MIANGUL HASSAN AURANGZEB, J. Through the instant appeal under Section 39 of the Arbitration Act, 1940 ("the 1940 Act") the appellant, Hajvairy Associates (Pvt.) Limited, impugns the order dated 21.10.2021 passed by the Court of the learned Civil Judge, Islamabad whereby the application filed by the appellant under Section 34 of the 1940 Act praying for the proceedings in the civil suit instituted by the respondent, M/s Power Construction Corporation of China Limited, to be stayed was dismissed and the appellant was called upon to file a written statement.
2. The facts essential for the disposal of the instant appeal are that the Water and Power Development Authority ("WAPDA") published a notice in newspapers inviting bids for the award of the contract for civil works for Keyal Khwar Hydropower Project ("the Contract"). The appellant and the respondent executed agreements on 25.07.2012 and 08.06.2013 to participate in the bidding process as a joint venture. The appellant is a Pakistani company whereas the respondent is a company incorporated under the laws of the People's Republic of China.
3. The joint venture of the appellant and the respondent (hereinafter referred to as the "Hajvairy- Sinohydro JV") submitted its bid on 21.06.2013 and emerged as the successful bidder for the award of the Contract. Vide letter dated 28.01.2014, Hajvairy-Sinohydro JV's bid of Rs.14,544,825,431/- was accepted by WAPDA. Furthermore, through the said letter, Hajvairy-Sinohydro JV was required to commence works and to furnish a performance security for an amount equivalent to 10% of the contract price in the form of a bank guarantee and in accordance with the format provided in the bidding documents within 28 days. The said letter also provided that an advance payment equivalent to 10% of the contract price would be released against an irrevocable bank guarantee to be furnished by Hajvairy-Sinohydro JV.
4. On 19.09.2014, a formal contract was signed by WAPDA and Hajvairy-Sinohydro JV. The contract executed between the parties provided that documents including the letter of acceptance, the Particular Conditions of Contract, and the General Conditions shall be deemed to form and be read and construed as part of the Contract between the parties. Clause 8.2 of the Particular Conditions of Contract (Part-A) provided for a contract period of 48 months from the effective date of the commencement of works. Clause 14.2 of the Particular Conditions provided for the advance payment to be paid in two equal installments. The first installment was payable not later than the commencement date, whereas the second installment was payable when the Hajvairy- Sinohydro JV substantially completed mobilization at the site to the satisfaction of the Engineer.
The advance payment was to be repaid by the Contractor to WAPDA through deductions from each interim payment certificate. The project site was partially handed over to the Hajvairy- Sinohydro JV on 06.09.2016. The Engineer issued a Notice of Commencement showing the effective date of commencement of works to be 13.08.2016.
5. On 25.02.2014, Hajvairy-Sinohydro JV furnished an irrevocable performance bond in the form of an irrevocable bank guarantee issued by United Bank Limited ("UBL") for an amount of Rs.1,454,482,431/- in favour of WAPDA. This guarantee could be en-cashed on WAPDA s written declaration that the joint venture had failed to perform its obligations under the contract. On 17.10.2014, Hajvairy-Sinohydro JV furnished an irrevocable bank guarantee issued by UBL for an amount of Euros 3,416,712.19 and Rs.873,407,827.70 in favour of WAPDA to guarantee the repayment of 10% of the Contract Price. The validity period of the said performance bond and the advance payment bond was extended from time to time.
6. On 13.05.2015, another joint venture agreement ("JVA") was executed between the appellant and the respondent In the joint venture, the participating share of the appellant was 6%, whereas that of the respondent was 94% of the scope of works under the Contract. Clause 14.2 of the said agreement provided inter alia that disputes arising out of or relating to the said agreement shall be settled by arbitration in accordance with the provisions of the 1940 Act. For the purposes of clarity, the dispute resolution clause in the JVA is reproduced hereinbelow:- "14 Governing Law and Settlement of Disputes 14.1 The laws of the Islamic Republic of Pakistan (excluding its rules for conflict of laws or rules for private international law) shall govern the interpretation and performance of this agreement.
14.2 Any dispute, controversy or claim arising out of or relating to this JVA, or the breach, termination or invalidity thereof, unless settled by amicable arrangement, shall be settled by arbitration in Pakistan in accordance with the Arbitration Act of Pakistan as presently in force. The number of arbitrators shall be three, one of which shall be appointed as the chief arbitrator or presiding arbitrator. The language to be used in the arbitral proceedings shall be English.
