' SABIHUDDIN AHMED, J.--This appeal arises out of an order dated 26-6-1995 passed by the learned Single Judge, dismissing C.M.A. No,5241 of 1991, under section 34 of the Arbitration Act, filed on behalf of the appellant and allowing C.M.A. No,2033 of 1991. For grant of interim relief to the respondents Nos.1 and 2.
2. Briefly the admitted facts are that on May 31, 1989 an agreement was entered into between the appellant (described as authority) and the respondents Nos. 1 and 2 (described as company), whereby the latter were required to averred certain berths at Port Qasim into integrated container terminals and to maintain such terminals. This rather elaborate agreement has been filed as Annexure All to the memo. Of appeal. To appreciate the controversy between the parties, however, some of its relevant provisions are being reproduced as under:-- "(1) Wherever used in this agreement, the following terms shall have the following meanings:
(V) Contract term shall mean the duration of validity of this agreements as specified and provided in da use 48 hereto.
(VI) The 'effective date' of the agreement shall mean the date by which the company has obtained all the necessary permissions and sanctions from the Government of Pakistan, towards establishing the terminal or subject to fulfilment of requirements of clause 56, a date 180 days fro the date of signing whichever is earlier. The company shall keep the authority informed of progress in this regard.
(XV)"Mobilisation period" is the period commencing from the date of signing of this agreement till commencement of construction work.
53. If the company fails to mobilise and/or complete any party of the mobilisation, construction and or conversion works of the terminal and does not activate operation of the same in accordance with the programme referred to in clauses 3, 4 and 14 hereof, the authority shall serve 60 (sixty) days written notice to the company to mobilize and compete all such works within this period or activate the operation of the terminal as the case may be as per this agreement in case of failure of the company to comply with the authority's notice the authority shall in writing, request the company for an explanation for such failure and if the authority does not receive a proper justification within 15 (fifteen) days shall enter upon the land and the terminal/premises and partially or totally expel the company therefrom and/or itself undertake the completion of in completed construction and conversion work and/or operation of the terminal in whichever manner it may desire without thereby relieving the company of any of its obligations and liabilities under this agreement or affecting the rights and powers conferred on the authority by this agreement. In the event of such expulsion as aforesaid the authority may without prejudice to the suppliers, contractors and/or Banks who will have first charge on these assets take possession of any or all of the construction, plant, equipment, temporary works and material of the company and may use or sell them in any manner and apply the proceeds of sale in or towards the satisfaction of sums, due, or which may become due from the company under this agreement. In addition the authority shall also be entitled to take any other action under the provisions contained in the performance bond as per Schedule 'H' hereto.
56. The company shall use its best endeavours and efforts to obtain within 180 days of the date of the agreement all such consent, approvals, licences, permissions and sanctions from relevant authorities which are necessary and/or desirable to enable the performance of this agreement in accordance with its terms, in particular, and without prejudice to the generality of the foregoing al- Ghurair's investment in the share capital of the company shall be approved for the purpose of the foregoing private investment (Promotion and Protection Act, 1976); the authority shall support all such applications made by the company to the relevant authorities. If such consents, approvals, licences, permissions and sanctions are not obtained within 180 days as aforesaid, the authority shall normally agree to extend the time for reasons beyond the control of the company.
62. This agreement is based on the full accordance and good intentions of the parties and on their mutual desire to make the optimum use of port and terminal and to ensure and adequate return to both parties. And difference, therefore, which arises out of our in connection with the terms of this agreement or any other agreement made pursuant to this agreement (regardless of the nature of the question of dispute) shall as far as possible be settled amicably. Falling and amicable settlement within a reasonable period such differences shall be finally settled by arbitration by two arbitrators, one to be appointed by the company and the other by the authority and the arbitrators so appointed shall, before entering upon the references appoint an unpire. The arbitration shall be held at Karachi in accordance with the provisions of the Pakistan Arbitration Act, 1940 and any statutory modification or re-enactment thereof. Notwithstanding the commencement or continuance of any arbitration proceedings, no duties to be performed or right to be exercised by the parties under this agreement shall be suspended or discontinued. Reference to arbitration shall be a condition precedent to any legal action or proceeding."
