1. ' SYED HAIDER ALI PIRZADA, J.---This High Court Appeal is against the order, dated 6-8-1992 passed by the learned Single Judge in Suit No,428 of 1991 whereby the learned Single Judge dismissed the appellants' application .Under section 34 of the Arbitration Act.
2. ' The facts leading to the filing 'of the above appeal are that the appellants are public limited companies having their registered offices at Lahore and are engaged in the manufacturing, assembling and selling of tractors throughout Pakistan. The respondent No,1 is 'a corporation existing under the laws of Yugoslavia, having its registered office at Novi Beograd and engaged in manufacture and sale of tractors, components and parts.
3. ' Respondent No,2 is a financial institution which carries on the business of banking and having its principal place of business at Karachi.
4. ' The case of the appellants, as set out in the memo. Of appeal, is that in the year 1981 the appellants and the respondent No,1 agreed, for a joint profitable venture with the blessings of the.
5. Government of Pakistan for the assembly and progressive manufacture of tractors, components, spare parts and servicing thereof. The object was to make contribution to industrial growth of Pakistan and to promote economic relations between. Pakistan and Yugoslavia. The terms of the joint 'profitable venture between appellants and respondent No,1 were put in writing by two agreements dated 26-12-1981 which provided inter alia foreign equity participation in the shape of plant and machinery; gradual increase of the production of tractors and running of the company by a board of directors consisting of majority directors of the respondent No,1 (5 out of '9 directors), right to sell shares by each party and to repatriate dividend, providing of techni6a1 assistance know . There were other provisions in the said agreements etc. Under clause 47 of the said agreements, it was provided as follows:--- "Art..
6. 27.
7. ' The parties in good faith shall attempt. To settle amicably and 'by mutual agreement any dispute relating to this agreement and. The Company.
8. ' If the parties fail amicably to resolve the differences, all differences arising out of this agreement shall be submitted for arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, Paris, and the outcome of such Arbitration shall be final and binding on the parties.
9. ' As regards the procedure, the said Rules shall apply and, when necessary, the Concordat of the Swiss Confederation shall be invoked.
10. ' The place of arbitration 'shall be Lahore in case IMT1 are initiating arbitration, and it will be'
11. Beograd in case AAL is initiating arbitration."
12. ' The respondent No,1 agreed with appellant No,1 to establish a Joint Venture Company in Pakistan for the assembly and progressive manufacture of 'tractors. For this purpose; the respondent No,1 and other State-owned Yugoslav company, Interexport, entered into two agreements with appellant No,1- on 26-12-1981, namely, a Joint Venture Agreement 'and a Licensee, Technical Assistance and Servicing Agreement. Thereafter, the parties entered' into a .Protocol .At meeting held on 3rd October, 1985. This protocol relates to outstanding payments due from AAL and AMT- ATL to IMT. It contains six Articles. It contains that the total outstanding payment comes to U.S. $.4,476,308.00. The amount receivable by IMT from AAL against letters of credit comes to the value $ 2,839,808.00.
13. ' It is the further case of the appellants that the joint profitable venture started with a great deal of goodwill between the. Parties and with a great hope of 'accelerating the production of tractors and its components to meet the agricultural requirements of Pakistan. However, the conflicts which are inherent together with business risks in which a big venture came to the surface and the appellants were compelled to file a suit being Suit No,355/91 before a Senior Civil Judge, .Lahore for declaration and injunction against the respondent No,1, as they were threatened by unilateral terminations of the agreements and jeopardizing their joint business venture. The respondent No,1 during th0 proceedings pending in the above suit, filed application under section 34 of the Arbitration Act which was dismissed by order, dated 31-7-1991.
14. ' It is, the further case of the appellants that the respondent No,) as a counterblast, filed a suit on the original side of this Court, being Suit No,428 of 1991 against the appellants as well as respondent No,2 in which it alleged breach and default allegedly committed by the appellants and prayed for a judgment and decree for U.S. $2,504,786.00, U.S. $896,340.00 and $1,688,446.00 against respondent No,2 and appellants respectively., The appellants. During pendency of proceedings filed three applications namely under Order 37, C.P.C., under Order 7, Rule 11, C.P.C. And under section 34 of the Arbitration Act.
15. ' The learned Single Judge took up for hearing the application of the appellants under section 34 of the Arbitration Act and after hearing the parties, dismissed the same by order, dated 0-1992. The appellants being aggrieved and dissatisfied with the impugned order, have filed the present appeal.