14.3 The arbitral award rendered pursuant to sub-clause 14.2 hereinabove shall be final and binding upon both Parties. Neither Party shall seek any judicial re-judgment or other forms of judicial remedies under any jurisdiction other than for the sole purpose of application for enforcement of the arbitral award.
14.4 The foregoing governing law and arbitration clauses shall survive the termination or expiry of this agreement."
7. WAPDA, after expressing its dissatisfaction with the performance of Hajvairy-Sinohydro JV through a number of letters, issued notice dated 08.12.2017 for the termination of the Contract pursuant to clause 15.2 of the Conditions of the Contract. In the said letter, it was mentioned that after a lapse of 30% of the Contract period, Hajvairy-Sinohydro JV should have executed 25% of the construction work under the Contract but it had executed just 2% of the works. Vide letter dated 12.12.2017, Hajvairy-Sinohydro JV requested WAPDA not to encash the bank guarantees furnished in its favour. An attempt was made to assure WAPDA that if any amount is finally determined to be payable by the Hajvairy-Sinohydro JV as a result of the termination of the Contract, the same would be paid directly by the respondent through a bank transfer.
8. It is not disputed that WAPDA had paid an amount of Rs.410,501,679/- as the first installment of the advance payment, equivalent to 5% of the Contract price to Hajvairy-Sinohydro JV. Out of the said amount, Rs.77,416,000.91 was taken by the appellant, whereas Rs.224,778,377.59 was taken by the respondent. Presently, there are Rs.108,555,917/- in Hajvairy-Sinohydro JV's bank account maintained for the Project.
9. Vide letter dated 12.12.2017, the respondent informed the appellant that the advance payment allocated to the appellant from Hajvairy-Sinohydro JV's bank account maintained for the project was Rs.77,401,389.91. The appellant was requested by the respondent to repay the entire amount of the advance payment into Hajvairy-Sinohydro JV's bank account maintained for the project or into a bank account designated by WAPDA. Furthermore, the appellant was put on notice that if there was any amount required to be paid by the Hajvairy-Sinohydro JV as a result of the termination of the Contract and/or the recovery of the advance payment, the appellant's liability would be to the extent of 6% of the advance payment, i.e. Rs.77,401,389.91 in accordance with the terms of the JVA.
10. On 17.01.2019, the respondent filed a suit for recovery and permanent injunction against the appellant before the Court of the learned Civil Judge, Islamabad. The respondent had sought a direction to the appellant to sign a cheque for Rs.108,555,917/- to be paid to the respondent. The respondent had also sought a decree for an additional amount of Rs.77,416,000.91 against the appellant.
11. On 25.03.2019, the appellant filed an application under Section 34 of the 1940 Act praying for the proceedings in the suit to be stayed due to the arbitration clause in the JVA. Vide impugned order dated 21.10.2021, the learned Civil Court dismissed the said application and directed the appellant to file a written statement. The said order has been assailed by the appellant in the instant appeal.
12. Learned counsel for the appellant, after narrating the facts leading to the filing of the instant appeal, submitted that on 25.07.2012 the appellant and the respondent had entered into a pre-bid joint venture agreement which was amended on 08.06.2013; that after the execution of the Contract dated 19.09.2014 between WAPDA and Hajvairy-Sinohydro JV, the former was bound to handover the site to the latter within a period of 180 days, but after a lapse of more than 693 days, letter dated 12.08.2016 was issued for the handing over of the site and that too in a piecemeal manner; that after the award of the Contract, the JVA was executed between the appellant and the respondent; that the non-completion of the project is for reasons attributable to the respondent as it did not release the funds necessary for the execution of works; and that on 08.12.2017, WAPDA terminated the Contract.
13. Furthermore, it was submitted that after the filing of the suit, the appellant lost no time in filing an application under Section 34 of the 1940 Act; that the learned Civil Court vide impugned order dated 21.10.2021 dismissed the said application; that the sole ground on which the said application under Section 34 of the 1940 Act was dismissed was that the appellant had taken a step in the proceedings by filing an application under Order VII, Rule 10 of the Code of Civil Procedure, 1908 ("CPC"); that the appellant had not taken any steps in the proceedings before filing the application under Section 34 of the 1940 Act; that the appellant at no material stage filed such an application, and this fact can be verified by examining the record of the case before the learned Civil Court; that raising an objection to the territorial jurisdiction of the learned Civil Court does not amount to a step in the proceedings; and that the appellant is ready, willing and able to have the contractual disputes with the respondents resolved in accordance with the arbitration clause in the JVA.
Learned counsel for the appellant prayed for the appeal to be allowed and for the impugned order dated 21.10.2021 to be set aside.
