defendant No,1 a request to amend clause 44-C and 46-A of the letter of credit, which was not replied rather the defendant No,1 threatened for the cancellation of contract. End supplier raised some issues regarding the L.C., which were communicated and request was made for further extension in the date of shipment.
The extension was awarded with the condition that negotiation of documents communicated under Clause 21 of the tender documents with the Bank will be subject to the concurrence/NOC of T.C.P. Learned counsel argued that according to plaintiff this clause was in contravention of the terms and conditions of tender documents and rendered its performance impossible. A working paper was also prepared and the shipment period was further extended up to 30-42012 and expiry of L.C. Extended up to 3-5-2012 with further amendment that all shipment documents will be verified/attested by nominated representative of Pakistan Embassy Ukraine.
9. The defendant No,1 took the stand that the plaintiffs failed to fulfill their contractual obligations despite various extensions in the date of shipment, however, the proposed amendment required, to be made in the L.C. Was not disputed by counsel for the defendant No,
1. He pointed out Clauses 10 to 12 of affidavit in rejoinder submitted by the plaintiffs in which they shown their willingness to supply awarded quantity on the same rates, but subject to deletion unworkable clause from the letter of credit.
10. During pendency of this suit counsel for the defendant No,1 submitted a letter of 'defendant No,1 dated 28-5-2012 in court on 6-6-2012. In fact in this letter the instructions were given by T.C.P. To their learned counsel with no objection if the same cargo is supplied at the original contract rates with fresh performance guarantee. Though in this letter various clauses were proposed relating to the date of shipment, reopening of L.C. Rate of penalty etc. But again a condition was proposed that the supplier will nominate the vessel and offer the cargo to Pre-Shipment Cargo Agent duly nominated by T.C.P. Within due course of time to ensure-that the cargo is shipped within the shipment period. It was further stated that a clause relating to verification of the shipment documents by Pakistan Embassy in the country of shipment may be provided/maintained in the L.C. In order to protect the corporation's interest vis-a-vis any possible attempt on encashment of L.C. Against improper/non-genuine documents. The whole controversy between the plaintiff and defendant No,1 is roaming around the modalities suggested by them to each other regarding the terms and conditions of L.C. Sometimes the plaintiffs requested for amendment sometimes defendant No,1 insisted that new clauses be incorporated in the L.C.
11. In my view the allegations and counter allegations levelled by the parties against each other and which party committed default and become instrumental in breach of contractual obligations require evidence there is no doubt that there are certain differences between the parties relating to the terms and conditions of the L.C. And the modalities of 'shipment which is required to be resolved through arbitration and since there is an arbitration clause in the agreement, therefore, it would be just and proper to appoint arbitrator to resolve the dispute. At this stage while considering the application under section 20 this court cannot dilate the factual controversy in the limited scope which requires evidence before the arbitrator, who is fully competent to decide, which party committed default in its obligation whether the shipment was delayed or become impossible due to default or inaction of the plaintiffs or the plaintiffs were sincere to perform their obligation in accordance with tender but it was the defendant No,1, who created undue interference and hindrance and insisted to include or incorporate unreasonable clauses in the letter of credit, which made the letter of credit unworkable and the supplier raised objection for which the entire deal or possibility of shipment was frustrated. There is no cavil to the proposition expounded in the case of Messrs Jamia Industries Ltd. supra that the existence of a difference or dispute is an essential condition that constitutes a cause of action for an application under section 20, Arbitration Act. A dispute implies an assertion of a right by one party and repudiation thereof by another. The scope of the power conferred on the Court under section 20 is merely limited to determination of the factum of a real dispute and no more. It is not for the Court to go into the questions pertaining to the disputes raised or suggest the manner of decision thereof, which was amount to usurping the jurisdiction of arbitrator. If court passes an order or reference of the matter to arbitrators, it amounts to acceptance of application and no formal order of filing of arbitration agreement is necessary for the court while passing such an order it would be deemed to have taken the agreement on the file.
