1. ' By this order I will dispose of C.MA.No, 3907/88 and C.MA.No, 3908/88 in Suit No,421/88 and C.M.A.No, 3280/88 and C.MA.No,3281/88 in Suit No, 156/88.
2. ' Both the said suits are under Order 37 C.P.C. And in both the defendants have simultaneously filed two applications, one under Order 37, Rule 3, C.P.C. For leave to appear and defend the suit and the other under section 34 of Arbitration Act, 1940 for stay of the suit.
3. ' The crucial point which came up for consideration while the said two applications were put up for hearing in both the said suits was which of them be taken up, heard and decided first. In order to fully appreciate the legal implications it would be worthwhile to reproduce relevant provisions of Order XXXVII, CPC as well as section 34 of Arbitration Act as under:-- "Order XXXVII. Rule 2. C.P.C.--Institution of summary suits upon bills of exchange etc.--(1) All suits upon bills of exchange, hundis of promissory notes, may, in case the plaintiff desires to proceed hereunder, be instituted by presenting a plaint in the form prescribed; but the summons shall be in Form No,4 in Appendix B or in such other form as may be from time to time prescribed.
(2) In any case in which the plaint and summons are in such forms, respectively, the defendant shall not appear or defend the suit unless he obtains leave from a judge as hereinafter provided so to appear and defend; and, in default of his obtaining such leave or of his appearance and defence in pursuance thereof, the allegations in the plaint shall be deemed to be admitted, and the plaintiff shall be entitled to a decree--
(a) -..................................
4. (b)......................................
5. (c)......................................
6. (3)......................................
7. O. XXXVII Rule 3 C.P.C.--Defendant showing defence on merits to have leave to appear.--(1) The Court shall upon application by the defendant, give leave to appear and to defend the suit, upon affidavits which disclose such facts as would make it incumbent on the holder to prove consideration, or such other facts as the Court may deem sufficient to support the application.
(2) Leave to defend may be given unconditionally or subject to such terms as to payment into Court, giving security, framing and recording issues or otherwise as the Court thinks fit.
(3) The provisions of section 5 of the Limitation Act, 1908 (IX of 1908), shall apply to applications under sub-rule (1)."
8. S.34 of Arbitration Act.--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 properly conduct of the arbitration, such authority may make an order staying the proceedings."
9. It will thus be seen that under the above provisions of Order XXXVII, Rule 3, C.P.C. a defendant will only be entitled to appear and defend the suit if permission is granted to him by the Court. In other words if permissions is not granted or is not applied for or conditional order granting leave is not complied with by the defendant a decree in consequence will follow as provided under Order XXXVII, Rule 2, C.P.C. Section 34 of the Arbitration Act on the other hand enables a party to an arbitration agreement to apply to the judicial authority for stay of suit before filing of written statement or taking any step in the proceedings so that the dispute between the parties may be resolved through arbitration instead of Court.
10. ' There is however nothing in Order XXXVII, C.P.C. Or anywhere in C.P.C. Which expressly bars an application for stay of summary suits although it may be argued that stay of suit without first obtaining leave to defend the suit under Order XXXVII, Rule 3, C.P.0 is barred by necessary implication. Similarly it may be urged from the other side that under section 34 of the Arbitration Act, the proceedings in the suit may be ordered to be stayed by a Court irrespective of the suit being regular or summary the legislature making no distinction between the two. These questions along with others came up for discussion during the course of arguments when Mr.AA.Sharif and Mr.Kamal Azfar, Senior Advocates of this Court were requested to act as amicus curiae and the following questions were formulated:--
(1) Whether in the face of Order XXXVII, rule 3, C.P.C. Requiring the defendant first to obtain leave to appear and defend the suit, an application for stay of suit under section 34 of the Arbitration Act is maintainable?
(2) Whether filing an application under Order XXXVII, rule 3, C.P.C. For leave to appear and defend the suit will tantamount to taking a step in the proceedings within the meaning of section 34 of the Arbitration Act?