14. On the other hand, learned counsel for the respondent submitted that since there was no road to access the project site, works could not commence until the access road was constructed; that under the terms of the JVA, it was the responsibility of the appellant to construct the access road to the project site; that negligence on the part of the appellant in constructing the access road jeopardized the entire project; that constant reminders by the respondent requiring the appellant to construct the access road were of no avail; that this inaction on the appellant's part caused the respondent to make arrangements for the construction of the access road called Keyal Valley Road; and that the said inaction on the appellant's part also resulted in interim payment applications for work done not to be issued to WAPDA / Engineer.
15. Furthermore, it was submitted that for furnishing a performance bond and advance payment bank guarantee in favour of WAPDA, the appellant was required to make contributions to the extent of its 6% share under the JVA executed between the appellant and the respondent; that in order to avoid the risk of a default, the respondent provided the entire funds for the furnishing of such guarantees; that the appellant failed to furnish counter guarantees in terms of clause 5.4 of the JVA; that in terms of clause 9 of the JVA, one Pak Rupee account and one Euro account was opened by the joint venture partners; that the Pak Rupee account was jointly operated by the appellant and the respondent; that the advance payment of Rs.410,501,679/- was deposited in the Pak Rupee account of the joint venture out of which Rs.224,778,377.59 were withdrawn by the respondent and Rs.77,416,000.91 by the appellant leaving behind a balance of Rs.108,555,917/- which still remains deposited in the said account; that the appellant, being a joint signatory of the said account, has refused to sign cheques for further withdrawals from the said account; that under the terms of the JVA, the appellant could only take 6% of the advance payment but has taken far in excess of its due share; that it is only after the respondent arranged the funds for furnishing the advance payment guarantee in favour of WAPDA that 50% of the advance payment in terms of clause 14.2 of the Conditions of Contract was released in favour of the Hajvairy- Sinohydro JV; that it ought to be borne in mind that the respondent had provided the collateral for furnishing the advance payment guarantee for the entire amount and not just 50% of the advance payment; that on 25.10.2017, the respondent applied for the second installment of the advance payment to be released but WAPDA, vide letter dated 15.11.2017 refused to do so for reasons entirely attributable to the appellant; that on 08.12.2017, WAPDA issued a notice for the termination of the Contract and proceeded to encash the advance payment guarantee; that the total amount of the advance payment received by Hajvairy-Sinohydro JV from WAPDA has been repaid to the latter by the respondent only; that the appellant has not repaid Rs.77,401,389.91 received by it from the advance payment made by WAPDA; that in order to prevent reputational damage and to avert the adverse consequences of the encashment of a guarantee, the respondent paid back through a bank transfer the entire amount of the advance payment to WAPDA; that since it is the respondent that has re-paid the entire amount to WAPDA, it is entitled to receive Rs.108,555,917/- which is presently the balance lying in the Pak Rupee account of the Hajvairy-Sinohydro JV; that since the appellant was jointly and severally liable to the extent of its 6% share in all the profit and losses with respect to the project, the appellant is liable to pay to the respondent Rs.77,416,000.91 from the Pak Rupee account of the Hajvairy-Sinohydro JV; that the impugned order dated 21.10.2021 does not suffer from any legal infirmity; and that the appellant had taken a step in the proceedings before filing an application under Section 34 of the 1940 Act. Learned counsel for the respondent prayed for the appeal to be dismissed.
16. I have heard the contentions of the learned counsel for the contesting parties and have perused the record with their able assistance. The facts leading to the filing of the instant appeal have been set out in sufficient detail in paragraphs 2 to 11 above and need not be recapitulated.
17. Through the impugned order dated 21.10.2021, the learned Civil Court had dismissed the appellant's application under Section 34 of the 1940 Act. Section 34 falling in Chapter V of the said Act reads thus:- "34. Power to stay legal proceedings where there is an arbitration agreement.- Where any party to an arbitration agreement or any person claiming under him commences any legal proceedings against any other party to the agreement or any person claiming under him in respect of any matter agreed to be referred, any party to such legal proceedings may, at any time before filing a written statement or taking any other steps in the proceedings, apply to the judicial authority before which the proceedings are pending to stay the proceedings; and if satisfied that there is no sufficient reason why the matter should not be referred in accordance with the arbitration agreement and that the applicant was, at the time when the proceedings were commenced, and still remains, ready and willing to do all things necessary to the proper conduct of the arbitration, such authority may make an order staying the proceedings."
