1. ' This is an application under section 41(b) of the Arbitration Ad, 1940, read with Order 39, Rules 1 and 2, C.P.C., to restrain the respondents from encashing the performance bond dated the 24th March, 1991, issued by Bank of America, Karachi, in favour of the respondents.
2. ' The facts of the case, briefly stated, are as follows. By a contract dated the 12th February, 1991, the petitioner agreed to supply 6000 metric tons of Palm oil of Malaysian origin to the respondents. The period of shipment provided by the contract was 1st to 15th March, 1991, and clause 12 (A) of the Contract provided as follows:-- "GCP reserves right to accept or reject late shipment at its sole discretion. However, late shipment, if accepted, shall be subjected to such terms and conditions as may be imposed by GCP."
3. ' Clause 18 of the Contract provided for the seller, i,e, the petitioner herein, to furnish performance bond/bank guarantee for due performance of the contract for an amount of 3% of the total value of the goods; and, by clause 20 of the Contract, it was agreed that in the event of any question or dispute arising under the Contract, the same shall be referred to arbitration by two arbitrators to be nominated one each by the parties.
4. ' The petitioner furnished to the respondents a performance bond dated the 24th March, 1991, issued by Bank of America, Karachi, in favour of the respondents. The relevant portion of the performance bond is reproduced below:-- "Now therefore, in consideration of aforesaid, we Bank of America NT and SA, Karachi hereby undertake and guarantee due performance of the contract by the sellers in all respects and we unconditionally and absolutely bind ourselves to the following:--
(1) To make payment of US $69,768 (US Dollars, sixty-nine thousand seven-hundred sixty eight only) to the Buyers or as directed by the Buyers on the date of the receipt of demand from the Buyers in writing without any question whatsoever.
(2) ..
5. (3)
6. ' We understand that this guarantee is unconditional and that the sole judge for deciding whether the sellers have performed the Contract and fulfilled the terms and conditions of the Contract will be the Buyers."
7. ' The petitioner was unable to supply the Palm oil within the stipulated period any by its telex dated the 4th March, 1991, requested the respondents to extend the shipment period by 30 days without any penalties. The reason for the extension sought was stated to be a crisis situation said to have developed in Malaysia due to the 'Woodhouse mishap' viz. Bankruptcy of Woodhouse Group of companies who had contracted to supply Palm oil to a trading house from whom the petitioner had contracted to purchase the requisite palm oil for supply to the respondents under the contract; and the consequent inability of the Woodhouse Group and the said trading house respectively to supply the palm oil. That situation was alleged to have resulted in a force majeure situation. The respondents by their telex dated the 6th March, 1991, stated that the problem being faced by the petitioner was noted and stated that any delay in shipment would be considered under the terms of the 'agreement; and by their subsequent telex dated the 14th March, 1991, the respondents stated as follows:-- "In our opinion the reasons for the delay in shipment as intimated by you do not constitute force majeure situation. However, as a very special case and gesture of goodwill we agree to extend the shipment period in the above case for further 30 days that is up to 15-3-1991 subject to imposition of late shipment penalty for the actual delay in shipment beyond 15-3-1991 and reservation of our other rights in terms of contract."
8. ' By the same telex dated the 14th March, 1991, the respondents also called upon the petitioner to submit the performance bond. It may be noted that although the respondents were asked to furnish the performance bond by the telex dated the 14th March, 1991, so that the letter of credit could be amended to provide for extension of the shipment period, in fact, the performance bond had to be furnished in terms of the contract referred to above. Subsequently, the performance bond, as stated above, was submitted and the letter of credit was amended; and the Palm oil was supplied within the extended period.
9. ' The respondents by their telex dated the 5th June, 1991, submitted their claim for US $ 10,885.52 on account of shortage and for US $ 179,572.14 on account of late shipment penalty for 30 days making a total of US $190, 457.66. The petitioner sent a reply on the 3rd July, 1991 stating that the bankruptcy of the Woodhouse Group of companies had resulted in the increase in the price of Palm oil and also unavailability of the commodity. Mention was also made of the Gulf war and the consequent shortage of the tankers. The letter concluded by saying that in view of the factors enumerated above, the penalty imposed by the respondents was extremely harsh and by requesting the respondents to review the matter and condone the penalty. The respondents by their telex dated the 15th August, 1991, in reply to the above letter, refuted the allegation in the petitioner's letter and stated that the respondent was not agreeable to allow any condonation.
10. Some further correspondence followed the telex, ending with the notice dated the 19th November, 1991, from the petitioner's counsel to the respondent. By this letter, the petitioner invoked the arbitration clause in the contract, appointed Mr. Afzal Nabi, Advocate, as their arbitrator, and called upon the respondents to appoint their arbitrator within 15 days. The respondent has denied the receipt of this letter and has alleged that it came to know of the alleged appointment of the arbitrator by the petitioner only after notice of this petition was served upon them.