3. Immediately upon the signing of the agreement the respondent-company caused a performance bond to be exceeded by the respondent No,3 (Bank of Oman) by way of security for performance of obligations of the respondents Nos.1 and 2. The bond was executed in favour of the appellant authority and its operative provision read as under:- "4. Where the authority has entered into a Contract Agreement including Annexures A to J thereof, which to the extent herein provided for, are by reference made part hereof and are hereinafter referred to as the Contract for construction, conversion and operation of Container Terminal dated 31-5-1989 with the promoters of Pak-Arab Container Terminal and Services (Pvt.) Ltd. (hereinafter referred to as "the company").
' And whereas it is stipulated by the Authority that the company shall furnish bond for due performance of their obligations and carry out construction, conversion and operation of Container Terminal at berths 5, 6 and 7 as per the terms of the Contract for the validity of the contract.
' Now the condition of the above-written bond is that if the company shall duly perform all their obligations in carrying out all the functions relative to the construction conversion and operation of a container terminal as per the contract for the period of the contract, then and in any such case, the above written bond or obligation of the surety shall be void and of no legal effect, but otherwise we under the to pay the Authority upon their first demand made by the Chairman, PQA any sums within the limits of bond as aforesaid without recourse to the company."
4. Apparently the respondents were unable to obtain the requisite permission from the authorities within the agreed period of 180 days from signing of the agreement. Consequently the appellant purported to invoke clause (53) and serve a legal notice upon the respondents to complete all the works within 60 days. The respondent informed the appellant that the requisite permissions were not granted by Government Agencies not owing any default that could be attributed to the respondents. Nevertheless the appellant did not find this explanation ' satisfactory' and inter alia threatened to encash the Performance Bond. They also issued a notice in the Press, inviting bids from other tenderers.
5. The respondents filed Suit No,450 of 1991, seeking the following reliefs:--
(a) For cancellation of the agreement dated 31-5-1989 as having been rendered void due to impossibility of its performance;
(b) For delivery and cancellation of the Performance Bond dated 31-5-1989;
(c) For a permanent injunction restraining the appellant (Port Qasim Authority) from encashing the Performance Bond and restraining the respondent No,3 (Bank of Oman) from allowing such encashment.
6. An application (C.M.A. No,2033 of 1991) for interim relief was also submitted, seeking to restrain the defendant from encashing performance bond. A counter-affidavit was filed on behalf of the Bank, substantially supporting the plaintiff's case. Appearance, however, was entered on behalf of the appellant Port Qasim Authority, but instead of contesting main suit, an application under section 34 of the Arbitration Act, for stay of suit in reference of proceedings to arbitration was made. Both the applications came up to be heard together and the learned Single Judge by a consolidated order, impugned in this appeal, rejected the appellant's application under section 34 of the Arbitration Act holding that the effective date of the contract never came into existence and as such the arbitration clause could not be invoked. With respect to the interim injunction restraining encashment of Performance Bond, the learned Single Judge held that since the contract had not come into existence and the agreements stood frustrated the appellant had no right to encash bond. As such the status quo order was confirmed.
7. Mr. Abid S. Zuberi, learned counsel for the appellant has assailed the findings of the learned Single Judge on both Courts and has contended that:--
(i) The dispute raised in the plaint came within the scope of the arbitration agreement and as such the learned Single Judge was not justified in dismissing the plaintiffs' application under section 34 of the Arbitration Act.
(ii) That the performance bond was independent contract between the appellant and the bank was obligated to encash it upon the appellants' demand irrespective of the dispute between the parties to the main agreement i,e, the appellant and the respondents Nos. I and 2.
' In support of his submissions, he has relied upon the cases of Lahore Stock Exchange v. Fredrick, J.
Whyte Group Pakistan Ltd. PLD 1990 SC 48, Hyderabad Municipal Corporation v. Columbia Enterprises 1990 CLC 47, Heyman v. Darvin Ltd. (1942) 1 AER 337 and National Construction v. Aiwan- e-Iqbal Authority PLD 1994 SC 311.