(Emphasis added)
18. Section 34 of the 1940 Act vests in the Court the discretion to stay or not to stay the proceedings.
The Court should exercise its discretion in refusing to stay a suit in a sparing and cautious manner, as a prima facie duty is cast upon the Court to act upon the agreement. Where a defendant invokes the discretion of the Court under Section 34, it is necessary that he should not have disentitled himself from doing so either by filing a written statement or by taking any other step in the proceedings. His application to the Court under Section 34 may be filed "before filing a written statement or taking any other step in the proceedings." The words "taking any other steps in the proceedings" does not include each and every step. It must be such a step as would clearly and unambiguously manifest the intention to waive the benefit of the arbitration agreement and to proceed with the suit. Taking other steps in the suit proceedings connotes the idea of doing something in aid of the progress of the suit or submitting to the jurisdiction of the Court for the purpose of adjudication of the merits of the controversy in the suit.
19. Once a party exercises the option to invoke the arbitration clause in terms of Section 34, that is a manifestation of its readiness and willingness to do all things necessary for the proper conduct of arbitration. If the Court is satisfied that the dispute pending before it in a suit (legal proceedings) should be decided by arbitration in accordance with the arbitration agreement and the parties are ready and willing to do all things necessary for the proper conduct of the arbitration, it may make an order staying the proceedings before it. The effect of an order under Section 34 of the Act is of a stay of the suit.
20. In the present case, the written statement was indisputably not filed before the application under Section 34 was presented by the appellant. The question is whether any other step was taken in the proceedings as contemplated by Section 34 and it is this point with which we are directly concerned in the present case. Whether a particular application to the Court amounts to a step in the proceedings depends on the circumstances in each case and no absolute test can be laid down to determine this.
21. The suit instituted by the respondent was taken up for hearing by the learned Civil Court on 18.01.2019. Due to security reasons, summons were not issued to the defendant / appellant and the matter was adjourned to 24.01.2019. On the said date, summons were again not issued to the defendant / appellant for the same reason and the matter was again adjourned to 30.01.2019, on which date the Presiding Officer was on leave. On 31.01.2019, the respondent filed an application under Order XXXVIII, Rules 1, 2 and 5 CPC for the furnishing of security. On the said application, the learned Civil Court issued notice to the appellant to show cause as to why security should not be furnished. On 09.02.2019, a memo of appearance was filed on behalf of the appellant and the matter was adjourned to 27.02.2019, on which date the learned counsel for the appellant filed his power of attorney and raised an objection regarding the territorial jurisdiction of the learned Civil Court at Islamabad and sought the return of the plaint in the respondent s suit. On 07.03.2019, the learned Civil Court, after hearing the arguments of the learned counsel for the contesting parties, held that it did have the jurisdiction to entertain the suit and required the appellant to file a written statement.
22. On 25.03.2019, the appellant filed an application under Section 34 of the 1940 Act praying for the proceedings in the suit to be stayed due to the arbitration clause in the JVA. On 10.05.2019, the respondent filed a reply to the said application. Vide impugned order dated 21.10.2021, the learned Civil Court dismissed the said application and directed the appellant to file a written statement.
23. The learned Civil Court dismissed the said application under Section 34 of the 1940 Act by holding that such an application has to be filed before taking any step in the proceedings, and that the appellant had filed the said application after filing an application under Order VII, Rule 10 CPC, and in this way, had taken a step in the proceedings.
24. The appellant, by taking the plea that the plaint ought to be returned on the ground the Civil Court at Islamabad did not have the jurisdiction to adjudicate upon the suit, was in fact in the nature of a preliminary objection regarding the maintainability of the suit. It was an objection to the trial of the suit on the merits of the dispute between the parties. The said objection did not invite an adjudication on the merits of the controversy in the suit. The plea was for the purpose that the Civil Court does not adjudicate upon the merits of the contractual disputes between parties, and therefore cannot, in my view, be termed as a step in the proceedings' or manifesting the intention of the appellant to unequivocally abandon its right under the arbitration agreement.
