' FA.O. No,113 of 1987 and Civil Revision No,1662 of 1987 arise out of judgment dated 30-6-1987 whereby the learned Senior Civil Judge, Lahore rejected objection petition filed by the Government of Pakistan and made the award rendered by the umpire dated 9-9-1984 as rule of Court. Former is filed by the Federation of Pakistan which shall be hereinafter called as the "Borrower" while the latter is brought by M/s. Joint Venture Rocks KG/Rist (hereinafter called as the "Consultant"). As both FAO and Civil Revision involve examination of common questions of law and facts, these are being disposed of by common judgment.
2. The facts, material for the purpose of FAO as well as civil revision are not much in dispute. These are; in year 1976, the borrower conceived of various projects to establish Seed Industry in the country in order to meet the growing need of agriculture sector. It, on account of financial constraints, moved the World Bank for advancement of financial/technical assistance. As a result of mutual negotiation, the International Development Association a subsidiary of World Bank agreed to advance the needed facilities to borrower. On 29-3-1976, the borrower and International Development Association (hereinafter referred to as creditor), entered into an agreement by which the creditor agreed to lend borrower the amount in various currencies equivalent to twenty-three million dollars (Dollar 23,000,000) for the purpose of constructing Seed Factories in accordance with implementation of schedule framed and planned by the creditor. The pertinent clauses of this agreement were section 2.08 in Article II and 3.06 in Article III of agreement dated 29-3 1976. Section 2.08 specified that currency of U.S.A. will be relevant for the purpose of section 4.02 of general conditions while section 3.06 enjoined borrower to employ foreign consultants whose qualification, experience and responsibilities were to be determined by the creditor. According to this section the consultants were to assist the borrower/Provinces/Seed Corporation in processing plan, design, preparation, evaluation of tender documents and supervision of construction of factories.
3. Pursuant to this agreement, the borrower called for tenders from the companies of foreign consultants. Basico GMBH/Kocks K.G. a joint German Venture submitted its tender which was accepted by borrower being lowest. As a result, the borrower and M/s. Basico GMBH/Kocks K.G. entered into a consultancy agreement on 26-11-1976 which shall be referred to as "agreement". In Junuary, 1978, Basico & Co. went into Liquidation and M/s. Kocks, with the approval of borrower, associated a Pakistani firm known as Rist. Resultantly a new contract was entered between the borrower and M/s. Kocks and Rist on 28-5-1978 wherein the name of Basico & Co. was deleted and the name of Rist was substituted. The new venture shall be hereinafter described as consultant.
4. Since the dispute arose out of the agreement, it will be apt to refer to its salient features. Period of the contract was five years commencing from "starting date" specified in section 1.01(b). It meant the date from which the consultant resident staff commenced duties in Pakistan as set forth in the time schedule attached as Appendices B(1) and B(2) and after which the consultant may receive payments hereinafter. Under section 3.01, the President was to pay consultants in Deutsche Marks (shortly stated as D.M.) an amount not exceeding in value U.S. Dollars 2,137,878.00 (D.M. 5,173,665) at the specified rate of exchange viz. 2.42 D.M. to one U.S. Dollar. The details of payments and services agreed to be rendered by consultants were described in paragraph (a) through (I) of this section. This section further stipulated that out of total amount mentioned above 18% would be payable in local currency and balance 82% in foreign exchange. Section 3.02 dealt with payments out of contingencies up to a maximum of U.S. Dollars 707,070.00 (D.M. 1,711.109) to be payable on the basis of price escalation to the satisfaction of borrower. This amount was payable in the same ratio i.e. 18% in local currency and balance 82% in foreign exchange (D.M.). Paragraph (a) of this section referred to Appendix C which in detail provided the schedule of period of time to be actually spent by personnel including necessary travel time. Against the period of work the payments were specified both in Dollar as well as in D.M. Under another section which is also numbered as section 3.02, the President was to pay consultants for items referred to in section 3.01 in following manner: Not later than 30 days after signing the Contract, an advance payment of 10% i.e. U.S. Dollars 213,788 (equivalent to D.M.
517,467). 82% in Deutsche Marks 424,241.00 equivalent to U.S. Dollars 175,306 shall be paid to the accounts of the Consultants with Deutsche Bank, OBSERURSEL/TS, A/C No,441/2300 and 18% viz. U.S. Dollars 38,482 equivalent to D.M. (93,126) shall be payable to their Bank Account A/C No,1598-45, in Habib Bank Limited, Civic Centre Branch, Islamabad. Under paragraph (b) of this section, the consultants were under a duty to submit their bills to the President for its approval of an itemized statement of expenditure described in section 3.01 and actually incurred till the end of such quarter.
The consultants were to submit these bills not later than 15 days after the end of each quarter of a year. The President was to pay the consultants the amount of respective quarterly invoices after deducting 10% of each invoice within a period of three days after having received the invoice.
Article VI contained clauses relating to settlement of disputes, suspension and termination of the contracts which will be described in the later part of this judgment.
5. The construction of the factories at Sahiwal, Khanewal and Rahimyar Khan started in 1978. The consultants submitted their bills in D.M. and were accordingly paid. It was in year 1978 when Dollar started depreciating against other world currencies on account of certain international events.