(3) Which of the said applications has precedence over the other to be first taken up heard and decided?
(4) Whether section 34 of the Arbitration Act is made applicable to summary suits under Order XXXVII, Rule 2, C.P.C.?
(5) What is the significance, effect and consequence when both the said applications are filed simultaneously?
11. ' Learned counsel for the parties as well as learned amicus curiae candidly conceded that there is no direct case-law on the points involved but in a few cases situation such as this has been anticipated by Courts laying down certain guidelines which might be helpful in the instant case. I will however take up the question No,2 first. According to Mr. A. A. Sharif, learned amicus curiae, the conduct of the defendants is to be objectively assessed in the determining this question and if their conduct shows unequivocally their intention to defend the suit they would be disentitled to press into service provisions of section 34 of the Arbitration Act. In support reliance was placed on P.I.A.
12. Corporation v. Pak-Saf Dry Cleaners Limited reported in PLD 1981 SC 553 in which it was held as follows:-- "In my opinion, the true tests for determining whether an act is a step in ' the proceedings is not so much the question as to whether the party sought an adjournment for filing the written statement although of course that would be satisfactory test in many cases but whether taking into consideration the contents of the application as well as all the surrounding circumstances that led the party to make the application display an unequivocal intention to proceed with the suit, and to give up the right to have the matter disposed of by arbitration."
13. ' In Badshah Meah Sodagar v. Norrul Haq PLD 1967 Dacca 250 it was held as follows:-- "It has been, if I may say so with respect very rightly held; 'The true test for determining whether an act is a step in the proceedings is not so much the question as to whether, there has been an application in the suit although, of course, that would be a satisfactory test in many cases--but whether the act displays an unequivocal intention to proceed with the suit and to give up the right to have the matter disposed of, by arbitration." It was also held in the case that the filing of an unconditional appearance in Court was not a step in the proceedings as it was an act which was incumbent upon the defendant in order to prevent the suit from being set down as being undefended. The ratio decidendi of the case is that a Court must apply its mind by the facts and circumstances of each case and to decide for itself whether the conduct displayed by the defendant can be construed as acquiescence in the proceedings that have been instituted in the suit."
14. ' Other cases relied upon are Badshah Meah Sodagar v. Norrul Haq and others PLD 1967 Dacca 250, Province of Punjab v. M/s. Irfan and Co. PLD 1956 Lah. 442, Nooruddin Abdul Hussain v. Abu Ahmed Abdul Jalil, AIR 1950 Bom. 127, Dunichand Sons & Co. v. Fort Gloster Industries Ltd. AIR 1962 Cal. 541, Bhawanidas Ramgovind v. Premchand Lachhmipat AIR 1925 Cal. 801, Austin & Whetley Ltd. v.
15. S.Bowley & Co. 1913 Vol. 108, Law Times 921.
16. ' It will be seen that special emphasis has been laid by the Courts of law on words "Unequivocal" and "Acquiescence" in the context of section 34 of the Arbitration Act.
17. Accordingly it will be worthwhile to refer to the definitions and meanings of words "Unequivocal and acquiescence", which according to Black's Law Dictionary (Fifth Edition) are as under:-- "Unequivocal".--clear, plain, capable of being understood in only one way, or as clearly demonstrated. Free from uncertainty, or without doubt; and when used with reference to the burden of proof, it implies proof of the highest possible character and it imports proof of the nature of mathematical certainty. Berry v. Maywood Mut. Water Co.No,1 11 Cal. App. 2d 479, 53 P.2d 1032, Molyneux v. Twin Falls Canal Co. 54 Idaho 619, 35 P.2d 651, 656."
18. "Acquiescence.--It arises where a person who knows that he is entitled to impeach a transaction or enforce a right neglects to do so for such a length of time that, under the circumstances of the case, the other party may fairly infer that he has waived or abandoned his right. A form of equitable estoppel. Schmitt v. Wright, 317 IIIApp. 384, 46 N.E. 2d 184, 192."