12. Now I will take-up the application (C.M.A. No,4528 of 2012) moved by the plaintiffs under section 41 of the Arbitration Act, 1940 read with Order XXXIX, rules 1 and 2, C.P.C. In which the plaintiffs have prayed that the defendants be restrained from encasing demand draft No,2018269 dated 2-5-2012 drawn on Bank of Punjab in favour of the defendant No,1 and to deposit the same with the Nazir of this court till pendency of the application and/or arbitration proceedings. It was further prayed that the defendant No,1 be also restrained from cancelling Letter of Credit dated 26-1-2012 issued in favour of the plaintiffs. Under section 41 of the Arbitration Act the court for the purpose of and in relation to arbitration proceedings have the same powers of making orders in respect of all the matters set out in the second schedule as it has for the purpose of and in relation to any proceedings before the court. Before an interlocutory injunction is granted, the plaintiff must prove that it has an extremely strong case and must show actual or potential damage of very serious nature i,e,, irreparable loss and balance of convenience must favour the grant of interim injunction and the order should not be sought as a fishing expedition. In the case in hand on the basis of bank guarantee/performance guarantee issued by Bank of Punjab in favour of, the defendant No,1, they issued aforesaid demand draft equivalent to a sum of bank guarantee in favour of the defendant No,1. The bank issued the demand draft equivalent to the sum of bank guarantee and the plaintiffs have also attached copy of demand draft with their application moved under section 20 of Arbitration Act. Copy of bank guarantee is available on record which was issued on 20-1-2012 in favour of Trading Corporation of Pakistan (Pvt.) Ltd., which has been referred to as Buyer and the plaintiff No,1 has been referred to as Seller in the Indenture of Bank Guarantee. The relevant clauses of performance guarantee are reproduced as under:-- "(2) AND whereas the seller has requested us to issue a guarantee for an amount of Rs,107,000,000 (Rupees One Hundred Seven Million only.)
(3) NOW, therefore, in consideration aforesaid. We The Bank of Punjab Railway Road Faisalabad hereby undertake and guarantee due performance of the contract by the Sellers in all respect and we unconditionally and absolutely bind ourselves to the following:
(i) To make payment at once of Rs, 107,000,000 to the Buyer, or as directed by the Buyer on the date of receipt of demand in writing without any question whatsoever and without oral or written reference to the Seller.
(ii) To keep this guarantee valid and in force for ten (10) days after completion of contract including settlement of all claims made by the Buyer.
(iii) To extend this guarantee for such further period or periods as may be required by the Buyer in the Buyer's sole discretion, before the expiry of the validity date.
(4) We understand that this guarantee is unconditional and that the sole judge for deciding whether the Seller has performed the contract and fulfilled the terms and conditions of the contract will be the Buyer including claims by Buyer.
(5) We further understand that any grant of time or indulgence to the Seller without reference to us shall not in any manner absolve us from liability to make patient to the Buyer as stipulated under this Guarantee."
13. The terms and conditions of aforesaid performance guarantee unequivocally show that performance guarantee was unconditional and sole Judge for deciding whether the seller has performed the contract and fulfilled the terms and conditions of the contract will be the buyer including claims by buyer. It further stipulated that any grant of time or indulgence to the seller without reference to the bank shall not in any manner absolve the bank from liability to make payment to the buyer as stipulated in the guarantee. In order to fulfill and honour the commitment made by the bank, they issued the the demand draft. Though under the terms of guarantee, the bank was bound to make payment as directed by buyer on the date of receipt of demand in writing without any question whatsoever and without oral or written reference to the seller but on contrary the bank informed the plaintiffs and the plaintiffs have also arranged the copy of demand draft which they have annexed with the plaint.
