1. ' This application under section 34 of the Arbitration Act, 1940 is filed by defendant 1, for stay of the suit on the ground that the dispute between the parties is liable to be referred to the Arbitration in accordance with clause 12 of the contract, dated 7th August, 1970 entered into between the plaintiff and defendant No. 1, before the dispute arose.
2. ' The plaintiff which is a public limited company entered into the contract, dated 7th August, 1970 with defendant I, a trading company constituted under the laws of U.S.S.R. For purchase of a complete spinning plant commencing from blow room and ending with winding (including doubling) and packing, comprising of 24960 spindles, under P.A.Y.E. (Pay As You Earn) Scheme. The total price agreed to was U.S. $ 16,48,891 C and F, Karachi, out of which the plaintiff was required to make cash payment of 3.5% equivalent to U.S. $ 57,711 and the balance 95.5% was payable within eight years in 14 equal bi-yearly instalments of U.S. $ 1,13,655.77 with interest thereon @ 3i per cent per annum. Under the contract the installation and erection of machinery was to be done by the Russain Engineers and technicians who completed the same by about October, 1972. It appears that after installation of machinery when the plant went into production it did not achieve the desired result which resulted into dispute between the parties and lengthy correspondence was exchanged between them. The plaintiff alleged that the machinery supplied by defendant No. 1 was not in accordance with the specification given in the contract, and in respect of some of the machinery and their parts the defendant No. 1 overcharged the plaintiff while some of the spare parts and accessories mentioned in the contract were not supplied at all. The plaintiff accordingly made a claim of Rs, 54,99,396.24 against the defendant which included a sum of Rs, 43,74,057.57, on account of failure of the plaint to reach the assured production level. It appears that at one stage technicians from Russia arrived to inspect the working of the plant but the dispute between the parties could not be resolved with the result suit No. 1757/1975 was instituted by the plaintiff before the Civil Court at Karachi for cancellation of contract, dated 7th October, 1970 and for permanent injunction restraining defendant No. 1, from recovering the balance instalments under the contract. The plaint in the aforesaid suit was, however, rejected by the Court under Order VII, rule 11, C,P.C. And thereafter the present suit was filed in this Court in 1979, for recovery of a sum of Rs, 4,42,33,555 and damages against defendant No. 1 and for injunction against defendant No. 2, restraining it from making any payment to defendant No. 1 in terms of the guarantee, dated 12th September, 1970, which defendant No. 2 had executed in favour of defendant No. 1 on behalf of plaintiff, to secure payment of instalments agreed under the contract, dated 7th August, 1970. It is however, an admitted position that during the pendency of the present suit the entire payment covered under the aforesaid guarantee has been made to defendant No. 1, by defendant No. 2, and therefore, defendant No. 2, is now only a formal defendant in the suit. The application under section 34 of the Arbitration Act filed by defendant No. 1, is opposed by the plaintiff on the following grounds which are specifically urged in the counter-affidavit filed in reply to the application under section 34 of the Arbitration Act :
(1) "that the arbitration clause in the contract allows recourse to Courts i,e, filing of civil suit ; as such the options open are to proceed in Court or invoke arbitration ;
(2) that the arbitration clause in any case is ambiguous and not specific in which event Civil Courts have a jurisdiction to entertain and try any and all disputes between the parties ;
(3) that the plant and machinery, as supplied, are installed in Karachi, the relevant record and documents will be truckloads is all at Karachi, the engineers, technicians, supervisors and workers, who are relevant witnesses to depose about the operation of the machinery are all in Karachi and so also the workers who have worked thereon. These witnesses are in large number and reside in Karachi. The particulars of purchase of raw material, its processing through the plant and machinery and the end-product, viz. Cotton yarn were, respectively, purchased and sold in or at Karachi and all documentary and other evidence, therefore, is at Karachi. It is well-settled that in such circumstances the plaintiffs can maintain the suit at Karachi and the arbitration clause, even if it exists, would enable Courts not to say the suit under section 34 of the Arbitration Act ;
(4) that arbitration before the Foreign Trade Arbitration Commission for Chamber of Commerce (F.T.A.C.) in Moscow would be against the principles of natural justice, inconvenient and without basis. All evidence cannot be taken to Moscow. Witnesses cannot proceed to give evidence there, they may refuse to go to Moscow, foreign exchange will not be available and expenditure in the circumstances will be exceptionally high ;
(5) that without prejudice to the above the plaintiffs have specifically averred fraud and misrepresentation and prima facie case of fraud and misrepresentation is established by reference to the correspondence and developments which have been stated to have taken place.