19. ' Halsbury's Laws of England (4th Edition) paragraph 1473 defines "acquiescence" as follows:-- "The term "acquiescence" is used where a person refrains from seeking redress when there is brought to his notice a violation of his rights of which he did not know at the time, and in that sense acquiescence is an element in laches. Subject to this, a person whose rights have been infringed without any knowledge or assent on his part has vested in him a right of action which, as a general rule, cannot be divested without any satisfaction or release under seal. The term is, however, properly used where a person having a right, and seeing another person about to commit or in the course of committing an act infringing upon that right, stands by in such a manner as really to induce the person committing the act, and who might otherwise have abstained from it, to believe that he assents to its being committed; a person so standing by cannot afterwards be heard to complain of the act. In that sense the doctrine of acquiescence may be defined as quiescence under such circumstances that assent may be reasonably inferred from it, and is no more than an instance of the law of estoppel by words or conduct. "
20. No doubt the two applications one under Order XXXVII, Rule 3, C.P.C. For leave to appear and defend the suit and the other under section 34 of the Arbitration Act for stay of legal proceedings are mutually destructive. However, the contradiction in terms thereof may lead to fruitful results.
21. The defendant when filing the former is mindful that in case of his failure to do so, a decree will necessarily follow against him under Order XXXVII, Rule 2, C.P.C., while he is aware at the same time that upon his failure to file the later, he will be deprived of his right to seek stay of proceedings and get the dispute resolved through an agreed forum. Under the circumstances it cannot be said that the defendant has taken steps in the proceedings within the meaning of section 34, of Arbitration Act. On the other hand the very fact that the defendant has filed an application under section 34 of Arbitration Act simultaneously with his application under Order XXXVII Rule 3, C.P.C. Establishes his unequivocal intention not to submit to the jurisdiction of the Court. Query No,2 is answered accordingly.
22. ' Both Mr.Kamal Azfar and MrA.A.Sharif have brought to my notice conflicting judgments of two learned Judges of this Court sitting singly which might be relevant here. In both these cases the defendants simultaneously with their application under Order XXXVII Rule 3, C.P.C. Had filed another application under section 10, C.P.C. For stay of suit and the question involved was which of the two shall have precedence over the other.
23. ' In S. M. Akil Fikree v. Mohammad Qamaruzzaman PLD 1982 Karachi 745 it was held that unless the defendant files an application under Order XXXVII, Rule 3, C.P.C. And obtains leave to defend to suit, he would have no locus standi to file even an interlocutory application. The learned Judge observed:-- "From a perusal of the case cited above it seems clear that proceeding under section 10, does not relate to the matter in the controversy in suit or the merits of the case and it does not constitute a defence. It has been contended as section 10 bars the trial and does not form a defence, the defendant can press his application under section 10, C.P.C. This objection overlooks the mandatory provision of Order XXXVII, rule 2, sub-clause (2), C.P.C. Under which a defendant cannot appear and defend the suit without the leave of the Court. Mr.Fazeel is justified in contending that unless the bar imposed by Order XXXVII, rule 2, is removed the suit will not be ripe for trial and the question of stay will not arise at all."
24. ' In Habib Bank Ltd. v. Ali Mohtarim Naqvi PLD 1987 Karachi 102 the other learned Judge of this Court took entirely a different view and held that "the mandate postulated in section 10, C.P.C. Should be applied at the earlier stage before the mischief which is intended to be controlled has fully run its course. Once a decree is passed the provisions of section 10, would become a dead letter from the point of view of the defendant who was entitled to the protection of section 10 C.P.C. On account of the previous action which he had filed in the Court." While disagreeing with the earlier decision, it was further observed:-- "It appears to me that the learned Judge has treated the application under section 10, C.P.C. As an interlocutory application in the suit. With great respect to the learned Judge my approach is different. The interlocutory application seeking an interim relief is subservient to the relief claimed in the plaint. Surely such an application is not to be pressed till such time that leave to defend is granted to the defendant. But an application under section 10, C.P.C. Ranks higher than the application for interim/interlocutory relief. Conceptually speaking such an application is not the application in the suit. It is an application out of ambit of the suit. In my humble opinion if the consideration and disposal of the application under section 10, C.P.C. Is deferred till after the leave application is decided it would result in consequences diagonally opposed to those which section 10 seeks to achieve. As discussed by me in the preceding paragraphs if leave is refused a decree would immediately be passed against the defendant and there would be nothing left to be stayed."