Confronted with this situation the borrower entertained apprehension that if claimants were paid according to amount specified in D.M. in Schedule C-I, C-Il, the amount of loan which was in dollar would be exhausted before the completion of contract and so the consultants will not be able to render their services in accordance with the Schedule of time specified in Appendix C-I and C-II. In year 1980, the consultants submitted their invoices for first quarter and second quarter of 1980 in D.M. by reference to the amount specified in schedule C-I, C-II and C-III to agreement. The borrower refused to accept the bills submitted in D.M. and took up a position that consultants must submit their bills in Dollars which was specified in the Schedule C-I, C-II and C-III to ageement. The borrower further informed the consultant that they will pay consultants in D.M. after converting amount specified in Dollar against itemized brake-up in Appendix C-I and C-II to agreement on basis of specified rate of exchange incorporated in agreement i.e., 1 Dollar = 2.42 D.M. The consultants declined to accept this position of the borrower and continued submitting their bills in D.M. In this background, the consultants under section 6.05 in Article VI notified to President of Pakistan that they were not receiving payments according to the agreement, were, therefore, compelled to terminate the contract. This occurred vide telex dated 3-9-1980. Thereafter followed telex after telex and then counter telex after counter telex. The consultants stated that they would withdraw their personnel with effect from 15-12-1980. The borrower replied that they will do so on their own risk. It was on 24-12-1980 when borrower informed the consultants that the services rendered by them were highly inefficient and unsatisfactory and on this ground terminated the contract with effect from 31-3-1981.
6. The borrower as well as consultants agreed to refer their disputes to arbitration. Mr. Justice (Rtd.)
Zakiuddin Pal was nominated as arbitrator by the consultants while Mr. ZA. Qureshi was nominated by the borrower. The arbitrators entered the reference. The consultants as well as the borrower submitted their claims. The consultants prayed for grant of following claims:--- D.M.
3.1:Deduction Exchange Rate:92,122.66 3.2:Price Escalation: 1,449,330.42 3.3:Other Deductions: 71,720.86 3.4:Invoices I/81 and II/81: 184,668.48 3.5:Add. Eng. Services: 727,721.27 3.6:Loss or Profit: 453 716.18 Total: 2,979,279.87 Less Advance not vet repaid:204,642.35 Total qualified claim 2,774,637.52 ' Likewise claims submitted by the borrower may be described as follows:--- (1)Reimbursement of proportionate part of sums paid to consultants of the advanced money on account of premature termination of the Contract:2,33,770.49 D.M.
(2)-do--- 6,36,829.00 (Rupees)
(3)Compensation for loss suffered by the Punjab and Sindh Seed Corporation for following items (a)Wrong selection of site for construction of Khanewal Seed factory by consultants:5,00,000 (Rupees five lacs)
(b)Making of wrong designs of Sahiwal Factory5,00,000 (Rupees five lacs)
(c)Wrong design of Shell Roof of Khanewal factory made by consultants.30,00,000 (Rupees thirty lacs)
(d)Placing of stirup at improper places at Sahiwal factory.1,00,000 (Rupees one lac)
(4)Negligence and dishonesty in prequalifying number of contracts70,00,000 (Rupees seventy lacs)
(5)Loss of cement on account of inefficiency of consultants7,00,000 (Rupees seven lacs)
(6)Delay in installation of machinery on account of negligence on the part of consultants.34,00,000 (Rupees thirty-four lacs)
(7)Payments of NESPAK for the purpose of suggesting remedial measures in the construction of the factories:5,00,000 (Rupees five lacs)
(8)Rebuilding of factories at Sahiwal and Rahimyar Khan.3,50,00,000 (Rupees three crores, fifty lacs)
Total quantum claimed:5,86,01,483.60 (Rupees five crores, eighty-six lacs, one thousand, four hundred eighty-three and paisas sixty only).
7. On the divergent claims submitted by parties learned Arbitrators framed issues both regarding the claims of consultants and borrower separately. These issues are as follows: ' In the case of claim filed by J.V. Kocks K.G. Rist, against the Federal Government of Pakistan:
(1) What is the mode of payment, whether in D.M. or Dollars in terms of agreement onus on both parties? OP.
(2) Whether the Government of Pakistan was justified in making deductions in the bills submitted by the claimant for the quarter 1 and 11/81? OPR.
(3) Whether the claimant was justified to terminate the contract in terms of section 6.05 of the contract, if so its effect?
(4) Whether the respondent was justified in withholding the payment on account of escalation, if so how much the claimant is entitled to receive the escalation charges?
(5) Whether the claimant is entitled to remuneration for the additional services as claimed by it and if so, to what extent?
(6) Whether the claimant is entitled to receive damages on account of loss or profit. If so, to what extent?
(7) Whether the claimant is guilty of breach of contract between the parties, if so, with what effect?
(8) Is the Government of Pakistan entitled to claim damages from the consultants, if so, to what extent?
(9) Relief.
' In the case of counter-claim of Government of Pakistan filed against J.V. Kocks K.G. Rist:
(1) What is the scope of reference and the effect thereof on the respective claims of consultants and Government of Pakistan?
(2) Whether the consultant is guilty of breach of contract, if so, to what effect?OP
(3) Whether the claim by Government of Pakistan is legally maintainable?
(4) Whether the Government of Pakistan is legally entitled to recover damages for the breach of contract, if so, to what extent?
(5) Whether the Government of Pakistan has suffered losses, if so, to what extent?
(6) Relief.