8. Mr. Khalid Rehman, learned counsel for the respondent Nos. 1 and 2 argued that:--
(i) The agreement dated 31-5-1989 never came into effect in terms of clause 46 read with clause 1 (iv);
(ii) Alternatively the agreement stood frustrated by supervening events and came to an end. The appellants treated it so by inviting fresh tenders and could not invoke the arbitration clause;
(iii) That disputes relating to existence or enforceability of a contract containing an arbitration clause could only be decided by a Civil Court and not by arbitrator.
(iv) Likewise the performance bond could also be enforced only after the contract had come into effect and could not, as such, be encashed.
' He has relied upon several precedents which I propose to refer to in the later part of this judgment.
Mr. Shaiq Usmani, learned counsel for respondent No,4 mainly supported Mr. Khalid Rehman's contention.
9. Mr. Yousuf Qasim, learned counsel for respondent No,3 also adopted Mr. Rehman's arguments and further contended that the respondent-Bank not being a party to the agreement dated 31-5- 1989, could not in any case be bound by the award of the Arbitrators and the Arbitrators had no jurisdiction to entertain proceedings involving rights and obligations of the Bank. He referred to the cases of M.A. Nawaz v. National Bank of Pakistan 1970 SCMR 234 and Hidayatullah v. Shamimuddin 1993 MLD 993.
10. Mr. Zuberi's main contention, however, was that the arbitration clause, which embraced not only disputes arising out of the agreement but also those connected therewith was broad enough to cover all disputes between the parties raised in the plaint. He strongly relied upon the judgment of the Hon'ble Supreme Court in Lahore Stock Exchange Case PLD 1990 SC 48. In this case the agreement between the parties contained an arbitration clause to cover "any dispute, reference or question in respect of interpretation or concerning anything herein contained or as to rights, liabilities or duties of the parties hereunder " Upon disputes having arisen the respondent filed an application for appointment of an arbitrator which was resisted by the appellant on, inter alia, the ground that there was no legal agreement between the parties, the person signing the agreement was not a director or legally authorised by the respondent to do so, and the question of existence or otherwise of an agreement could only be decided by a Court and not an arbitrator.
11. After examining relevant case-law from different jurisdictions and other prestigious authorities on the subject, their Lordships came to the conclusion that the arbitration clause was wide enough to cover a dispute regarding the validity of the agreement and the question whether the agreement had been entered into by a legally authorised person was a matter touching the agreement and could be decided by the arbitrator (P.52).
12. Interpreting expression "arising out of the contract" their Lordships cited with approval, the following observations of the Supreme Court of India in Dhanarajamal Govindram v. Shanji Kalidas & Co. (z).
"The argument is that when a party's question the very existence of a contract no dispute can be said to arise out of it. We think that this is not correct and even if it were, the words 'in relation to' are sufficiently wide to comprehend even such a case. In our opinion the argument must also fail."
13. The above judgment which we are respectfully bound to follow, in our humble opinion, fully supports the appellant's case. Obviously only a director or other legally authorised person can enter into a contract on behalf of an incorporated company. The appellant had. Questioned the very existence of a legally binding contract. Nevertheless the Honourable Supreme Court held that the phrase "dispute in respect of or concerning anything herein contained" was broad enough to give jurisdiction to arbitrators. In the present case the signing of the contract by the parties is admitted and no illegality invalidating it has been alleged. The dispute at best appears to be whether its terms become or were at the relevant time legally enforceable. At the same time the expression" arising out of or in connection with the agreement, regardless of the nature of the dispute" appears to convey a still broader amplitude. It therefore appears extremely difficult to sustain the view, in the face of the abovementioned binding precedent, that the dispute in question is not arbitrable.
14. In all fairness, however, it may be proper to examine Mr. Khalid Rehman's contentions in some detail. The main thrust of his submission was that there was no arbitration agreement between the parties as the agreement dated 31-5-1991 had not come into effect. He referred to the definition of the expression "effective date" occurring in clause 1(vi) of the agreement and contended that the agreement could legally come into effect only after necessary permissions had been obtained and the requirements of clause 56 fulfilled. The contention is indeed ingenious, but needs to be repelled for a variety of reasons.