3. The arbitration clause does not exist for fraud and misrepresentation has completely wiped out the contract together with the arbitration clause ;
(6) that a charge of fraud is a serious matter which is liable to be investigation by a Court ;
(7) that the application is liable to fall also for the reason that the Defendant N. i, have taken steps in the proceedings before filing the application for stay of the suit ;
(8) that in particular the Defendant No. 1 entered serious opposition to the plaintiff's application under Order XXXIX, rules 1 and 2, asked for time for written statement. Counter-affidavit opposing the plaintiff's application under Order XXXIX has also been filed which are all steps in the proceedings disentitling stay of the suit ;
(9) that Foreign Trade Arbitration Commission for Chamber of Commerce (F.T.A.C.) is an association constituted in a country where everything is State-owned. The State-owned Defendant No. 1 and the State constituted Foreign Trade Arbitration Commission for Chamber of Commerce (F.T.A.C.) cannot do justice and as such no arbitration can be ordered by or through F.T.A.0 on account of manifest bias ;
(10) that the above circumstances are jointly liable to be considered in exercising discretion under section 34 of the Arbitration Act, for dismissing and rejecting the application."
4. ' I have heard the learned counsel for partied at length on the above application. Mr. Khalilur Rehman, the learned counsel for defendant No. 1, amongst other raised a contention before me that besides section 34 of the Arbitration Act, the present suit is also liable to be stayed under section 3 of the Arbitration (Protocol and Convention) Act, (VI of 1937), where under unlike section 34 of the Arbitration Act the Court has no discretion in the matter of stay of a suit if the subject- matter of the proceedings is covered under section 3 of Act VI of 1937. I will first deal with this contention of the learned counsel because, if he succeeds on this ground, it will not be necessary to examine any other contention of the learned counsel. Section 3 of Act VI of 1937 relied by the learned counsel reads as under : "3. Notwithstanding anything contained in the (Arbitration Act, 1940) or in the Code of Civil Procedure, 1908 if any party to a submission made in pursuance of an agreement to which the protocol set forth in the First Schedule as modified by the reservation subject to which it was signed by India applies, or any person claiming through or under him, commence any legal proceedings in any Court against any other party to the submission or any person claiming through or under him in respect o any matter agreed to be referred, any party to such legal proceedings may, at any time after appearance and before filing a written statement or taking any other steps in the proceedings, apply to the Court to stay the proceedings ; and the Court, unless satisfied that the agreement or arbitration has become inoperative or cannot proceed, or that there is not in fact any dispute between the parties with regard to the matter agreed to be referred, shall make and order staying the proceedings." (The underlining* is mine).
5. ' The learned counsel relied on the above-quoted provision of law with special emphasis to underlined portion, to contend that as soon as in a legal proceedings commenced in a Court of law by one of the parties to dispute, the other party applies for stay and succeeds in showing to the Court that the subject-matter of the dispute is covered by an arbitral clause in an agreement to which they are parties and the protocol set forth in the first schedule to the Act, VI of 1937, applied to that agreement, then the Court has no option but to order stay of the legal proceedings in the Court and direct the parties to have recourse to the arbitration clause. It is urged that although the application filed on behalf of defendant No. 1 is stated to be under section 34 of the Arbitration Act but in the affidavit filed in support of the application, it is categorically stated that it may also be treated as an application under section 3 of Act VI of 1937 and since the protocol set forth in the 1st Schedule to the Act applied to the agreement, dated 7th August, 1970 under which the present dispute has arisen between the parties, the suit has to be stayed to give effect to the arbitral clause in the said agreement. In reply to the above submission of the learned counsel for defendant No. 1, Mr. Mansoor Ahmad Khan, learned counsel for the plaintiff contended that section 3 of Act VI of 1937 is not attracted in the present case as no submission has been made by the parties so far in pursuance of clause 12 of agreement, dated 7th August, 1970. It is urged by the learned counsel that the condition precedent for application of section 3 of Act VI of 1937, is the existence of a submission made in pursuance of the agreement between the Parties which is not the case here. Alternatively it is contended by the learned counsel that the word "shall" used in section 3 of the Act VI of 1937 is to be read as "may" in the scheme of section and therefore, the Court is not bound to stay the proceedings if it is satisfied that circumstances existed which justified refusal to stay the legal proceedings. In support of the above contentions the learned counsel for the plaintiff has relied on the following cases :
(1) Messrs V/O Tractore-export Moscow v. Tarapore & Co. Madras AIR 1971 SC 1.