11. ' It is claimed by the respondents that after the notice of this petition was served upon them, they appointed their arbitrator so that the panel of the arbitrators was constituted subsequent to the filing of this petition.
12. ' Mr. Samiuddin Sami contended that the present petition is premature because no arbitration proceedings were pending when the present petition was filed. Mr. Sharaf Faridi submitted, in reply, that in fact the arbitration commenced on the 19th November, 1991, when he sent the notice to the respondents informing them that the petitioner had appointed their arbitrator and calling upon respondents to appoint their own arbitrator. In support of his submission, he relied on section 37(3) of the Arbitration Act, 1940. Mr. Samiuddin Sami submitted, in reply, that the respondents did not receive the notice dated the 19th November, 1991, and that in any case, it was not a notice required by section 42 of the Arbitration Act as it was neither delivered to the respondents nor sent by registered post. He relied on the case of Messrs Ahmed Bakhsh Abdul Rashid v. Muhammad Aslam & Brothers (PLD 1954 Lahore 620) where it was held that service of notice by telegram was not one of the methods specified by section 42 and notice by telegram was, therefore, not valid.
13. Since the receipt of the notice has been denied by the respondents and the petitioner has not produced any proof to show that the notice was sent and delivered to the respondents, it would appear, prima facie, that the notice was not delivered to the respondents. It is, therefore, not necessary to decide' whether a notice sent by FAX was a valid notice. In any case, even assuming that the notice sent by FAX was a valid notice and was delivered to the respondents; it cannot be said that arbitration proceedings commenced from the date of that notice viz. The 19th November, 1991. The contract provides for appointment of two arbitrators, one each by the parties. The respondents had 15 days, after the service of notice, in which to appoint their arbitrator and by no stretch of imagination can it be said that arbitration proceedings commenced even before the respondents had appointed their arbitrator and while the time to appoint an arbitrator had not yet expired.
14. ' The contention on behalf of the petitioner that arbitration proceedings commenced on the 19th November, 1991, by virtue of the provisions of section 37(3) of the Arbitration Act is without substance because under that provision arbitration proceedings are deemed to have commenced only for the purposes of section 37 and of the Limitation Act, 1908. The purposes of section 37 arc set out in subsections (2), (4) and (5) of that section.
15. ' Mr. Sharaf Faridi submitted that in the circumstances of this case, the application is maintainable because admittedly the respondents have, since the filing of the present application, appointed their arbitrator. He relied on the cases of Muhammad Akbar v. The Province of Punjab (PLD 1974 Lahore 231) and Sha Vektavarmal Seshmull v. Shah Naimul Umaji & Co. (AIR 1962 Madras 436). In PLD 1974 Lah. 231 while the petitioner was approaching the Commissioner for reference of the dispute to arbitration, he filed an application under section 41 of the Arbitration Act for temporary injunction. However, after the application was filed but before it was decided, the arbitrator had already entered upon the reference. It was held that the application was maintainable and the Civil Court had jurisdiction to entertain it. As for the case reported in AIR 1962 Madras 436, it was there held that section 41 is applicable when proceedings are pending in a Court and also when only arbitration proceedings are pending. The question of maintainability of the application under section 41, was not really contested or decided. That case is, therefore, not apposite.
16. ' Mr. Samiuddin Sarni, on the other hand, contended that the petition being premature must be dismissed even though the respondents had appointed their arbitrator since it was filed. He relied on the case of M/s. Asadullah Khan & Co. v. Karachi Shipyard and Engineering Works Ltd. 1979 CLC
625. In that case an application under section 41 of the Arbitration Act, to restrain the respondent from en cashing a bank guarantee was filed and an application under section 20 of the Act was filed subsequently. The application under section 41 was held to be premature and was dismissed.
17. ' The question for consideration is whether in the circumstances of this case the application must be dismissed. It is true that Naimuddin. J. ( as he then was) held in 1979 CLC 625.That an application under section 41 of the Arbitration Act, 1940, which is premature must be dismissed but the same learned Judge observed in the case of Twaha v. The Mastcr M.V. "Asian Queen" PLD 1982 Kar. 749 as follows:-- "It is settled so far as this country is concerned, that if a Court entertains a suit without jurisdiction but subsequently acquires jurisdiction or if the cause of action for the suit matures during the pendency of proceedings, then the suit would not fail. If any authority is needed reference may be had to Abdullah Bhai and others v. Ahmed and Messrs M. Wahabuddin and Sons v. The Controller of Rent and 11 others.
18. ' In the last named case the landlord had filed an application before the expiry of the period of 6 years for which protection was provided under the Displaced Persons (Compensation and Rehabilitation) Act, 1958 and an objection was raised that the application filed was premature.
19. However, during the pendency of the application the period of 6 years had already expired, therefore, the learned Judges of the Peshawar High Court did not dismiss the application on that ground and observed as follows:-- "Be that as it may, the admitted position now is that the petitioner has already remained in possession of the disputed shop for more than six years and has also occupied his own shop premises. This development, which has taken place during the pendency of the proceedings, can be taken due notice of by this Court, and consequently it would be wholly unjust to dismiss the eviction application at this stage on a technical ground that when it was filed the period of six years had not expired."