15. In the first place, if I may say so with respects, there appears a logical inconsistency in the argument. It is claimed that the agreement never came into effect, and at the same time the contention is founded upon the nothing but the terms of the same agreement, If, for all legal purposes the agreement was a dead letter how would recourse to its provisions be possible?
Obviously the definition contained in clause 1(vi) could be referred to only if it is acknowledged as part of a legally binding agreement between the parties. Again there is no basis to contend that clause 1(vi) had become enforceable, clause 52 (arbitration clause) had not.
16. Secondly the definition of the expression "effective date" in the agreement neither proves its factual non-existence nor its legal invalidity. It may be observed that the respondents never urged that no agreement was signed nor have they claimed that the one executed was void ab inito. The provision relied upon by them nowhere shows that it would be treated as ineffective for all purposes. At the risk of repetition, one may reproduce the relevant clause: "1, Whenever used in this agreement.--The following terms shall have the following meaning:-- -(vi) The effective date of the agreement shall mean ..................... "
' Evidently the agreement does not even say that it will become effective from a particular date or after fulfilment of certain conditions. All it says is that the expression "effective date" shall have a particular connotation only when used in this agreement and not otherwise. We are quite clear in my mind that this definition can be resorted to only for the purpose of construing the expression "effective date" whenever it occurs in the agreement itself and has nothing to do with the date of enforceability of the agreement. In fact it would acquire relevance only after the agreement becomes legally enforceable.
17. Indeed it is an admitted position that the agreement was signed between the parties. Pursuant to obligations created thereby a performance bond was furnished. The agreement also created certain obligations which were required to be performed for the purpose of reaching the "effective date" in terms of clause 1(vi). According to the respondents themselves they acted diligently and made all good faith efforts to fulfil the requirements of clause 56 but were unable to do so for reasons beyond their control. It is, therefore, impossible to say that none of the provisions of the agreement ever came into effect. On the other hand reading of the agreement as a whole would show that while some of the obligations created thereunder were to be performed instantly, others were to be undertaken only at a later stage after fulfilment of certain pre-conditions and the expression "effective date" was used with reference to the latter type of obligations. I am refraining from analysing different provisions of the agreement but this position is amply demonstrated by clause 56. This clause ordains certain pre-conditions to be fulfilled before reaching the "effective date" but the obligations so created are indeed an integral part of the agreement
18. Even otherwise there are several contracts where the respective obligation of the parties are required to be performed at some time in the future either on or after particular date of upon the happening of a particular contingency. That, however, does not mean that the contract has not come into existence. A distinction must be kept between the formation of a contract and the performance of the covenants of the parties created thereunder. The fact that the parties are not required to perform an obligation till specific date or even a contingency does not mean that no contract exists. Indeed a promisor may be relieved of obligation to perform on account of some supervening even not in contemplation of the parties. That does not mean that the contract never existed. It only means that the promisee was not liable to perform his duty. In the present context, therefore, I am clearly of the opinion that it may be possible for the respondent to urge that the "effective date" not having arrived they were not require to perform their obligation under the contract, but they cannot be heard to say that the contract never came into being.
19. Indeed there is authority for the proposition that when the very existence of an agreement containing an arbitration clause is disputed or the legal validity of such agreement is questioned, such disputes ought to be decided by this Court and not by the arbitrators. This proposition has been succinctly stated by Viscount Simons in the celebrated decision of the House of Lords in the case of Heyman v. Darvins in the following words:-- "If the dispute is as to whether the contract which contain the clause has ever been entered into at all that issue cannot go into arbitration under the clause for the party who denies that he has ever entered into the contract is thereby denying that he has ever joined in the submission. Similarly if one party to the alleged contract is containing (sic) that its void ab initio (because for example the making of such contract is legal). The arbitration clause cannot operate on this view the clause itself is also void."