25. ' Reference may here be made to M/s. Aslo Marine Limited v. M.T. Magta and another reported in PLD 1985 Karachi 745. In this case a vessel was arrested and the defendants upon service filed a counter-affidavit against the arrest of the vessel dealing also with the allegations made in the plaint and setting out their own defence. Security was also furnished by them upon the arrest of the vessel. At a subsequent stage however the defendants filed an application under section 34 of the Arbitration Act. It was held by Naimuddin. (as he then was):- "The counter-affidavit was filed in reply to the application for arrest of the vessel. I am of the view that filing of the counter-affidavit containing matters pertaining to defence of the case and also a statement that the defendants will deal with the allegations made in the plaint in the written statement, and furnishing security without simultaneously applying for stay are all steps in the proceedings. I am fortified in my conclusion by the observations of Russell on Arbitration, 19th Edition page 182 which reads as follows:-- "The filing of an affidavit, on a summons for judgment under Order XIV, disputing the claim and asserting a right to submit the dispute to arbitration, is probably a "step in the action", so that if this is done a summons to stay ought to be taken out at the same time.
26. ' Here it would be worthwhile to see how the English Courts visualized a situation when summon to stay would be taken out at the same time.
27. ' In Pitcher Ltd. v. Plaza (Queensbury) Limited 1940 All E.R. 151 Slesser L.J. Observed as under:- "The substance of this case, however, has been perhaps argued rather more upon the basis that the defendants here have taken a step in the action. I entertain myself no doubt whatever that they took a step in the action when they appeared before the master and asked for leave (to quote their affidavit) to defend the action. It is true that there may be difficult cases where an application to stay is made at the same time as leave is asked to defend, upon which I do not propose, for myself, to pass judgment in this case, and where there may be a question as to whether or not those two matters, taken together, would constitute such a step in the action as to preclude the defendants from relying upon their requests for a stay. Here, however, one has an entirely different case. One has a summons under R.S.C., Ord.14 for final judgment, and one has an affidavit in support of leave to defend the action, with a vague intimation that they might not object, as appears in one of the affidavits, to the matter being referred in the action to the official referee. It is only when the matter comes before the judge that the judge, not in order to preclude the argument of counsel for the respondents whether this was a step in the action, but so as to have everything before him, says; "De bone esse, you may now take out a summons for a stay." In truth and in fact, however, a step in the action was taken when the summons to sign final judgment was answered by affidavit, and no application was made to stay the action on the ground of the arbitration clause."
28. ' Another Judge Goddar L.J. Made the following observation:-- "The only other thing which I want to say is that The Annual Practice, 1940, p. 2502, states as follows:-- ' In Allied Artists Corpn. v. Jacobson (I) it was held that where on a summons for judgment under R.S.C., Ord.14, the defendant had filed an affidavit disputing the claim and claiming the right to submit the dispute to arbitration, he had not taken a step in the action, but as the defendant had alleged fraud in his affidavit, a stay was refused.