20. ' In the case of Abdullah Bhai and others v. Ahmad Din PLD 1964 SC 106, cited in PLD 1982 Karachi 749, the licence was due to expire on the 31st December, 1959, and the suit for possession was filed on the 17th January, 1958. It was observed by the Supreme Court as follows:-- "An argument had been addressed to us that the suit was premature and should have been dismissed on that ground. The suit had been filed on 17-1-1958 that is long before 31-12-1959 on which date the period of licence was to terminate. The trial Court had dismissed the suit. The Additional District Judge on appeal had decreed it on a date when the period of the licence had expired and the appellants had a right to possession. It was open to the appellate Court to have decreed a suit which was premature when it was filed but the cause of action respecting which had arisen during the pendency of the suit. We would not be prepared at this stage to dismiss the suit on this technical ground and to direct the appellants to file a fresh suit."
21. ' There seems to be no principle or rule to support an argument that while a suit or an application for ejectment which is premature when it is filed would not fail if the cause of action accrued during the pendency thereof and also that such suit or application would not fail even if it was filed when the Court had no jurisdiction provided that, during the pendency thereof, the Court acquires jurisdiction, an application under section 41(b) of the B Arbitration Act should fail because it was premature when it was filed even though arbitration proceedings had commenced before it is decided.
22. ' In M/s. Shaukat and Raza Ltd. v. Karachi Development Authority 1980 CLC 346 Naimuddin, J. (as hc then was), while dismissing an application under section 41 of the Arbitration Act, 1940, because no arbitration proceedings were pending when it was filed or commenced before it was decided, distinguished the case reported in PLD 1974 Lahore 231 on the ground that there an arbitrator had already been appointed and had entered upon the reference. The case reported in AIR 1962 Madras 436 was also distinguished as in that case an arbitrator had been appointed during the pendency of the proceedings under section 41.
23. I would, therefore, be inclined to hold that an application under section 41 of the Arbitration Act cannot be dismissed merely because it is premature and that the Court has jurisdiction to entertain such application if C arbitration proceedings commence while it is pending and before it is decided.
24. ' The next question for decision, therefore, is whether in the present case arbitration proceedings can be said to have commenced because, upon receiving notice of the present petition, the respondent has appointed its arbitrator and the panel of arbitrators had been constituted. It would appear not. It was held in 1979 CLC 625 that "in the absence of appointment of arbitrator and filing of claim before him, it is not possible to hold that any arbitration proceedings had commenced...".
25. Again in 1980 CLC 346, it was held that proceedings can be said to have commenced only when some action is taken before an arbitrator, for example, filing a statement of claim or dispute before him. It is not the case of the petitioner that any claim has been filed before the arbitrators. It cannot, therefore, be said that any proceedings are pending before the arbitrators.
26. ' Since no arbitration proceedings are pending, the petition is liable to be dismissed for that reason alone and it not necessary to consider the merits. It may, however, be observed that even on merits the petition must fail. Mr. Sharaf Faridi submitted that the encashment of the performance bond ought to be restrained because the respondent is not entitled to recover the full amount of bond without proof of damages. He relied on Messrs Jamia E industries Ltd. v. Messrs Pakistan Refinery Ltd. PLD 1976 Karachi 644 and province of West Pakistan v. Messrs, Misri Patel & Co. PLD 1969 SC 80.
27. Mr. Samiuddin Sami, on the other hand, submitted that the performance bond is an unconditional one and encashment thereof cannot be restrained unless there is allegation of fraud to the knowledge of the Bank which has issued it. He relied on R.D. Harbottle (Mercantile) Ltd. v. National West Minister Bank Ltd. (1978) 1 BQ 146), Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. (1978) 1 Q.B.D. 159), Jaxmaco Ltd. v. State Bank of India AIR 1979 Calcutta 44, Sirafi Trading Establishment v. Trading Corporation of Pakistan Ltd. (1984 CLC 381), and Toyo Menka Kaisha Ltd. v.
28. Ferro. Alloys Pakistan Ltd. (1988 CLC 418). The cases cited by Mr. Faridi as well as several other cases were considered by K.A. Ghani, J. In the case of Sirafi Trading Establishment wherein it was held:--- " the bank guarantee....Would be governed by the same principles of law, which are applicable to payments by banks against confirmed letters of credit. Thus an absolute oligation is imposed upon the bank which executes the guarantee to honour the same according to its terms. There may be exceptions to the general rule in special cases or in cases of fraud to the knowledge of the bank, where the Court may preclude banks from fulfilling their obligations to third parties."
29. The petitioner has not alleged any fraud to the knowledge of the bank which has issued the performance bond and no other ground to restrain encashment of the bond was canvassed before me. The petition, therefore, fails and is hereby dismissed. The petitioner will bear the costs of the respondent No, 1.