16. ' The learned Single Judge came to the conclusion that it cannot be said with certainty that the present proceedings are in respect of the matter agreed to be referred to the arbitration. He found that the appellant Acquiesced in the proceeding and they cannot be allowed to invoke the provisions of section 34 of the said Act. He found that the application under Order XXXVII, Rule 3, C.P.C. Is to be treated as a step in the proceedings. He also found that the appellants had no intention whatsoever at the initial stages to invoke the arbitration clause. In that view of the matter, he observed that the appellants were not ready and willing to enforce arbitration agreement. He also came to the conclusion that a suit cannot be split up. In these circumstances, the application was dismissed.
17. ' We have heard Dr. Pervaiz Hassan, learned counsel appearing for the appellants, Mr. Kazim Hassan, learned counsel appearing for the respondent No,1 and Mr. Saeed A. Shaikh, learned counsel appearing for respondent No,2. We have gone through the impugned order and the decisions cited at the bar.
18. ' In view of these agreements, it has to be considered whether the arbitration clauses contained in the original agreements dated 16-12-1987 continue to apply to protocol dated 3-10-1985 entered into between the parties and to the present disputes which have arisen between the parties.
19. According to the appellants, the protocol is modification of the original agreements of 16th December, 1981. Therefore, according to them, the arbitration clauses contained in the original agreements continue to apply to the protocol and therefore the present disputes are covered by the arbitration clauses in the original agreements. The respondent No,1, however, contends that new rights and new liabilities are created under the protocol. These amount, therefore, to fresh agreement between the parties' and the original agreements of 16th December, 1981 do not apply to this protocol.
20. ' The protocol, therefore, must be examined to see whether it amounts to only a modification of the original agreements of 1981 or whether it amounts to new agreement between the parties. -In the present case, since the parties have had contractual relationship for manufacture and sale of tractors.
21. ' The case of the respondent Ko.1, as set out in the plaint, is that during the course of business, the respondent No,1 supplied tractors and parts thereof to the appellants against letters of credit issued by respondent No,2. The appellants defaulted on the payments due to the respondent No,1 under the letters of credit. Accordingly it was mutually agreed between the parties that the payments would be made as stated in-a protocol dated 3rd October, 1985. It is the further case of the respondent No,1 that in accordance with the terms of the said protocol, the amount of U.S. $ 3,564, 308.00 was to be paid by the appellants. The first instalment was to commence on 30th day of the signing of the protocol. As such the entire amount outstanding was to be liquidated by 3rd November, 1990. It is their further case that to meet these liabilities, Bills of Exchange were drawn and, duly executed by the appellants. A sum of U.S. $.2,504,786.00 remained unpaid. The respondent No,1 called upon the appellants to make payments but failed to do so.
22. ' The protocol must be examined to see whether it amounts to only a modification of the original agreements of 1981 or whether it amounts To new agreemeent between the parties. This protocol appears to suggest that the terms of the original agreements were not changed or modified. The protocol only provides that the respondent No,1 had supplied tractors to the appellants against Letters of Credit and the price of tractors was to be paid to the respondent No,1. It appears that there are no substantial changes in the original agreements. The terms of the original-agreements were not changed. As the terms of the original agreements were not changed and The original agreements remained intact, the arbitration clauses as contained in the agreements of 16th December, 1981 can apply to the protocol.
23. We are of the view that where the original contract for manufacture - and supply of tractors and parts thereof contained provisions for arbitration in A respect of disputes arising out of or in relation to such agreements and there was no substitution of the original agreements by a new. Contract but there was only modification of the original agreements in respect of outstanding dues, the arbitration agreements and all other clauses were enforceable in law. On the facts, we come to the conclusion that an alteration in outstanding payment. Could be considered as only a minor modification of the original agreements and therefore the arbitration clauses continue to govern the disputes of the parties.
24. ' The present suit is for enforcement of clause's under the protocol of 1985. The arbitration clause in the agreements of 1981 can govern these new contract obligations.
25. ' The second contention that requires consideration is that whether appellants took steps in the proceedings or not. It is common ground that the above suit was filed under Summary Chapter for recovery of U.S. $.2,504,786.00.
26. ' The appellants moved an application under Order XXXVII, Rules 2 and 3, C.P.C: Order XXXVII, Rule 2(2) appears drastically to curtail a litigant's' normal rights in a Court of Justice, namely to appear and defend himself as of right, if and when sued, because it says that when a suit is instituted on a bill of exchange, . Hundi, or a promissory note under the provisions of sub-rule (1),' defendant shall not appear or defend the suit, unless" he obtains leave from a Judge, so to appear and defend, as provided: But the rigour of that was softened by Rule 3(1) which makes it obligatory on the Court to grant leave when the conditions set out there, are fulfilled.