29. ' For myself, I should say that is a somewhat dangerous passage to follow. In the first place as the stay was refused on the ground that the defendant had alleged fraud, any view which the judge may have expressed as to whether or not the affidavit was insufficient to justify a stay is in the nature of an obiter dictum. The position was that, as the defendant alleged fraud, a stay had been refused. For myself, I am not at all satisfied that, if the defendant filed an affidavit in answer to an application for judgment under R.S.C. Ord., 14, although he may raise the arbitration clause, it may not be said that he has taken a step in the action unless at the same time he has taken out a summons to stay the action. Of course, if he has taken out a summons to stay the action which comes on (as, in the ordinary course, it would) at the same time as the summons for judgment, and the master refuses the application to stay, and says, "on the plaintiff's summons, I give judgment," I should say that there could be no doubt that, in appealing against both the refusal of the master to stay and the order giving leave to sign judgment, the defendant is not taking a step in the action. He has done what he can, by taking out the summons to stay, to get the action referred. If the master has refused that, and the defendant goes to the judge on that, he must at the same time, of course, also go to the judge and say: "Set aside the judgment, because, if this had gone to arbitration, it would follow that the master would not have given judgment. "I myself feel great doubt as to whether, if SWIFT,J, did say what he is reported to have said, it is right. It seems to me that, if a defendant who is sued wants an action stayed, he should take out a substantive application at the earliest possible moment."
30. ' In all probability the learned Judges would have given the verdict as above if confronted with a controversy as real and living as before me. A survey of the legal proposition reveals preponderance of opinion that an application under section 34 of Arbitration Act is a substantive application fortifying me to conclude that if no other step is being taken in the proceedings by the defendant his application under section 34 of Arbitration Act shall have precedence over an application under Order XXXVII Rule 3 C.P.C. For being taken up and decided first notwithstanding the embargo placed on the defendant to first obtain leave to appear and defend the suit. Surely, this jurisdictional question can also be understood by reference to the intention of the parties as embodied in the arbitration agreement to resolve their dispute through a forum of their choice and not by a decision of judicial authority. Unless other requirements of section 34 have not been violated by a defendant a Court of law ordinarily should not allow a plaintiff to act contrary to his commitments to refer to arbitration. Accordingly I hold that section 34 of the Arbitration Act is an overriding provision of law and cannot be allowed to be struck off when confronted face to face with the provisions relating to leave to appear and defend the suit under Order XXXVII, C.P.C. It would not be out of place to mention here the observation made by learned Single Judge in Habib Bank Ltd. v. Al Mohtarim Naqvi, PLD 1987 Karachi 102 referred to above, that an application under section 10, C.P.C. Is an application out of ambit of the suit and rates higher than the application for interim/interlocutory relief and if leave under Order 37 Rule 3, C.P.C. Is refused a decree would immediately be passed against the defendant and there will be nothing to be stayed.
31. ' The queries having being answered, now I will deal with the facts of both the abovenamed suits. In Suit No,421 of 1988 the defendants had accepted the quotations of the plaintiffs for Rs,98,60,000 for the construction of Rezwan Plaia vide Agreement dated 24-8-85 which was to be completed within 30 months and the plaintiffs were required to maintain the same for six months after completion.
32. While the plaintiffs were executing the work, the defendants unilaterally stopped execution of the work in November 1985, took forcible and illegal possession of the site of work from the plaintiffs and asked them to finalize the accounts with them. The defendants' architect after verification and adjustment found a sum of Rs,1,32009.44 payable by them to the plaintiff for which amount the defendants issued a cheque in favour of the plaintiffs. The said cheque was presented by the plaintiffs to the defendants' bank but was dishonoured. The plaintiffs thereupon sent a legal notice dated 6-3-1986 to the defendants and upon their failure to repay the amount, the suit was filed by the plaintiffs.
33. ' The defendants, while admitting the execution as well as consideration under the cheque, have contended that the amount of cheque was payable by them only upon the plaintiffs prior undertaking that they have received full and final payment of all their claims against the defendants. Since the plaintiffs backed out of their undertaking they were disentitled to the amount of the cheque. It is further urged by them that the interest claimed by the plaintiffs is illegal and contrary to Sharia and cannot be granted in view of the provisions of Article 2-A of the Constitution of Islamic Republic of Pakistan. The defendants have further alleged that they have a claim against the plaintiffs for damages caused to them as a result of breach of contract by the plaintiffs. In support of their application under section 34 of Arbitration Act, the defendants have filed an agreement dated 28-4-1985 entered into between the parties wherein, as per clause 29, it is stated as follows:-- "In case of any dispute between the contractor and the owner the decision of architect shall be final and binding upon contractor and owners.