' The Arbitrators, however, chose to send the reference to the Hon'ble Mr. Justice Durab Patel, a former Judge of the Supreme Court, as Umpire. It was on 9-3-1982 when the Umpire entered the reference, recorded the evidence of the parties.
8. After hearing the parties and after perusing the material available on record the Umpire rendered award on 9-9-1984. While dealing with Issues Nos.1 and 2, the learned Umpire accepted the consultants' construction of section 3.01 and held that the borrower had to pay Consultants contracted amount in D.M. On this finding the learned Umpire found that the borrower was in breach of contract in not making full payments of its dues to consultants from and after the second quarter of 1980 and therefore, the consultants were fully justified to terminate the agreement. On this conclusion the learned Umpire decreed the amounts which were deducted on the basis of exchange rate amounting to 92,122.66 D.M. He also further decreed the claim of 15,000 D.M. for quarterly payments and 3,000 D.M. towards overhead of Consultants Organization. On the question of escalation, the learned Umpire held that the Consultants were entitled to claim amounts due to escalation from the year 1976. He however, found that the consultants were entitled to get this question decided by the borrower within the terms of section 3.02 of the agreement. As regards the consultants' claim regarding non-payment of Invoices 1/81 and 2/8I, the learned Umpire decreed the claim with reluctance on the basis of finding that borrower had failed to produce the Invoices in order to support the contentions that these related to period after termination of agreement. The remaining claims of consultants were rejected by the learned Umpire. In short the claim of consultants was decreed by the learned Umpire in following words:--- "Turning now to the plaintiff's suit, the Government are dismissed should decide the plaintiff's claim for escalation within 3 months and the base period for calculating the rise in prices is the date of `the agreement'. Next, for the reasons which I have given, I also decree the plaintiff's claim for its bills and the claim described 'other items'. I, therefore, award the plaintiff 363,513.96 D.Ms. and clarify that all conversion of currency will be at the rate of 2.42 D.Ms. per dollar."
' While dealing with the claim of borrower, the learned Umpire accepted its claim embodied in paragraphs Nos.32 and 33 of the claim and decreed this claim in following manner:--- "I now turn to the Government's claims which are for a sum of Rs,58,601,483.60. This enormous amount consists of many items, two of which were never in dispute. I pointed out earlier that the Government had paid a deposit to the plaintiff mostly in D.Ms. at the time of the signing of the agreement. As the plaintiff terminated the agreement before its completion, it is liable to refund a proportionate part of this deposit and the Government's claim in paragraph 32 of its claim is for this refund. Unfortunately the Government has not been able to calculate its claim properly. But the plaintiff had immediately admitted its liability for D.Ms. 233,770.49 in its written statement to the Government's claim. Both in 1982 and in 1984, I was told by the Government's counsel that the plaintiffs calculations are correct, and so I award D.Ms. 233,770.49 by consent. Similarly the claim in paragraph 33 of the Government's claim for Rs,63,682,900 is admitted by the plaintiff therefore, I allow this claim."
' The remaining claim of borrower was rejected.
8-A. Feeling aggrieved from the above award, the appellant filed objections under section 30 of the Arbitration Act contending therein that the award rendered by the Umpire suffered by errors of law apparent on the face of the record. It was prayed that the award be set aside and the case be remitted to the learned Umpire for reconsideration of the whole matter. The consultants also submitted objections pertaining to the items of the claim which were rejected by the learned Umpire. After hearing the parties, the learned Senior Civil Judge, Lahore by impugned decision rejected the objections and made the award as rule of the Court.
9. The arguments put forth by Mr. Saeed-ur-Rehman Farrukh, Advocate, learned counsel for the borrower may be conveniently summarised as below:--- Firstly, that in paragraphs Nos.34, 35, 47, 60, 63 and 65, the learned umpire found that consultant had rendered services which were not only unsatisfactory but were infected with negligence.
According to the learned counsel, in spite of this finding, the learned umpire decreed the claim of consultants.
Secondly, that the learned umpire had committed error of law while non-suiting the claim of Government of Pakistan on the premises that Seed Factories were owned by Punjab Seed Corporation and Sindh Seed Corporation (hereinafter referred as P.S.C. and S.S.C. respectively) and, therefore, on the principle of privity of the contract, the borrower had no locus standi to claim losses suffered by P.S.C. and S.S.C. According to the learned counsel, this approach was wholly contrary to law as P.S.C. and S.S.C. were the beneficiary of loan negotiated through borrower.
Elaborating further, the learned counsel contended that the learned umpire had missed to notice paragraph 2 of Appendix A of agreement which inter alia specified that commercial operation would be carried out by two autonomous Government-owned institutions in Province of Punjab and Sindh namely P.S.C. and S.S.C.
Thirdly, that the umpire had construed currency clause in agreement with patent error of law on the face of award. According to the learned counsel, the currency clause provided three currencies namely, U.S. Dollars, German D.M. Currency and Pakistani currency namely rupee. The Schedules C- I and C-II in detail allocated the period for which the consultants had to render services. The payments to consultants were specified in two currencies namely Dollar and D.M. The clause further provided that consultants were to be paid in D.M. and rate of conversion of currencies was specified, one dollar to 2.42 D.M. According to the learned counsel, fixed rate of conversion was, in fact, essence of the contract and the borrower was under obligation to make payment to consultants in D.M. after taking into consideration the fluctuation in currency. On these premises, the learned counsel contended that the construction of the umpire of currency clause is clearly illegal on the face of clause itself and, therefore, merits to be set aside. Reliance was placed on Ashfaq Ali Qureshi v. Municipal Corporation Multan and another 1985 SCM R 597, Ashfaq Ali Qureshi v. Municipal Corporation, Multan and another 1984 SCM R 597, M/s. Aslam Saeed & Co. v. M/s. Trading Corporation of Pakistan Ltd. PLD 1985 SC 69 and Ghulam Abbas v. Trustees of the Port of Karachi PLD 1987 SC 393.