27. ' Rule 2(2) says that in any case in which the plaint and summonses are in such forms, respectively, the defendant shall not appear or defend the suit unless he obtains leave from a Judge and,. In default of his obtaining such leave or of his appearance and defence in pursuance thereof, the .Court will accept the statements in the plaint as correct and on those statements pass a decree in favour of the plaintiff..
28. ' In order, therefore, to avoid a decree, the defendant receiving such summons must apply for leave to appear and defend the suit. The defendant shall not appear or defend the suit unless he obtains leave from a Judge. In default of his obtaining .Such leave or of his appearance and defence in pursuance thereof, the Court will accept the statements in the plaint as correct and on those statements pass a decree in favour of the plaintiff. Such leave would only prevent the Court from passing the decree.By obtaining leave to appear or defend, he becomes entitled to appear or to defend. But such' appearance Is not indicative of any intention on his part to waive his right under the arbitration agreement.
29. From the facts, as narrated above, it is clear that the appellants before taking any step in terms of Rules 2 and 3 of the Order XXXVII had only sought leave to appear or defend the suit.
30. ' The other aspect of the case is that the appellants have averred in subpara. (i) of para. 1 of the application that the underlying agreements between the applicants/appellants and the plaintiffs/respondent No,1, that is the Joint Venture Agreement dated 26th December, 1981 and the Licensee, Technical, Assistance and. Security Agreement dated 26th December, 1981 contain arbitration clause 27 of Joint Venture Agreement and clause 16 of Licensee, Technical, Assistance and Security Agreement and according to which disputes arising out of the agreements should be referred to arbitration in accordance with the Rules and Regulations of the International Chamber of Commerce. In this view of the matter, this Court may stay the proceedings under section 34 of the said-Act.
31. ' In Ives & Barker v. Willians (1894) 2 Ch. D.478, Lindley, L.J. Said at page 484 as under:--- "The authorities show that a step in the proceedings means sintering in the nature of an application to the Court, and not mere talk between solicitors or solicitors' clerks, nor the writing of letters, but the taking of some step such as taking out a summons or something of that kind; which is, in the technical sense, a step in the proceedings." ' in G.M. Pfaff A.G. v. Sartaj Engineering Co. Ltd., Lahore and 3 others PLD 1970 Lah. 184 a .Division Bench of Lahore High Court observed at page 193 as under:--- "There is no particular form of application provided in section 34 and, therefore, if it can be detnonstrated that the respondent made it clear to the Court that he was refusing to submit to its jurisdiction In the present case, the appellants had filed an application under because there was a subsisting arbitration agreement between the parties, which required the submission of the particular dispute to arbitrators, the respondent would be deemed to have discharged his duty of making an application. Such an intention was clearly notified to the -Court by 'the first few, paragraphs of the so-called 'written statement'. There is no doubt, however, of the fact that the respondent did not present a separate application under section 34 but there is no indication whatsoever in this section requiring such a step to be taken."
32. ' We are in respectful agreement with the observations of the learned Judges of the Division Bench.
33. Order.500CVII; Rules 2 and 3 and sub-para. (1) had specifically said that there are arbitration clauses and disputes have arisen between the parties, the suit be stayed under section 34 of the said Act. We are; therefore, of the view that the appellants had availed of their right to apply under section 34 of the said Act before taking any step in the suit. The learned Single Judge has not considered this aspect.
34. ' Section 34 of the Arbitration Act has received the consideration of the Supreme Court in Pakistan International Airlines Corporation v. Messrs Pak Saaf Dry Cleaners PLD 1981 SC 553. It should be a step to abandon the right to have the suit stayed. It should be a step in aid of the progress of the suit or submission to the jurisdiction of the Court for the purpose of adjudication of the merits of the controversy in the suit.
35. ' In M/s. Cepcon (Pvt.) Ltd. v. M/s. Rizwan Builders Ltd. 1990 MLD 2033, Mr. Haziqul Khairi, J. Held that the defendant filing an application under section 34 of the Act simultaneously with its application under Order XXXVII, Rule 3, C.P.C. Establishes his unequivocal intention not to submit to the jurisdiction of the Court. We are in respectful agreement with the observation of the learned Single Judge, ' In Island Textile Mills Ltd., Karachi v. V/O Technoexpert and another 1979 CLC 307, Mr. Ajmaf Mian, J.
36. (as he then was) after referring to a number of decisions given his conclusion at page 314 as under:--- "In my view the question as to whether a defendant has taken steps in the proceedings will depend the facts of each case and it will Nary from case to case. If from the conduct of the defendant it appears that he has acquiesced to the suit and intended to contest the suit on merits before the Court, he cannot thereafter, file or press an application under section 34 of the Arbitration Act.