(2) Ramji Dayawala & Sons (P) Ltd.v. Invest Import 1982 P SC 12 (SC of India).
(3) Messrs Pakistan Insurance Corporation v. P.T. Indones Oriental Lines and others PLD 1977 Kar.
6. 562.
7. [Here in italics]
(4) Kamani Engineering Corp. Ltd. v. Societe de Tractore Et D' Electricite Anony me AIR 1965 Born.
8. 114.
9. ' The contentions of the learned counsel for the plaintiff are not without force. In the first noted case of V/O Tractore-export, Moscow the Supreme Court of India interpreted the expression "submission" used in section 3 of Indian Foreign Awards (Recognition and Enforcement) Act (XLV of 1961) and by a majority held that the expression "submission" in the above section means actual submission or completed reference and does not mean an agreement to refer or an arbitral clause. It was further held in the case that a suit in India is not liable to be stayed under section 3 of Act of 1961, is the absence of actual submission of dispute to arbitration in foreign country. It may be mentioned here that both Act VI of 1937 and Act XLV of 1961 are statutes in pari materia and section 3 of Indian Act XLV of 1961 is identical in its terms to section 3 of Act VI of 1937. In the second noted case Ramji Dayawala & Sons (P) Ltd. The Supreme Court of India directly considered the expression "submission" used in section 3 of Act VI of 1937 and following the majority decision in V/O Tractore- export's case held as follows : "Section 3 of 1937 Act is in pari materia with section 3 of 1961 Act. It, therefore, becomes crystal clear that section 3 of the 1937 Act would only be attracted if there is a submission pursuant to an agreement to that effect."
10. In view of the above discussion I am quite clear in my mind that in order to attract the application of section 3 of Act VI of 1937 in a case the following conditions must be shown to exist :
(i) That there is actual reference or submission of dispute to the arbitration by the parties in pursuance of an agreement to which the protocol set forth in the First Schedule to Act VI of 193 applied ;
(ii) That after the submission or reference of the dispute to arbitration as aforesaid, one of the parties to the submission has corn menced legally proceedings in a Court against the other party in respect of the same subject-matter ;
(iii) That the other party to such proceedings has appeared in the Court and before filing a written statement or taking any other step in the proceedings, apply to the Court for stay of the proceedings ; and
(iv) The agreement or arbitration has not become inoperative or cannot proceed and that there is in fact a dispute between the parties which is agreed to be referred.
11. The Court will order stay of legal proceedings in a Court under section 3 of Act VI of 1937 only after it is satisfied that all the conditions mentioned above are existing. Whether a Court dealing with an application under section 3 of Act VI of 1937, has discretion to stay the proceedings pending before it or it is bound to do so, in my opinion, is not necessary to examine here, as in the present case it is an admitted position that no reference or submission in terms of clause 19 of the agreement, dated 7th August, 1970 has so far been made by the parties. It is, therefore, quite obvious that the very first and most essential condition required to attract the application of section 3 of Act VI of 1937 is non- existant and as such it has no application in the circumstances of the present case.
12. ' I will now revert to the other contention of Mr. Khalilur Rehman, that the suit is also liable to be stayed under section 34 of the Arbitration Act in view of clause 12 of Agreement, dated 7th August, 1970. Clause 12 in the agreement reads as under : "XII. Arbitration.-The parties shall take all measures to settle amicably all disputes or differences which may arise out of this contract or in connection with it.
13. ' In case the parties are unable to arrive at an amicable settlement all disputes and differences which may arise out of this contract are to be submitted with the exception of recourses of Leg al Courts of Arbitration by the Arbitration commission to the Rules as follows :
(a) If the Sellers are a respondent in such a dispute it is submitted for settlement to the Foreign Trade Arbitration Commission for the Chamber of Commerce in Moscow, in accordance with the Rules of Procedure of the said Commission.
(b) If the Buyers are a respondent in such a dispute or disco tract the dispute is submitted for settlement to the Federation of Pakistan Chamber of Commerce and Industries Pakistan. The Arbitration Award shall be final and binding on both the parties.