Fourthly, that the learned umpire has awarded a sum of 1,84,668.48 D.M. in lieu of invoices 1/81 and 11/81. While doing so, the learned umpire had omitted to consider section 6.06 which laid down that upon the termination of the contract under section 6.03, 6.04 or 6.05 no payment shall be made to the consultants except for services which were rendered satisfactorily. According to the learned counsel, the agreement was terminated before the invoices 1/81 and 11/81 were submitted. On these premises, it was contended that the learned umpire had no power in law to award this sum to consultants. According to the learned counsel, this was an error of law which floated on the surface of award.
Fifthly, that the learned umpire had allowed the claim with respect to leave availed by the personnel of the consultants. According to the learned counsel, this was contrary to agreement which did not provide for such relief to consultants.
Sixthly, that the teamed umpire had rejected the claim of Government on the basis that the losses suffered by the Government were, in fact, suffered by P.S.C. and S.S.C. and, therefore the borrower had no right to claim such losses. According to learned counsel, this finding was wholly alien to the express provisions of agreement wherein P.S.C. and S.C.C. were necessary parties.
10. Raja Abdul Razaak, the learned counsel for the consultants, on the contrary vigorously supported the judgment of the learned Senior Civil Judge, Lahore by raising following points: Firstly, that in this case the dispute between the parties arose over the interpretation of section 3.01 of the contract which pertained to the payment of money to be made to the consultants by the borrower. According to the learned counsel the currency of the agreement was German Mark and payment had to be made in that currency. On the basis of this circumstance the learned counsel for the consultants contended that the dispute referred to the arbitrators was, therefore, specific question of law and award rendered by Umpire in respect of this dispute was not open to challenge under section 30 of the Arbitration Act. Reliance was placed on J.Kaikobad v. F.
Khambatta AIR 1930 Lah. 280; Rala Ram Walaiti Ram v. Bansi Lal Jagan Nath AIR 1932 Lah. 239, Durga Prosad Chamria v. Sewkishen Das Bhattar PLD 1949 PC 187, Overseas Cotton Co. v. S.M. Fuzail & Co. PLD 1958 Kar. 27, Suleman Haji Muhammad & Co. v. State Bank of Pakistan PLD 1960 Kar. 78, Trading Corporation of Pak. Ltd. v. Aslam Saeed & Co. PLD 1973 Kar. 65, Waseem Cosntruction Co. v.
Government of Sindh PLD 1987 Kar. 575 and LDA v. Khalid Javed & Co. 1983 SCM R 718.
Secondly, that the learned arbitrators have exhaustively dealt with the claim submitted by the borrowers and had rejected the same after giving cogent reasons in support of his conclusion.
According to the learned counsel the conclusion of arbitrators did not suffer from any error of law apparent on the face of the record. On the basis of this contention the learned counsel for the consultants contended that the FAO filed by the borrower be dismissed.
11. From the above narration, the following questions emerge for determination:--
(i) Whether the dispute pertaining to interpretation of section 3.01 of Article III of the agreement was specifically referred to the arbitrators for decision and therefore, the finding of the learned arbitrators on this question is not susceptible of interference under section 30 read with section 33 of the Arbitration Act?
(ii) Whether the conclusion of the arbitrators in regard of section 3.01 suffers from error of law apparent on the face of the record?
(iii) Whether the learned arbitrators had not correctly decided the claim submitted by the borrower against the consultants?
12. Having penned down the facts, the circumstances of the case, the arguments of the parties and the points for decision I hereby proceed to determine the points noted above in seriatum. Question No,1 has not been free from difficulty. This came into consideration in well known authority "Hodgkinson v. Fernie (6) 3 C.N.N.S.
189. While speaking for the Bench Willian, J. said: "The law has for many years been settled, and remains so at this day, that, where a cause or matters in difference are referred to an arbitrator, a lawyer or a layman, he is constituted the sole and final judge of all questions both of the law and of fact....The only exceptions to that rule are cases where the award is the result of corruption or fraud, and one other, which though it is to be regretted, is now, I think firmly established viz., where the question of law necessarily arises on the face of the award or upon some proper accompanying and forming part of the award. Though the propriety of this latter may very well be doubted, I think it may be considered as established."
' This question again came up for examination in two famous cases, namely Government of Kalentan v. Duff Development Company Ltd. 1923 AC 395 and F.R. Absalom Ltd. v. Great Western (London) Garden Village Society Ltd. 1933 AC 592. The case of F.R. Absalom Ltd. is a direct authority on the Question No,1. In this case the argument was that Award suffered from an error of law apparent from the face of the award. The Court after hearing the parties found that no question of law was specifically referred to the Arbitrators and the Arbitrators had decided the reference on the basis of package of issues which was sent to him. While dealing with the question it was held: "The authorities make a clear distinction between these two cases, and as they appear to me, they decided that in the former case the Court can interfere if and when any error of law appears on the face of the award, but that in the latter case no such interference is possible upon the ground that it so appears that the decision upon the question of law is an erroneous one."