37. However, if a defendant makes his stand clear at the earliest opportunity that he wishes that the disputes/differences be referred to arbitration as per arbitration agreement, in such a case the mere fact that the defendant has contested an application for injunction or for the appointment of a receiver will not constitute a step in the proceedings."
38. ' It was further held at page 315 as' under:--- "In my view, since the defendant No,1 contested the above application without prejudice to their present application, it cannot be urged that the aforesaid defendant has taken any steps in the proceedings within the meaning of section 34 of the Arbitration Act so as to disentitle them to press their present application." .
39. ' We are of the humble view, that the step must be such as to manifest the intention of the party unequivocally to abandon the right under the arbitration agreement and instead to opt to have the dispute resolved on merits in the suit. The step must be such as to indicate the election or affirmation in favour of the suit in the place of the arbitration.
40. ' In the light of these principles and looking to the substance of the application dated 20-4-1991, this cannot form an opinion that the appellants have abandoned their right to have the suit stayed and took steps in the suit to file the written statement.
41. ' A plain reading of the above clause indicates that in case, the parties are unable to arrive at an amicable settlement in respect of their disputes and differences as contemplated under the arbitration clause, the same are to be submitted for arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, and the outcome of such arbitration shall be final and binding on the parties.
42. ' The contention of Mr. Kazim Hassan is that the subject-matter is not covered by the arbitration clause. On the other hand, Mr. Pervaiz 'HaSsan submitted that the subject-matter is covered by the above clause.
43. ' The contention of Mr. Kazim Hassan is that the Protocol of 1985 and other Memorandums are subsequent to the conclusion of Agreements of 1981 and therefore the same cannot be the subject matter of arbitration. In support of his above contention, he referred to the photostat copy of the Protocols entered into between the parties.
44. ' This contention is not well-founded. The protocol does not exclude the terms, of the agreements of 1981. It has come on record that there are disputes and differences between the parties. In our view, the distinction sought to be made by the learned counsel for the respondent No,1 on the basis of the language employed in the arbitration clause referred to hereinabove is not material as prima facie the respondent No,1's claims arise out of the contract. '
45. ' The other contention of Mr. Kazin.' Hassan is that the appellants had not filed any affidavit in.
46. Support of the application stating therein that the respondent Nod was at the relevant time when the proceedings were commenced and still, remained ready and willing to do all things necessary to the proper conduct of the arbitration. This contention is also not well-founded.
47. ' The contention of Mr. Kazim Hassan is.That there are two defendants to the above suit and the defendant' 1\16.1 is not a party to the arbitration' agreement. This contention is not well-founded as in the instant case, the suit is for recovery of the amounts under the original agreements and the defendant No,1 is merely added as a pro forma party without making any independent claim in the above suit.
48. ' In our opinion, the defendant No,1 is not concerned with the merits of the plaintiff's claim and the dispute is between the appellants and the respondent No,1.
49. ' It is evident in the present case, that the appellants clearly disclosed in the affidavit that there are arbitration clauses and there were disputes and differences between the appellants and the respondent. No, l. The learned Single Judge overlooked this fact in the affidavit.
50. The question is whether the learned Single Judge was justified in the facts and circumstances of the case in exercising his discretion, in favour of the respondent No,1. It is well-settled that while the trial Court has discretion in the matter, the appellate Court could not ordinarily substitute its discretion in place of discretion exercised by the trial Court. But it is equally well-settled that where the trial Court ignored the relevant evidence, side-tracking the approach to be adopted in the matter and overlooking various relevant consideration, has ,exercised its discretion on way, the appellate Court keeping in view the fundamental principle, can and ought to interfere because when it is said that a matter is within the discretion of the Court, it is to be exercised according to well-established judicial principles according to reason and, fair play, and not according to whim and caprice. Under these circumstances, it would not be considered in the present case that the appellants have failed to state specifically and clearly disputes which have arisen between the parties and the subject-matter of the above suit is covered by the arbitration clause.
51. ' On this view of the matter, this appeal must succeed and is allowed with the result that the order of the learned Single Judge is set aside and the appellants' application under section 34 of the Arbitration Act is granted and accordingly proceedings in Suit No,428 of 1991 filed on the original side of this Court' are stac with the direction that the dispute in the case will now be referred to arbitration in accordance with the arbitration agreements between the appellants and the respondent No,1 and for that purpose, the file of the above suit shall be laid before the learned Single Judge for passing appropriate orders in accordance with law.
52. ' In the facts and circumstances of the case, the parties are directed to bear their own costs.