14. The learned counsel for the plaintiffs referred to the cases of Janardan Mohapatra -and Societe Generale De Surveillance S. A. Supra in which it was held that powers under section 41 of Arbitration Act can be exercised by court in an appropriate case for the purpose of and in relation to arbitration proceedings. Hon'ble Supreme Court held that according to section 20 of Arbitration Act, the application has legal siatus of a suit. Apart from that, under section 41, of Arbitration Act, the court in which the proceedings are pending, is competent and vested with the jurisdiction to pass interim orders as could be passed in a regular civil suit in the form of temporary injunction or otherwise. The learned counsel also referred to the case of Messrs Continental Cable supra in which learned Single Judge of this court though fully cognizant of the fact that no injunction is normally granted to restrain encashment of unconditional bank guarantee and also relied upon the case of Pakistan Engineering Consultants and two others cases reported in 1989 SCMR 379 and PLD 1996 Karachi 183 and held that since encashment of performance bond was dependent of determining of question as to who had committed default for fulfillment of its obligations or in completion of work without given period and such question requires evidence and encashment of performance bond was declined. The learned Single Judge restrained the encashment on the ground that plaintiff in that case performed under sub-contract substantially and encashment of performance bond was found detrimental to the interest of the plaintiff. The facts and circumstances of the above case as compared to the case in hand are distinguishable as in this case, the plaintiffs have not performed any act so far under the tender documents or contract and dispute between the parties is allegedly relating to insertion of few terms and conditions of Letter of Credit. The leamed counsel also relied upon the case of Ch. Abdul Rauf supra. Though in this case also powers conferred upon the court under section 41, Arbitration Act read with Second Schedule were discussed but facts are distinguishable as it does not relate to bank guarantee or its encashment but plaintiffs asked restraining order from changing status of immoveable property.
Lastly learned counsel referred to the case of Zawar Petroleum supra in which again learned Single Judge of Lahore High Court discussed powers of court conferred under section 41 of Arbitration Act but facts are distinguishable as case was only relating to Joint Venture and "Concession Agreement" for exploring, discovery and production of petroleum in Pakistan. The applicant in the revision application filed in Lahore High Court challenged the grant of Development and Production Lease by Government of Pakistan to the respondent No,1 as according to applicant it was opposite to the Joint Venture. Though court held that under section 41 the court has power to issue interim injunction on certain conditions but the above revision application was dismissed.
15. Learned counsel for the defendant No,1 referred to the cases reported as 1979 CLC 625, 1980 CLC 346, 1984 CLC 546 and 1987 CLC 2063. All the said case-laws discussed the powers conferred upon the court under section 41 of the Arbitration Act but the facts and circumstances of the case are distinguishable. In this case not only plaintiffs filed application under section 20 of appointment of arbitrator but for an interim relief they also moved an application 'under section 41 of the Arbitration Act. There is no question involved regarding the maintainability of applications. He further relied upon 1997 SCMR 1508 in which it was held that the object of passing interlocutory order or status quo was to maintain situation obtaining on that date when party concerned had approached the court and not to create new situation and the court cannot grant interlocutory relief of the nature. Which was amount to allowing main case. The grievance of the defendant No,1 is that the defendant No,2 issued the demand draft and in fact performance guarantee was encased, but this court directed not to present the pay order and if the demand draft is encased then the defendant No,1 and or 2 as the case may be shall deposit the amount of demand draft with the Nazir of this court. The demand draft was deposited in the bank account of the defendant No,1 on 4-5-2012 but according to slip issued by the bank the payment was stopped in view of the interim order passed by this court. He further referred to 1982 CLC 344 in which again it was held that injunction granted only to restore a status quo and not to create new situation. In the case reported in PhD 1968 Karachi 222, the learned Single Judge of this court while deciding the suit held that the suit for injunction that defendant bank be restrained and prohibited from paying over guarantee amount to person entitled to guarantee arrange for by plaintiff was not found maintainable. Malik Khushal Khan, learned counsel for the defendant No,2 argued that the main dispute is between the plaintiffs and defendant No,1, however in order to implement the interim orders passed by this court, the encashment of demand draft was deferred by the defendant No,2 till further orders of this court.