' In AIR 1955 SC 468, the question was whether the award was bad on account of error of law apparent on the face of it, as provided in section 16(1)(c) of the Arbitration Act. Examining this contention, this Court observed as under:--- "This covers cases in which an error of law appears on the face of the award. But in determining what such an error is, a distinction must be drawn between cases in which a question of law is specifically referred and those in which a decision on a question of law is incidentally material (however necessary) in order to decide the question actually referred. If a question of law is specifically referred and it is evident that the parties desire to have a decision from the arbitrator about that rather than one from the Courts, then the Courts will not interfere, though even there, there is authority for the view that the Courts will interfere if it is apparent that the arbitrator has acted illegally in reaching his decision, that is to say, if he has decided on inadmissible evidence or on principles of construction that the law does not countenance or something of that nature. See the speech of Viscount Cave in Kelantan Government v. Duff Development Company 1923 AC 395 at page 409. But that is not a matter which arises in this case.
' The case-law about this is, in our opinion the same in England as here and the principles that govern this class of cases have been reviewed at length and set out with clarity by the House of Lords in F.R. Absalon Ltd. v. Great Western (London) Garden Village Society 1933 All ER 616 and in Kelantan Government v. Duff Development Co. 1923 All ER (Rep.) 349. In Durga Prasad v.
Sewkishendas the Privy Council applied the law expounded in Absalom's case to India: See also Chainpsey Bhara & Co. v. Jivraj Balloo Spinning and Weaving Co. AIR 1927 PC 164. The wider language used by Lord Macnaghten in Ghulam Jilani v. Muhammad Hassan 1902-29 Ind. App. 51 had reference to the revisional powers of the High Court under the Civil Procedure Code and must be confined to the facts of that case where the question of law involved there, namely limitation, was specifically referred. An arbitrator is not a conciliator and cannot ignore the law or misapply it in order to do what he thinks is just and reasonable. He is a tribunal selected by the parties to decide their disputes according to law and so is bound to follow and apply the law, and if he does not, he can be set right by the Courts provided his error appears on the face of the award. The single exception to this is when the parties choose specially to refer a question of law as a separate and distinct matter."
13. The Court further proceeded to examine whether in the facts of that case, the arbitrator was specifically asked to construe clause 6 of the contract or any part of the contract or whether any question of law was specifically referred. The Court emphasised the word 'specifically' by pointing out that "parties who made a reference to arbitration have the right to insist that the Tribunal of their choice shall decide their dispute according to law, so before the right can be denied to them in any particular matter, the Court must be very sure that both sides wanted the decision of the arbitrator on a point of law rather than that of the Courts and that they wanted his decision on that point to be final." The Court then proceeded to examine the various clauses of the contract and held that this is not the kind of specific reference on a point of law that the law of arbitration requires. The Court held that when a question of law is the point at issue, unless both sides specifically agree to refer it and agree to be bound by the arbitrator's decision, the jurisdiction of the Courts to set an arbitration right when the error is apparent on the face of the award is not ousted. The mere fact that both parties submit incidental arguments about a point of law in the course of the proceedings is not enough. This decision is an authority for the proposition that where the parties specifically agree to refer a specific question of law for the decision of the arbitrator and agree to be bound by it, the Court cannot set aside the award on the ground of an error of law apparent on the face of it even though the decision of the arbitrator may not accord with the law as understood by the Court. If on the other hand, the question of law is incidentally decided by the arbitrator, it is not enough to oust the jurisdiction of the Court to set aside the award on the ground that there is an error apparent on the face of the award."
' This question came up for examination before the Division Bench of West Pakistan High Court, in Muhammad Sadiq Muhammad Afzal v. Ministry of Industries PLD 1966 Kar.
412. In this case M/s. Shaikh Muhammad Sadiq Muhammad Afzal & Co., was awarded a contract by Director-General Supply and Development Karachi to supply the poles for Chief Engineering, West Pakistan Electricity Department, Peshawar on 4-10-1956. The Contractor was to deliver the poles on 4-10-1956, however, the date of delivery was extended to 30-6-1957. On 13-6-1957 the Contractor stated that 7,000 poles would be ready for shipment in March/April 1957 from Mangla Port in East Pakistan. On 11-3-1957 the Contractor informed that. further 3,000 poles were ready for inspection.
Pursuant to this communication the Department Inspector went to site and reported that only 200 poles were tendered for inspection and balance 4,000 poles were being collected from the forest.