20 Mr. Khalid Rehman, one may say in fairness to his industry has cited a large number of cases in support of this proposition from different jurisdictions, some of which have also been referred to in the impugned judgment. He has relied upon certain Indian cases, C.M. Mathu Kutty v. Varee Kutty AIR 1950 Madras 64, Pramada Prasad Mukharjee v. Sagarmal Agarwala and others AIR 1952 Patna 352, Suwalal Jain v. Clive Mills Ltd. AIR 1960 Calcutta 90, Toller v. Law Accidents Society (1936) 2 AER 952, Hirji Muljee v. Cheong Yue S.S. Co. Ltd. 1926 AC 497 and M/s. Agricides (Pvt.) Ltd. v. M/s. Ali Agro Supply Corporation Ltd. 1988 CLC 59.
21. With profound respect, however, in view of the authoritative pronouncement of our Supreme Court in the Lahore Stock Exchange case PLD 1990 SC 48 and some recent judgments of the Supreme Court of India, the proposition stated in para. 19 and enunciated in the, above-cited cases can only be accepted subject to certain important qualifications i,e,:
(a) The governing factor in determining whether a dispute falls within the jurisdiction of arbitrators is the language of the arbitration agreement/clause.
(b) There is no prohibition in law against resolution of a dispute relating to the existence or validity of an agreement by arbitrators. The parties can, through separate agreement, a clearly worded provision in commercial agreement or even a broadly worded arbitration clause in such agreement, agree to refer such disputes to arbitrators.
(c) The rule that arbitrators cannot decide questions affecting their own jurisdiction is thus not a rule of law but merely a principle to be applied in construction of an arbitration agreement/clause.
In other words, if the arbitration clause is susceptible of more than one interpretation, the Court will presume that the parties never contemplated adjudication of disputes regarding the very existence or validity of the agreement by arbitrators themselves. However, if express words or necessary intendment signified a contrary intention, the disputes would indeed be arbitrable.
(d) That arbitration clauses containing expressions like "arising out of" or "in relation to" or "connected with" to show that they are broad enough to cover disputes relating to the existence of an agreement.
22 At this stage, it may be useful to refer to the. Comprehensive formulations of Mr. Justice Talzapurkar of the Supreme Court of India in the case of Renusagar Power Co. Ltd. v. General Electric Company and another AIR 1985 SC 1156 which have been adverted to by our own Supreme Court in the Lahore Stock Exchange case: "Four propositions emerge very clearly from the authorities discussed above:
(1) Whether a given dispute inclusive of the arbitrator's jurisdiction comes within the scope or purview of an arbitration clause or not primarily depends upon the terms of the clause itself; it is a question of what the parties intend to provide and what language they employ.
(2) Expressions such as 'arising out of or 'in respect of or 'in connection with' or 'in relation to' or 'in consequence of or 'concerning' or 'relating to' the contract are of the widest amplitude and content and include even questions as to the existence, Validity and effect (scope) of the arbitration agreement.
(3) Ordinarily as a rule an arbitrator cannot clothe himself with power to decide the questions of his own jurisdiction (and it will be for the Court to decide those questions) but there is nothing to prevent the parties from investing him with power to decide those questions, as for instance, by a collateral or separate agreement which will be effective and operative.
(4) If, however, the arbitration clause, so widely-worded as to include within its scope questions of its existence, validity and effect (scope), is contained in the underlying commercial contract then decided cases have made a distinction between questions as to the existence and or validity of the agreement on the one hand and its effect (scope) on the other and have held that in the case of former those questions cannot be decided by the arbitrator, as by sheer logic the arbitration clause must fall alongwith underlying commercial contract which is either nonexistent or illegal while in the case of the latter it will ordinarily be for the arbitrator to decide the effect or scope of the arbitration agreement, i,e, to decide the issue of arbitrability of the claims preferred before him.