(c) If the Buyers and Sellers both lodge claims against each other with their respective Chamber of Commerce in Pakistan and Moscow, then both Chambers of Commerce will be requested by both parties to evolve a joint formula for the settlement of dispute. In this connection all necessary practical steps will be taken by both Chambers to meet each other through their appointed Representatives at a place and date mutually agreed upon to have a joint session for final arbitration."
14. ' The learned counsel contends that at the time the plaintiff entered into the agreement, dated 7th August, 1970, he was fully aware of the above noted clause in the agreement which provided for arbitration at Moscow in the event of a dispute and claim by the plaintiff and, therefore, he cannot now be allowed to resile from it by pleading that the entire evidence in the case is available here in Pakistan and it will be inconvenient for the plaintiff to produce the same before the Arbitral Tribunal in Moscow. In support of his above contention Mr. Khalilur Rehman, relied on the case of Island Textile Mills Limited Karachi v. V/O Technoexport and others (1).
15. ' Mr. Mansoor Ahmad Khan, the learned counsel for the plaintiff, on the other hand challenged the correctness of the view expressed in the above-cited case and contended that all the evidence in the case is at Karachi and the nature and volume of evidence is such that it is both impossible and impracticable for the plaintiff to produce it before the Arbitral Tribunal in Moscow. He also contended that keeping in view the number of witnesses who will be examined in the case and foreign exchange restriction it will not be possible for the plaintiff to prosecute the arbitration proceedings at Moscow except with a disadvantage. It is
(1) 1979 CLC 307 ' accordingly urged by the learned counsel that it is fit case in which stay should be refused by the Court as otherwise if the arbitration proceedings are held at Moscow it will be for all intent and purposes in the circumstances an ex parte proceedings against the plaintiff. The contention of the learned counsel for the plaintiff has greatly impressed me. No doubt the above contention did not find favour with the Court, in the case of Island Textile Mill Limited Karachi but with utmost respect I am unable to agree with the reasoning of the learned Judge that where a party, at the time he entered into the contract was aware that the agreement also contained arbitral clause which provided for arbitration in a foreign country in the event of a dispute or claim under the agreement then the Court cannot refuse to stay proceedings brought by one of the parties to such an agreement in contravention of the arbitration clause. It must be clearly understood that a party applying under section 34 of the Arbitration does not have absolute right to obtain stay of legal proceedings in the Court. Such an order is purely discretionary and in appropriate cases the Court may refuse to stay the proceedings in spite of an arbitral clause in the agreement between the parties which provided for reference of dispute to arbitration. No doubt the Court has to exercise this discretion in a judicious manner but the discretion conferred on the Court can neither be curtailed nor circumvented by means of agreement between the parties. It is true that ordinarily when a party has entered into an agreement of which the arbitral clause is an integral part, he should not receive assistance from the Court if he resiles from it but this does not mean that even in a case where the Court is satisfied that the very purpose and object of arbitration would be frustrated or it is not likely to be achieved it will still stay the legal proceedings and direct the parties to have recourse to arbitral c clause. No doubt one of the commonly understood object of inserting arbitral clause in commercial agreement is to be avoid expenses and conventional delays experienced in Court of law but the paramount and the most avowed object of arbitration still remains the same, namely, the resolution of dispute between the parties in a fair, just and impartial manner. This latter stated objective cannot be sacrificed in the name of less expensive and speedy mode of settlement of dispute between the parties. Therefore, where the Court finds that a party to the dispute is not likely to get a fair just or impartial of his cause in arbitration proceedings it may refuse to stay the legal proceedings in Court brought in contravention of the arbitral clause in the agreement under section 34 of the Arbitration Act. The instances in this regard are not lacking and there are strings of decided cases in which the Courts in spite of existence of foreign arbitration clause in an agreement refused' to stay proceedings in Court on the ground that conduct of arbitration proceedings may result in injustice to one of the parties. In the case of M/s. M. M. Yasin v. Irving R. Body & Co. (1), a Division Bench of the then High Court of West Pakistan, Karachi Bench, refused to give effect to an arbitration clause which provided for arbitration in New York on the ground that the plaintiff was resident at Karachi whereas the venue of arbitration proceedings was at New York, where the plaintiff may not be able to find any representation. In a recently decided case reported as Muhammad Hanif v. Eckhard & Co. Marine G M B H and 2 others
(2) a learned Single Judge of this Court refused
(1) PLD 1967 Kar. 756 (2) PLD 1983 Kar, 613 ' to stay the proceedings of a suit pending in Court under section 34 of Arbitration Act on the ground that the entire evidence of both the parties is at Karachi and therefore to carry the entire burden to London before the arbitrator would be most inconvenient and expensive. Similarly in an another unreported case decided by another learned Single Judge of this Court Admiralty Suit No. 92/1977 Mls. Aslo Marines Ltd. v. M. T. Magds the foreign arbitral clause in a bill of lading was not given effect to, and the application filed under section 34 of the Arbitration Act for stay of legal proceedings was rejected on the ground that it will cause great inconvenience to the parties as the entire evidence relating to the short landing of the cargo was available at Karachi. The question relating to stay of legal proceedings under section 34 of the Arbitration Act, filed in contravention of an arbitral clause in an agreement which provided for arbitration in the event of dispute in foreign country, has also been considered in a number of reported decisions from Indian jurisdiction but I will mention here only to such decisions by the Indian Supreme Court namely, Michael Colodetz and others v. Serajuddin & Co. (1) and Messrs V/O Tractor-export Moscow v. M/s. Tarapore and Co.