He, however, raised an objection that the poles were not properly creasoted and Contractor should be called upon to creasot them on 16-11-1957. The Contractor expressed his inability to treat the poles as they had neither the creasot oil nor necessary plant to apply this method. The Contractor was informed that two plants were available in East and West Pakistan and could be used for the requisite purpose. The Contractor however, declined to do so, which resulted into termination of contract by the Government. Thereupon the Contractor challenged the right of Government to cancel the contract and by notice dated 7-2-1959 claimed Rs,6 lacs as damages for breach of the Contract. The matter was referred to decision of two arbitrators who by Award dated 12-8-1959 held that the Government was not justified in cancelling the Contract and, therefore, Government was adjudged liable to pay Rs,4,95,250 by way of damages to the Contractor. The Government filed objections under section 30 of the Arbitration Act, on a plea that the Award rendered by the Arbitrators suffered from error of law apparent on the face of the record. The learned Single Judge accepted the plea of Government and set aside the award. Feeling aggrieved from the above decision, the appellant filed L.PA. which too was dismissed by the Division Bench. Upon review of the case-law his Lordship Mr. Justice Wahiduddin Ahmad, speaking for the Bench held: "In the present case too the learned counsel for the parties did not dispute that the real question for consideration is whether a question of law was specifically referred to the arbitrators or it merely arose in the course of proceedings. Thus what is to be examined is whether what was referred to the arbitrators was the general question, whether involving of fact or law or only some specific question of law in express terms as a separate question was submitted. In other words, whether there was a reference in which the question of construction arose as being material to the decision of the matter which has been referred to arbitration or a reference in which a specific question of law was referred to the decision of the arbitrators as the sole Tribunal. Before we consider the contention of the parties on merits, it will be convenient here to mention that this is not one of those cases in which the arbitrators have not given any reason on the findings reached by them. The learned arbitrators have at length discussed the dispute between the parties and had also given reasons in support of the award. It is to be noticed that in the award the learned arbitrators have noted that the following two points emerged for determination:--
(a) Whether the Government was justified in cancelling the contract?
(b) If not, to what damages, if any, is the contractor entitled?
' After stating the circumstances in which the contract was cancelled the arbitrators had further observed that the liability or otherwise of the cancellation of the contract depended in the context of the case on the answers to the following two questions:---
(i) Whether the poles could be rejected by the score of an objection as to treatment? and
(ii) Whether according to the terms of contract, treatment of poles by creasote "forced in under pressure" was compulsory?
' In rejecting the claim of the Department the arbitrators made the following observations:--- "Inasmuch as the method of treatment is provided in clause 1 and not in clause 2 it follows that poles could not be rejected on the score of an objection as to the method of treatment. That being so, the plea of the Government that it was entitled to reject poles for want of pressure treatment and therefore to cancel contract, is devoid of force and is not tenable."
' They further observed:--- "...... it was not open to the Government to read in the A/T that only the pressure method of treatment, to the exclusion of the other approved method, was prescribed. Such a construction will be doing violence to the plain language used in A/T. It may be said that the contractor should have got 'the other approved method' clarified putting in the quotations. This point does not create any complications as the contractor did make the enquiry during the subsistence of the contract. Had the Government suggested the other approved method of treatment at any time during the subsistence of the contract and had the contractor failed to comply the case would have been quite different and the responsibility could be pinned on the contractor."
' The learned Judge further said that: "After these issues had been settled the parties agreed to refer to arbitration the outstanding matters in the suit. In this background the Privy Council was satisfied that the two points of law as to which it was said that the arbitrator's error vitiated the award were specifically referred to him to decide. In the present case no such inference can be made. In the notice itself the appellant never asked the decision of the arbitrators on any question of law. The only dispute that he raised was that the Government was not justified in cancelling his contract and the Government having committed the default was bound to compensate him in damages. It was, therefore, incidentally that the question of the interpretation of contract which was material for the decision of the case arose before the arbitrators. It is not possible to hold that in the present case that the appellant firm wanted to refer any specific question of law to the arbitrators or that any such question was referred for their decision. It is one of those cases in which the question of construction of the term of the contract arose incidentally for the decision of the dispute referred to them. It seems to us that simply because the question of interpretation of the relevant clause of the contract was incidentally referred in the pleadings by the parties that would not clothe the arbitrators with the exclusive jurisdiction to decide the question of law involved in it."
14. The ratio deducible from the above precedents is that in arbitration matter if specific questions of law are referred to arbitrators, then their decision on such questions are final and binding on the parties who are precluded to challenge such conclusions under section 30 read with section 33 of the Arbitration Act. This rule is, however, subject to an exception that if the arbitrator/arbitrators arrive at a conclusion of law on questions which arise incidentally out of dispute referred to him/them, then such conclusions are open to scrutiny by the Court within the ambit of circumstances enumerated in section 30 of the Arbitration Act.
15. Applying this principle to the facts and circumstances of this case, it is quite clear to me that the consultants raised the dispute regarding the interpretation of section 3.01 of the agreement vide telex dated 3-9-1980. The borrower declined to accept the position of consultants and in reply informed them that if they terminated the contract they would do so on their own risk. In result the consultants did not terminate the contract and continued rendering consultancy service. It was on 24-12-1980 when the borrower terminated the contract w.e.f, 31-3-1981 on the ground of inefficient service and informed them that borrower was ready to refer all the disputes to the Arbitrators. In this factual background, the borrower nominated Mr. Justice (Rtd.) Zakiuddin Pal as an arbitrator while Mr. ZA. Qureshi was nominated by the borrower. The consultants as well as borrowers submitted their claims. On this, the arbitrators framed issues separately in accordance with the claim of borrower as well as the Consultants which had been fully dealt with in paragraph 7 of judgment. From the above facts I have, therefore, no hesitation in coming to the conclusion that the dispute pertaining to interpretation of section 3.01 was not specifically referred to arbitrators by the Consultants, but was in fact part of number of disputes which were referred to by the parties to the arbitrators and were fully reflected in issues framed by the arbitrators. The contention of the learned counsel for the respondent that the controversy pertaining to interpretation of currency clause was specifically referred to arbitrator, is neither borne by the record nor from resume of the facts which are not in dispute between the parties. In view of this, I have, therefore, no hesitation in coming to the conclusion that the contention of the learned counsel for the respondent is wholly untenable and deserves to be repelled.