23. Moreover, I am also of the view that even if the legal proposition enunciated in the cases cited by the learned counsel is accepted without reservation, they do not advance the respondent's case. In these cases it was alleged that either the agreement, in fact, was never made AIR 1950 Madras 64 or that it was premised on fraud or misrepresentation rendering it voidable AIR 1952 Patna 352 or that it was void for being contrary to or forbidden by law AIR 1960 Calcutta 90. In all these cases the very factual or legal existence of the agreements said to contain arbitration clauses was independently questioned irrespective of what the alleged agreement purported to say. If the agreements were found to be factually or legally non-existent the arbitration clause alongwith others would perish. In such circumstances it might be possible to say that disputes could be referred to a domestic forum only when there was a written agreement between the parties, whose factual existence or legal validity was beyond doubt. Nevertheless a distinction ought to be maintained when an independent dispute as to the existence or validity of an agreement, having nothing to do with its specific terms is raised and when such dispute arises only out of the terms of the agreement itself and can be resolved only through interpretation of its specific provisions. In the former case the dispute arises de-hors the agreement or independently of it, and, it may be possible to urge in the context of narrowly-worded arbitration clause that the dispute does not arise under the agreement. In the latter case, however, it is impossible to say that a dispute which can only be resolved through a proper interpretation of the specific provision of the agreement is not a dispute under such agreement or involving its interpretation. In the present case it is admitted that an agreement between the parties was signed and no question as to its legal validity has been raised. All that is said is that a particular provision of the agreement tends to show that it never came into existence. Apart from the logical fallacy that while the existence of that term (clause 1 (iv)) is acknowledged and that of another (arbitration clause) is denied, the fact remains that such dispute would only be treated as one under the agreement or relating to the interpretation thereof and squarely falls within the scope of the arbitration clause. The matter undoubtedly relates to the effect of the agreement and the distinction between this case and those cited at the bar can clearly be discerned from the formulation appearing in the last paragraph of the judgment of Justice Tulzapurkar quoted in para. 20 above.
24. It may now be convenient to deal with the case of Toiler v. Law Accident Insurance Society (1936) 2 AER 952. The facts of the case were that the appellant, a motorist signed a proposal form for motor car instance on August 15, 1935. The premium was not paid and the policy not issued up to October 29. However, cover notes were issued by the respondent-company indemnifying the appellant against claims" in terms of the society's usual form of comprehensive policy". The policy contained an arbitration clause requiring the differences arising out of the policy shall be referred to the decision of an Arbitrator. The appellant met an accident on October 2, i,e, after the issuance of cover note, but before the issuance of the policy. Certain claims were established against him and he used the respondent-company. The claim was resisted.On the ground that no contract of insurance had come into being before the issuance of the policy and in any event the policy contained an arbitration clause. The Court of Appeal decided that though the cover note itself constituted an agreement between the parties it did not contain an arbitration clause. It could be construed only as a contract to enter into an agreement (policy) which did not contain an arbitration clause, and therefore, the proceedings could not be stayed. The above case however does not support the respondent. Even if the agreement dated 31-5-1989 be treated as mere agreement to enter into an agreement, the fact remains that unlike the cover note in the precedent judgment, it does contain an arbitration clause which is enforceable.
25. The contention that the contract came to an end on account of certain events whereby it become impossible for the respondent to perform their obligation is equally misconceived. The respondent may well be justified in contending that because of certain reasons not contemplated by the parties and beyond he respondents' control it became impossible for them to perform their covenants. As the learned Single Judge has rightly done, we would refrain from entering into the merits of this contention. The argument, nevertheless, overlooks the well-established principle that when a contract is frustrated i,e, when it become impossible for any party to perform its obligation, the contract itself does not come to an end; only the party or both of them may stand absolved from performing their obligations. In this context reference may be made to the following statement of law contained in Halsbury's Laws of England, 4th Edition, para. 533: "Frustration or repudiation.--The fact that a contract is frustrated or repudiated does not of itself determine every possible operation of an arbitration clause referring to arbitration disputes arising out of the contract. It does not matter whether the arbitration clause is an ordinary clause or a Scott v. Avery clause."