16. At this juncture 1 would like to refer to section 126 of the Contract Act which provides that the contract of guarantee is 'a contract to perform the promise, or, discharge the liability of a third person in case of his default. The person who gives guarantee is called the surety, the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor. A bank guarantee furnished in a case involving absolute obligation imposed upon the bank to honour the same. Performance guarantee, performance bond, bank guarantees and letter of credit imposed an absolute obligation on the bank to pay irrespective of any dispute which may arise between the parties on the question as whether parties have fulfilled their part of contract or not. Where purchaser encased bank guarantee after the seller failed to supply the consignment the bank guarantee first constituted independent contract. Where the performance guarantee is .Found irrevocable in nature as in this case the doctrine of frustration of contract does not apply. In the case of National Construction Ltd.
Supra the Hon'ble Supreme Court held that the bank guarantee furnished by the appellants contained categorical undertaking and imposed absolute obligations on the bank to pay the amount irrespective of any dispute which may arise between the parties regarding the breach of contract. The apex court held that the courts must give effect to the covenants of the bank guarantees, the performance guarantees for the smooth performance of contracts. Those guarantees are independent contracts and the bank authorities must construe them, independent of the primary contracts. They should encash them notwithstanding any dispute arise out of the original contract between the parties. Finally the Hon'ble Supreme Court held that the encashment of bank guarantees cannot be postponed pending decision of the arbitration proceedings, which may take years to conclude.
17. In the case of Shipyard K. Damen again the Hon'ble Supreme Court held that the bank guarantee is similar to an irrevocable letter of credit which is an independent contract irrespective of any dispute between the parties to the principal contract. It was further held that bank must pay on demand if so stipulated without proof or conditions in absence of any special equities or clear/established fraud. Unqualified terms of guarantee cannot be interfered with irrespective of existence of dispute nor can interim of injunction restraining payment thereunder be granted, commitments of banks must be honored free from interference of the court. The bank guarantee should be D enforced on its own terms and realization against the bank guarantee would not affect or prejudice the case of contractor if ultimately the dispute is referred to arbitration for the reason, once the terms and conditions of the guarantee are fulfilled the bank liability under the guarantee was absolute and it was wholly independent of the dispute proposed to be raised.
18. In the case of Standard Construction Company (supra) the Hon'ble Supreme Court held that the bank guarantee generally contained in its contents whereby E guarantor undertakes to agree irrevocably and unconditionally to the payment to beneficiary. Amount mentioned in bank guarantee and demand of beneficiary is deemed to be conclusive evidence and beneficiary is considered as sole judge, prescribe certain eventualities on happening whereof beneficiary is entitled to demand encashment of guarantee. Ultimately, in this case the Humble Supreme Court held that authorities were entitled to encashment of pre-bid bank guarantee, which was unconditional bank guarantee. However, in the same case encashment of two subsequent bank guarantees were restrained, which were conditional on the fulfillment of certain conditions in the main agreement and does not allow the beneficiary to be a sole judge.
19. In the case in hand I have carefully examined the terms and conditions of bank guarantee and also reproduced the relevant clauses in which it was clearly agreed that the guarantee was unconditional and buyer was the sole judge to decide whether the seller has performed the contract and fulfilled the terms and conditions of the contract. The guarantor also agreed to honour the guarantee as directed by the buyer on the date of receipt of demand in writing without any question whatsoever and without oral or written reference to the seller. Keeping in view the dictum laid down by the Hon'ble Supreme Court, it is clear beyond any shadow of doubt that unqualified terms of guarantee cannot be interfered with irrespective of existence of dispute nor interim of injunction restraining payment thereunder can be granted. The commitment of bank must be honored free from interference of the court. As a result thereof, I have no hesitation in my mind to hold that no case is made out for passing or confirming the restraining order against the encashment of performance guarantee.
19. For the foregoing reasons, the suit is disposed of with the directions to the plaintiff No,1 and defendant No,1 to nominate their Arbitrators in order to resolve the dispute between the parties in view of Clause 26 of the agreement. However the application (C.M.A. No,4528 of 2012) moved under section 41 of the Arbitration Act is dismissed; consequently, the interim orders are recalled and defendant No,2 is directed to encase the demand draft. It is clarified that if the arbitration proceedings are concluded in favour of the plaintiff No,1, the defendant No,1 shall refund the amount of performance guarantee to the plaintiff No,1 forthwith.