16. Before I proceed to deal with the second question, I find it necessary to refer to treatise of unquestioned authority, namely, "Legal Aspects of Money By Dr. FA. Mann (3rd Edn.) published by Oxford at the Clarendon Press, 1971". This treatise pertains to law relating to money, the general problems regarding the money, International monetary system and its organisation the money obligation in international contracts. Its Chapter V deals specifically with the problems arising out of currency clauses occurring in the international contracts. The passages which have relevancy are being reproduced in extenso. These occur in Parts V & VI in Chapter V. These are as follows: "Wherever an obligation is validly expressed in a foreign currency, it becomes necessary to have regard to a distinction of fundamental importance, viz. that between the money of account and the money of payment. Its source is that fertile contrast between the substance of the obligation and the mode of performance which is generally recognized in connection with protective (especially gold) clauses, and another aspect of which will here again provide useful guiding principle.
' The money of account is that currency in which an obligation is expressed, while the money of payment is the currency with which the obligation is to be discharged.
' If foreign money is the subject-matter of an obligation, the proper method of discharging it will prima facie be by paying to the creditor that foreign money which has been promised. In other words, the money of account will also be the money of payment. But this is not always and everywhere so.
' If goods are bought for 1,000 U.SA. dollars, payable in pounds sterling, it is obvious that while foreign money is the money of account and thus determines the measures of value or the scale of payment, the mode of payment is by handing to the creditor pounds sterling. This may be so even in the absence of an express provision requiring or allowing the debtor to effect the actual payment in pounds sterling.
' Conversely, although pounds sterling are the money of account, foreign money may be the instrument of payment, pound 100 payable in U.SA. dollars or pound 100 payable in U.SA. dollars at the fixed rate of $3 per pound 1. In this case the obligation, though referring to the domestic currency as money of account, is really a foreign money obligation in disguise."
' The distinction between the money of account and the money of payment will also afford a useful guide to the solution of the problems raised by foreign currency clauses. The forms of such clauses vary so much that it is difficult to find a way through the maze of factual material and judicial decisions. Moreover, the meaning of such clauses may greatly differ in individual cases, and it is therefore impossible to lay down rules of universal application. It must suffice to state the governing considerations with special emphasis on the distinction between the various typesbf clauses.
' This uncertainty as to the amount eventually payable is avoided if the parties not only agree upon a separation of money of account and money of payment, but also stipulate a rate of exchange on the basis of which the former is to be converted into the latter: 'pound 100 payable in dollars, at the rate of exchange of Dollar 3 to pound 1 or, Dollar payable in the pounds sterling at the rate of exchange of pound 1 to Dollar 3. In these cases it is clear that it is in fact an amount of Dollar 300 or, in the second instance of pound 100 which is exclusively payable, and there exists therefore either a foreign money or a domestic money obligation in disguise. Such clauses are usually due to the parties lack of confidence in the stability of the money of account if the creditor is entitled to a sum of sterling payable in dollars, whether it be at the actual rate of exchange at the date of payment or at a fixed rate of exchange, an if therefore there exists a circuitously expressed foreign money obligation, it confers all the advantages and imposes all the disadvantages of such obligations: the creditor will be protected in the event of a depreciation of sterling but takes the risk of a depreciation of the dollar. This, no doubt is in conformity with , the parties' intentions.
' An example of a case in which it could clarify be assumed that payment in dollars was within the contemplation of the parties and that, therefore, they agreed upon a fixed sum of dollars rather than a variable sum of sterling, is provided by a decision of the Supreme Court of Pennsylvania. A bill of lading made freight payable in pounds sterling but contained the clause freight, if payable at destination (Philadelphia) to be at the rate of Dollar 4,866. Since payment in Philadelphia was envisaged the Court held that the freight was payable in dollars, the amount being ascertained by the agreed, not the current rate of exchange."
' The above statement of law was noted with approval in "American Jurisprudence (Second Edition), Volume 54, published by Lawyers Cooperative Publishing Company, Rochester," under the Heading of `MONEY' in para. S 32, which is as under:--- "Applicable rate of Currency Conversion: The rule that an award in respect of a contract, which by the contract term is payable in foreign money, must be expressed in United State money, does not, of course, determine the rate of exchange at which the amount stated in the contract in terms of foreign money is to be converted into dollars. The onus in such a case is upon the plaintiff to establish the applicable rate of exchange. Where, however, the applicable rate of exchange is established by the contract, or is otherwise agreed upon between the parties, it is a fixed rate and controls all matters within the scope of its operation."
17. The ratio deducible from the above statement of law can be summarised as follows:---
(a) Where an international agreement contains a foreign money obligation clause, wherein the obligations are expressed in various currencies, it is essential to distinguish between the money of account and money of payment while dealing with the, rights of the parties.
(b) The money of account is the currency in which the obligation is expressed while money of payment is currency in which obligation is to be discharged.
(c) In determining the money of account and money of payment the Courts/Arbitrators/Tribunals are to take into consideration the whole of the contract, intention of the parties, the surrounding circumstances of the agreement.
(d) When the currency clause stipulates the present rate of exchange between more than one currency as measuring yardstick such rate is to be considered in the context of whole scenerio of the agreement in order to determine the scale of payment. Furthermore if there is apparent disharmony between various provisions of agreement relating to currency obligation, then these provisions are to be interpreted on the principle of purposive construction aiming at saving contract rather than causing its ruination."