' In the House of Lords' decision in Heyman's v. Darvin (1942) 1 AER 337, Viscount Simon has observed at p. 344:-- "I can see no reason why an arbitration clause framed on the above lines should not equally apply, if the supervening event which is alleged by one side to have effected discharge by frustration occurs after the contract has been entered into, but before the time has come for anything to be done under the contract. The reasoning of Lord Dunedin applies equally to both cases. It is, in my opinion, fallacious to say that, because the contract has 'come to an end' before performance begins, the situation, so far as the arbitration clause is concerned, is the same as though the contract had never been made. In such cases, a binding contract was entered into, with a valid submission to arbitration contained in its arbitration clause, and, unless the language of the arbitration clause is such as to exclude its application until performance has begun, there seems no reason why the arbitration jurisdiction should not cover the one case as much as the other."
' Lord Macmillon at page 347 of the judgment, has observed:-- "I am accordingly of opinion that what is commonly called repudiation or total breach of a contract, whether acquiesced in by the other party or not, does not abrogate a contract, though it may relieve the injured party of the duty of further fulfilling the obligations which he has by a contract undertaken to the repudiating party. The contract is not put out of existence, though all further performance of the obligations undertaken by each party 'in favour of the other may cease.
It survives for the purpose of measuring the claims arising out of the breach, and the arbitration clause survives for determining the mode of their settlement. The purposes of the contract have failed, but the arbitration clause is not one of the purposes of the contract."
' In the opinion of Lord Wright:-- "If the parties are at one on the point that they did enter into a binding agreement in terms which are not in dispute, and the difference that has arisen between them is as to their respective rights under the admitted agreement in the events that have happened, e.g. As to whether the agreement has been broken by either of them; or as to the damage resulting from such breach; or as to whether the breach by one of them goes to the root of the contract and entitles the other party to claim to be discharged from further performance; or whether events supervening since the agreement was made have brought the contract to an end so that neither party is required to perform further. In all such cases it seems to be that the difference is within such an arbitration clause as this.
26. It was also argued that since the dispute involved intricate question of law it would be appropriate that the application under section 34 be dismissed and the matter be tried by the Court itself. Mr. Khalid Rehman relied upon the cases of Firm Chimanram Motilal v. Firm Vandravandas Gordhandas AIR 1948 Bombay 54 and Jaikishan Dass Mull v. Luchhiminatain Kanoria & Co. AIR 1974 SC 1579 in support of this proposition. We regret we are not impressed. In the Bombay case the arbitration was to be conducted by Sub-Committee of the Bombay Bullion Exchange and in the Supreme Court case by the Bengal Chamber's of Commerce. Keeping in view the nature of the dispute and the designated forum for arbitration, the Court exercises its discretion in refusing to stay the proceedings. In the present case, however, the arbitration clause allows each parties to nominate any person as their Arbitrator, who will in turn choose an Umpire. We can take judicial notice of the fact that there is no .Dearth of persons of high legal calibre, including a number of retired Judges, who have adorned the Bench of this 'Court with great distinction, who might be willing to act as Arbitrators. The arbitration is to be held in Karachi in accordance with laws of Pakistan and all the evidence is also likely to be available here. We are conscious of the fact that the Courts indeed possess a discretion to refuse stay of proceedings, but such discretion like all judicial discretion is liable to be exercised on sound judicial principle and very heavy onus lay on the respondents to show that resort to arbitration might be improper or inconvenient which they have failed to discharge.
27. In view of the above and particularly the binding judgment of the Honourable Supreme Court in the Lahore Stock Exchange case as well as the decision of the Supreme Court of India, which seem to overrule earlier decisions of High Courts, we are constrained to hold, with profound respect to the learned Single Judge, for whose learning and ability we have great regard, that the decision in so far as it relates to C.M.A. No,5241 of 1991, is concerned cannot be sustained.