34. ' The plaintiffs, while opposing both the applications of the defendants, have contended that the architect of the defendants had checked and scrutinized the bills submitted by the plaintiffs and under Clause 29 passed the bills of a net sum of Rs,1,32,009.44 for which the cheque in question was issued by the defendants in favour of the plaintiffs. According to them the application under section 34 of the Arbitration Act is misconceived as there is nothing to refer to arbitration.
35. ' In view of the discussion above I will take up the defendants' application bearing C.MA.No, 3908/88 under section 34 of. Arbitration Act first. Although this application is under section 34 of the Arbitration Act and the agreement dated 28-4-1985 refers to "dispute" between the parties, there is nothing to suggest there was an arbitration agreement or that the "architect" mentioned therein was to act as arbitrator. Similarly there is nothing to indicate ouster of the jurisdiction of the Court.
36. Hence this application is misconceived and hereby rejected. With regard to the defendants' application C.MA. No, 3907/88 under Order 37 Rule 3 C.P.C. For leave to appear and defend the suit the pleas raised by the defendants furnish plausible grounds for defence I therefore grant permission to the defendants to appear and defend the suit upon furnishing security in the sum of Rs, 132,009.44 within four weeks, whereafter the defendants may file their written statement within the next two weeks.
37. ' The other suit bearing No,156 of 1988 is for recovery of Rs,2,06,498 with mark up at Re.0.43 per one thousand per day from 1-1-1988 till payment. In September/October, 1985, the plaintiffs negotiated to purchase from defendant No,1, the entire production of cotton ginned and fully pressed by them at their factory during the year 1985-86 Cotton Crop Season and on 12-10-1985 an agreement was executed between the parties. On 24-10-1985, the plaintiffs granted an advance of Rs, One Million to defendant No,1, who, as a security for repayment thereof executed a Demand Promissory Note of the said amount. Earlier, vide letter of guarantee dated 22-10-1985, the defendant No,6 guaranteed repayment of the said amount with mark up payable within two days of receipt of demand from the plaintiffs. It was stipulated that in case of default on the part of the defendants to supply the cotton as per the agreement, the defendants would be liable to repay the entire amount of advance or such balance thereof as remains unadjusted by 31-1-1986 together with mark up at the said rate till payment. It is averred that the defendants have adjusted Rs,8,63,445 leaving a balance of Rs,126,555, together with accumulated mark up of Rs,206,498 as on 31-12-1987.
38. ' Defendant No,1 is a Partnership Firm and defendants No,2 to 5 are its partners. In their application bearing C.MA. No, 3280 of 1988 under section 34 of Arbitration Act, 1940, the defendants have prayed for stay of the suit in terms of Clause (8) of the agreement dated 12-10-1985 which states as follows:-- "Any dispute/difference touching terms and conditions contained in this contract, failing mutual amicable settlement shall be referred to Arbitrator to be nominated by each party (buyer and seller). Should the so nominated Arbitrators failed to arrive at an agreement, they (the Arbitrators) will nominate an Umpire whose findings shall be final and binding on both the parties."
39. ' According to them the plaintiffs have arbitrarily deducted Rs,227,606 in respect of 28 lots of cotton supplied by them to the plaintiffs from 14-11-1985 to 26-2-1986. Besides they are entitled to receive back Rs,30,000 from the plaintiffs for 1984-85 Season and Rs, 184,295.30 for 1985-87 Season. It is also alleged that the demand promissory note is not properly stamped.
40. ' A bare reading of the arbitration clause will reveal that there is an agreement to refer to arbitration. Evidently there is a dispute between the parties which is also the subject-matter of the suit. This dispute ought to have been referred to arbitration by the parties. Since the defendants have also not taken any steps in the proceedings as held by me above and otherwise are ready and willing to submit to arbitration, I am satisfied that the defendants have made out a case for stay of the suit. Accordingly I grant this application and order stay of suit in terms of section 34 of Arbitration Act. C.M.A.No, 3281/88 has now become in fractious. The parties are left to bear their own costs.