18. Guided by the foregoing principles I herein proceed to determine as to "what is money of account and what is the money of payment in the case in hand? Section 3.01 shows that the borrower covenanted to pay the consultants in D.M. an amount not exceeding U.S. Dollars 21,37,878 = D.M. 51,73,665 at the present rate of exchange i.e. one dollar = 2.42 D.M. It is also clear from this clause that the payments were to be made to consultants strictly in accordance with the schedule of time allocated to consultants for rendering the consultancy services as specified in paragraph
(a) through (f) of this clause. This clause further stipulated that 82% of the contracted amount was payable in foreign exchange while balance was payable in local currency. The agreement was followed by Schedule A, B, C-1 and C-2 which specified with mathematical detail the time schedule of consultancy service and the break-up of payments to consultants for their services commencing from starting day to the finish of the agreement. In these schedules, the amounts were specified both in dollars as well as in D.M. on the basis of present rate of exchange noted above. It follows from the above scheme of agreement that borrower had specified these amounts in two currencies after taking into consideration the present rate of exchange for a period of five years in consultation with the creditor. From the above contractual scheme, it is clear that this clause has American, German and Pakistani element. The loan was provided by the creditor in U.S. Dollars. The Head Office of the Lending Institution was situated in United States of America. The consultancy services were provided by the German Firm who was to be paid in D.Ms. The present rate of exchange at that time between U.S. Dollar and D.M. was mentioned as measuring yardstick. The most striking feature of the agreement is that ceiling was provided in regard of payments to be made to consultants both in U.S. Dollars as well as in D.Ms. From the above examination, it is absolutely clear that the calculation of the two currencies even in regard of ceiling was made on the basis of present rate of exchange of U.S. Dollars and D.Ms. On these essential features of the agreement, I have no doubt in my mind that money of account was dollar and not D.M. The dollar was the foundation of agreement on the basis of which the obligations of the parties were to be determined in accordance with the break-up of schedule. The amounts of payment specified in D.M. were to be worth on the basis of rate of exchange prevalent at the time of submission of Invoices/payment. The agreement is manifestly silent with respect to any undertaking that consultants, were entitled to receive their payments in D.M. irrespective of fluctuation of D.M. vis-a- vis dollar. This interpretation is fully in accord with purposive rule of construction of agreement.
Conversely the interpretation of this clause will be simply ruinous to maximum ceiling of U.S. Dollar provided in the agreement. The maximum amounts specified in Dollars against each item of service in Schedule A, B, C-1 and C-2 and the time schedule allocated to the consultants. This is even apparent from the stance of the borrower who firmly stated that it was prepared to pay consultants according to their Invoices submitted in D.M. provided they gave a clear undertaking that they will not abandon the agreement if during payment the maximum ceiling as provided by any item was exhausted on account of purchase of dollar by means loan which was in U.S. dollars.
This offer was wholly rejected by the consultants. On these facts, and circumstances of the agreement, I am clear in my mind that the interpretation of section 3.01 of the agreement made by arbitrator was wholly without any lawful support and was contrary to manifest intendment of the agreement. With highest respect to the unfathomable knowledge of Umpire I regret to conclude that the interpretation made by him proceeded on wholly illegal approach and unlawful assumptions. I have, therefore, no hesitation in coming to the conclusion that the award to this extent suffers from error floating on the face of the award. The over-all conclusion of the aforesaid examination is that the borrower was fully justified to ask the consultants to submit their Invoices in U.S. Dollars and when they submitted their Invoices in D.Ms., the borrower was fully justified in making payments to consultants in D.Ms. after making necessary deduction by taking into consideration the present rate of exchange applicable at the time of submission of Invoices.
19. As regards the third question, suffice it to say that the learned counsel for the appellant had not been able to point out any error of law infecting the award. The learned Umpire had examined the claim of borrower with meticulousness and rejected the claim except noted in paragraph No,31 after objctive appraisal of material on record and in consonance with law. The Umpire was the sole judge of facts. The conclusions of facts arrived at by him are not open to challenge within the ambit of section 30 of the Arbitration Act.
20. The only question surviving for consideration is "as to what relief the appellant is entitled to". It is a settled proposition of law that award which is bad in part may be good for the rest. The Court is empowered to reject the bad part of the award and may uphold its good part on the principle of severance of validity from invalidity. Reference be made to statement of law contained in treatise on Arbitration by Russal, at page 484, 9th Edition, 1979. Applying this principle to this case, I am clear in my mind that the award rendered by the Arbitrator to the extent of decreeing of the claim of consultants to the extent of deductions as pointed out in claim Nos.3.1 and 3.3 suffers from error of law apparent on the face of record and cannot be sustained. The remaining award is upheld.
21. As a result of foregoing conclusions, the FA.O. filed by the borrower partly succeeds. The award rendered by the Umpire to the extent indicated above is hereby set aside. In result consultants shall not be entitled to grant of amount deducted on the basis of fluctuation of currency rates i.e. 92,122.66 D.M. and 71,720.86 D.M. as other deductions. The remaining award is upheld. In consequence the judgment of the learned Senior Civil Judge, Lahore dated 30-6-1987 to the aforesaid extent is set aside and remaining is upheld. The Civil Revision also fails and is hereby dismissed. As the parties have succeeded partly, therefore, there shall be no order as to costs.