25. In the case of General Electric Company Vs. Renusagar Power Company (1987 (4) SCC 137), Renusagar Power Company ("Renusagar") had filed a suit for declaration against General Electric Company ("GEC") before the Civil Court after the latter had submitted certain disputes for arbitration to the International Chamber of Commerce. GEC filed an application under Order VII, Rule 11 read with Section 151 CPC praying for the rejection of the plaint in Renusagar's suit. The grounds taken in the said application were inter alia that the defendant did not reside and no cause of action arose within the local limits of the jurisdiction of the Civil Court. Another ground taken in the said application was that insufficient Court fees had been annexed with the suit. By this stage, GEC had not filed an application for staying the proceedings in the suit. The learned Civil Court had fixed a date for filing of the written statement. On the date which was fixed for filing of the written statement, GEC filed three more applications wherein several objections to the maintainability of the suit were taken. One of the objections was to the effect that the proceedings in the suit were liable to be stayed due to the arbitration clause in the agreement between the parties. Thereafter, GEC filed a written statement in which preliminary objections were taken to the maintainability of the suit. The application praying for the proceedings in the suit for stay was resisted on the ground that GEC, by filing objections to the maintainability of the suit on several grounds, had taken steps in the proceedings and therefore had disentitled itself from seeking the proceedings in the suit to be stayed. Since GEC had filed the written statement after seeking for the proceedings in the suit to be stayed, it was held that the application praying for the proceedings in the suit to be stayed was maintainable. The Court of original jurisdiction as well as the appellate Court dismissed GEC's application for proceedings in the suit to be stayed. The Supreme Court of India overturned these decisions by holding as follows:- "Objections to adjudication of the disputes between the parties, on whatever ground, are in truth not aids to the progress of the suit but hurdles to such progress. Adjudication of such objections cannot be termed as adjudication of the merits of the controversy in the suit. As we said earlier, a broad view has to be taken of the principles involved and narrow and technical interpretation which tends to defeat the object of the legislation must be avoided. We are of the view that an invitation to the court to reject a plaint or dismiss a suit on a ground not touching the merits of the controversy between the parties, but a ground such as insufficiency of the court fee paid, maintainability of suit, territorial jurisdiction etc. is really to enable the proceeding before the arbitrator to go on and far from an election to abandon arbitration and continue the suit. Every threshold bar to a suit set up by a defendant is a step to allow the arbitration to go on. It is a step in aid of arbitration and not in aid of the progress of the suit. In that view, we think that 8-C can hardly be called an invitation to the court to adjudicate upon the merits of the controversy, when in fact it is designed to prevent the court from touching upon the merits of the controversy."
26. In the case at hand, the objection referred to hereinabove was taken on behalf of the appellant but not through a formal application under Order VII, Rule 10 CPC. I have gone through the lower Court's record as well as the order sheet and have not found such an application on the record or reference in the order sheet for such an application having been filed. The Presiding Officer in the impugned order has held that the appellant had submitted an application under Order VII, Rule 10 CPC. Only if he had checked the record and gone through the order dated 07.03.2019, would he have noticed that no such application had been filed. The respondent, in its reply to the appellant's application under Section 34 of the 1940 Act, had clearly pleaded that on 27.02.2019, the appellant's counsel had filed his power of attorney and raised an oral objection to the effect that the Civil Court at Islamabad did not have the territorial jurisdiction to adjudicate upon the suit.
27. In the case at hand, the appellant did not seek an adjournment for the purpose of the filing of a written statement. If an adjournment is given by the Court itself for filing a written statement without any such request from the defendant or his counsel, it cannot be seen as a step in the proceedings. The Court also cannot presume that just because a party has made an appearance on knowledge of the suit, he must be deemed to be ready to file a written statement. Prior to the dismissal of the application under Section 34, the only order of the learned Civil Court requiring the appellant to file a written statement was passed on 07.03.2019 when the matter was adjourned to 25.03.2019. The appellant had not at any material stage sought an adjournment for the purpose of filing the written statement. It is not disputed that on the date fixed for the filing of the written statement, i.e. 25.03.2019, the appellant had filed an application under Section 34 of the 1940 Act.
28. Perusal of the order sheet of the learned Civil Court shows that formal summons regarding the suit had not been issued at any stage. The appellant came to know about the suit when he received notice as to the filing of the respondent's application for the attachment of bank accounts. The suit was filed on 17.01.2019 and notices regarding the said application were issued on 31.01.2019. The application under Section 34 of the 1940 Act was filed on 25.03.2019 which is early enough in the proceedings. In the circumstances of the instant case, the appellant cannot be considered to have elected to proceed with the suit or to have abandoned its right to have the disputes agitated by the respondent in its suit to be resolved through dispute resolution mechanism in the JVA.
29. In view of the above, the instant appeal is allowed; the impugned order dated 21.10.2021 whereby the appellant s application under Section 34 of the 1940 Act was dismissed, is set-aside; the said application under Section 34 is allowed; and the proceedings in the suit instituted by the respondent are stayed. The parties shall be at liberty to resolve their disputes arising from and related to the JVA in accordance with clause 14 thereof. In the event the appellant acts in a manner that is not indicative of its willingness or readiness to participate in the arbitration proceedings, the respondent may apply for the proceedings in the suit to be resurrected. No costs.