16. In Michael Colodetz's case, the Supreme Court of India refused to interfere with the order of High Court whereby stay of suit under section 34 of the Arbitration Act was refused. It was found by the Court that all the evidence in the case relating to dispute was in India and having regard to the severe restrictions imposed in the matter of providing foreign exchange to individual citizen, it will be impossible for the Indian firm to take their evidence to New York and to attend before arbitrator at the arbitration proceedings to defend the case against them and the proceedings before the Arbitrator would in effect be ex parte. Upon consideration of balance of inconvenience to the foreign firm as compared with the inconvenience which was likely to be caused to the Indian firm, the Supreme Court of India came to the conclusion that the aforesaid reasons were sufficient for not granting stay of legal proceedings in Court. Similarly in V/O Tractore-export's case also the Supreme Court of India refused to interfere with the order of High Court refusing to stay the suit on the ground that if the arbitration proceedings are allowed in the foreign country it would be ex parte proceedings against the Indian firm as due to restrictions of foreign exchange put by the Government of India, of which the Supreme Court took a judicial notice, it will be impossible for Indian firm to take its witnesses to foreign country before the arbitral tribunal and to properly conduct the proceedings there.
17. In view of the above discussion I am of the view that in spite of the fact that at the time the plaintiff entered into the agreement, dated 7th August, 1970 without defendant No. 1 they were aware that in the event of a dispute or a claim by them in respect of the agreement, the dispute is to be referred to arbitral tribunal in Moscow, they are entitled to show in the application under section 34 of the Arbitration Act filed for stay of their suit, that the commencement of the arbitration proceedings in the foreign country would result in an ex parte decision against them as all the evidence in respect of the dispute is available at the place where legal proceedings is filed and that either by reasons of impracticability or the restrictions imposed by Government in matter of providing foreign exchange to individual citizen it would be impracticable and
(1) AIR 1963 SC 1044 ' impossible for them to produce the evidence before the foreign arbitral tribunal. If the Court is convinced, after hearing the parties, in this behalf that the aforesaid reasons do exist it may refuse to stay ;he legal proceedings in such circumstances under section 34 of the Arbitration Act.
18. In the case before me the plaintiff categorically stated in sub-paras. (3) and (4) of paragraph 3 of their counter-affidavit that the entire plant and machinery supplied by defendant No. I are installed in Karachi, the relevant record which will be truckloads, is all at Karachi. The engineers, technicians, supervisors and workers, who are relevant witnesses to depose about the operation of the machinery are all in Karachi and so also the workers who have worked thereon. That these witnesses in large number reside in Karachi and if arbitration proceedings before the foreign tribunal takes place all these evidence cannot be taken to Moscow both for reasons of impracticability as well as on account of restrictions of foreign exchange and involvement of heavy expenditure. These allegations in the counter-affidavit of the plaintiff have gone absolutely unchallenged as no rejoinder affidavit in rebuttal was filed by defendant No.
1. It is also not disputed before me that the defendant No. 1, is engaged in extensive commercial activities in Pakistan and have their permanent representation here, besides their representation through U. S. S. R. Trade Representative in Pakistan. In consideration of above circumstances, I am of the view that it is a fit case in which stay of legal proceedings should be refused by the Court under section 34 of the Arbitration Act. I accordingly reject the application of defendant No. 1 under section 34 of the Arbitration Act but grant two months time to them to file their written statement.
19. There will be no order as to costs.