28. As regards the question of encashment of the performance bond Mr.Abid S. Zuberi assailed the order of the learned Single Judge restraining the encashment of the performance bond on the ground that the bond constituted an independent obligation on the part of the respondent No,3 to make payment of the amount irrespective of the dispute between the appellant and the respondents Nos.1 and 2. In this context he strenuously relied upon the case of Natio Construction Co. Ltd. v. Aiwan-e-Iqbal Authority PLD 1994 SC 31'1. In the aforesaid case the appellants were required to construct a building by the respondents who had advanced an amount of Rupees eleven million five thousand by way of mobilisation advance. This amount was covered by the Bank guarantee furnished by the Habib Bank Limited, which stipulated that it would be negotiable without reference to any dispute before any Arbitrator or Court. For some reason the project could not be completed within time and dispute arose between the parties. The appellant filed an application for appointment of an Arbitrator under section 20 of the Arbitration Act and also sought interim injunction restraining the respondents from encashing the bank guarantee. The injunction was refused by the Courts below and such orders were upheld by the Supreme Court. It was held that the guarantees are independent contract and the bank could encash it notwithstanding any dispute out of the original contract between the parties. The Court distinguished certain decision of this Court, wherein injunction restraining encashment of a performance bond was issued, pointing out that under the terms of such bonds, hey could not be encashed unless breach of contract on the part of the promiser was established.
29. Mr. Khalid Rehman on the other hand has referred to the cases of Province of West Pakistan v.
Mistry Patel PLD 1969 SC 80 and Pakistan Engineering Consultants v. PIA 1989 CLC 379. In the first case the respondent had agreed to purchase rice from the appellant at an agreed price and had furnished a Bank guarantee for performance of its obligation. The respondent defaulted and therefore, the Government encashed the bank guarantee and sold the goods at the respondent's risk. They were, however, able to obtain a price higher than that contracted with the respondent.
The Honourable Supreme Court held that the Government was liable to return the amount of the bank guarantee inasmuch as it did not sustain any loss from the breach of the contract.
30. The second case is particularly instructive in respect of the controversy before us. The respondent had engaged the appellant firm as consultants in respect of certain works. They had advanced an amount of Rs,43.9 million as mobilisation advanced against a bank guarantee. At the same time a performance bond was furnished for performance of the appellant's obligation under the contract. The dispute arose and the respondent attempted to encash the bank guarantee as well as the performance bond. In a well-reasoned judgment after examining the case-law in great deal Ajmal Mian, C.J. (as his lordship then was) hold that no injunction should normally be granted to restrain encashment of an unconditional bank guarantee issued to cover the amount advanced by way of mobilisation advanced. At the same time it was held that the performance bond stood on an entirely different footing and it would not be just and proper to allow its encashment without prima facie evidence of breach of contract. Judgment was sustained by the Honourable Supreme Court in the case reported in 1983 SCMR 379. In another very recent judgment in the case of Zeenat Brothers v. Aiwan-e-Iqbal Authority PLD 1996 Karachi 183 the same distinction has been upheld by our learned brother Rasheed Ahmed Razvi, J. After an exhaustive survey of case-law.
31. One may now to refer to the terms of the performance bond quoted in para.3 of this judgment which clarify that the aforesaid bond become enforceable only upon breach on contract by the respondents. As such Mr. Zuberi is not quite correct when he states that there was an unconditional obligation on the part of the bank to disburse the amount of the bond. The judgment of the Honourable Supreme Court relied upon by him is clearly distinguishable and the distinction has been appreciated by the Court itself. Therefore, on this aspect of the matter, the contention of the appellant fails and we would sustain finding of the learned Single Judge albeit or somewhat different reasons.
32. With respect to the submission of Mr. Yousuf Qasim it is indeed correct that arbitration agreement does not bind the respondent No, 3 and we entirely agree that the principle of law enunciated in the judgment cited by him. Nevertheless in view of the decision that we are recording it is not necessary to state anything further and the case can be disposed of as being primarily dispute between the appellant and respondents Nos.1 and 2.
33. In view of the above, the appeal is partly allowed and it is ordered that:-
(i) The parties shall appoint their respective Arbitrators, who would enter upon the reference within 15 days from the announcement of this judgment and make their Award within four months of having entered upon such reference. In case of difference of opinion the matter would be referred to the Umpire in accordance with the provisions of the Arbitration Act.
(ii) In case a party fails to appoint an Arbitrator the other party can move a proper application for appointment of an Arbitrator on the original side of this Court.
(iii) That the respondents Nos.1, 2 and 3 shall not encash the performance bond till the disposal of the suit which will now, however, proceed in accordance with the Arbitration Act.
' We are grateful to the learned counsel for the parties for their assistance.