By this order I propose to dispose of C.M.As. Nos.74 and 75 of 1997 preferred by the defendant and C.M.A. No,5659 of 1947 moved by the plaintiffs. The plaintiffs have filed this suit for recovery of an amount of Rs,4,875,000 on the basis of a dishonored cheque issued by the defendant on 17-6-1996.
Admittedly the plaintiff had entered into a contract for supply of Cables to the defendant the goods were agreed to be supplied in different consignment initially within a period of 2 months but such period was apparently extended as is evident from the admitted correspondence documents. . The terms of contract are contends in the plaintiff Facsimile Message addressed to the defendant, dated 25-1-1995 (Annexure B-2) to the plaint and the terms of the defendants Purchase Order, dated 25-2-1995 admittedly 15% of the price of the goods was to be paid in advance by the defendant against the plaintiff furnishing Bank guarantee and performance bond and the balance at the time of delivery of each consignment against invoice. Clause (14) of the terms and conditions of the contract printed on the reverse side of the purchase order contained in Arbitration Clause in the following words:-- "In case of any dispute arising out or in connection with this purchase order, an arbitrator who is acceptable to both S.C.L. and the Supplier shall be appointed by S.C.L. The decision of the arbitrator shall be binding on both the parties. In case the decision of the arbitrator is not acceptable to S.C.L. or the Supplier, the parties shall then submit to the. jurisdiction of the Courts of Law at Karachi which Courts shall have exclusive jurisdiction to settle any claim and/or dispute arising out of this purchase order or any acts done in pursuance thereof regardless of the location or place of business of parties here to or the place where the material is to be delivered. All costs and expenditure involved in the arbitration will be borne by the defaulter."
Note. The expression S.C.L. and Supplier relate to the defendant and the plaintiff respectively in the present context.
2. Originally the plaintiffs were required to supply Cables of the total value of Rs,87,856,000 Change Order, dated 15-5-1995 the value of the goods required to be supplied was reduced to 79,699,000.
Admittedly certain supplies were made by the plaintiffs between 30-4-1995 and 19-10-1995.
According to the plaintiffs the price of such goods was Rs,40,225,707 and after deducting the price of the Cables returned by the defendant (as being defective or not conforming to agreed specification) an amount of Rs,39,498,827 were payable by the defendant. Against this the plaintiff received payment to the extent of Rs,31,825,566.05 through various cheques issued between 27-4- 1995 and 8-8-1995. These figure are not seriously disputed by the defendant.
3. According to the plaintiff an amount of Rs,7,673,260.95 was due and payable by the defendant by way of price of goods already supplied. On 19-10-1995 the plaintiff submitted an invoice for Rs,13,483,340.90, the defendant vide their remittance note, dated 17-6-1996 agreed to make an adhoc payment of Rs,5,000.000 against aforesaid invoice and after deducting an amount of Rs,125,000 by way of income tax issued a cheque, dated 17-6-1996 for Rs,4,875,000 in favour of the plaintiff. The plaintiff presented this cheque for encashment through their bankers on 25-6-1996 but it was dishonored with the endorsement "effect not yet clear please present again" the same was presented again on 27-6-1996 and on 30-6-1996 but was returned with same endorsement.
The plaintiff thereafter informed the defendant about the dishonouring of the cheque and having received no response filed this suit invoking the summary procedure under Order XXXVII of the C.P.C.
4. Upon service of summons on or about 26-12-1996 the defendant filed two applications, first i,e, C.M.A No,74 of 1997 under section 34 of the Arbitration Act and the second i,e, C.M.A. No,75 of 1997 seeking leave to defend the suit. Mr. A.I. Chundrigar, learned counsel for the defendant astutely emphasised that though the applications were filed on the same day the one under section 34 of the Arbitration Act was filed earlier in point of time as is evident from the C.M.A. number assigned to it and, therefore, it cannot be contended that the defendant had taken any other step in the proceedings before filing the application. He further, explained that the second application was filed by way of abundant caution only for the reasons that if for some reason the Court was not inclined to stay the suit despite an arbitration agreement between the parties the defendant should have an opportunity to defend the suit on merits after being granted leave to defend and should not forfeit his right to defend by not filing an application for leave within the prescribed period of limitation.
On the other hand Mr. Shakir Naqshbandi, learned counsel for the plaintiff argued that both the applications were filed simultaneously and by filing an application for leave to defend the defence had acquised in adjudication of the dispute by the Court and, therefore, stood disentitled from seeking stay of proceedings under section 34 of the Arbitration Act. He further, contended that the suit was promised on a negotiable instrument and not on the contract between the parties and as such the provision of section 34 of the Arbitration Act could not be invoked.
6. Mr. A.I. Chundrigar heavily relied upon a judgment of this Court in the case of Capcon (Pvt.) Ltd. v.
Rizwal Builders 1990 M LD 2027, wherein Haziqul Khairi, J. was pleased to hold that simultaneously filing of an application for leave to defend under Order 37, Rule 3, C.P.C. alongwith an application under section 34 of the Arbitration Act would not per se imply that the defendant had taken step in the proceedings within the meaning of the expression contained in section 34 of the Arbitration Act so as to disentitle the defendant from seeking stay of the proceedings. It was further, held that "application under section 34 of the Arbitration Act had precedents over the one under Order 37, Rule 3, C.P.C. and was required to be decided first". Having held that the dispute between the parties was covered by an arbitration agreement and there was no justifiable reason for refusing the stay His Lordship granted the application for stay of proceedings and held the application for leave to defend have become infructuous.
7. I entirely agree that by filing an application for leave to defend alongwith an application under section 34 of the Arbitration Act might not as a pure matter of law, amount to taking "steps in proceedings" or constitute a waiver on the part of the defendant to apply for stay of proceedings and a reference to the domestic forum agreed upon between the parties. Nevertheless, with profound respect I was a little doubtful whether an application under section 34 of the Arbitration Act, must invariably take precedents over one under Order 37, Rule 3, C.P.C. The logical outcome would be that whenever the parties entered into an arbitration agreement, the statutory presumption created by the Negotiable Instruments Act and enforceable through the mechanism provided by Order 37, Rule 3, C.P.C. would stand destroyed. In plain words whenever an arbitration agreement exists, the defendant, irrespective of the questions whether his defence is sham or plausible would stand relieved of the statutory liability to satisfy the Court that he has a plausible defence and would have an unconditional right to plea his defence in arbitration proceedings without ever being put to terms.
8.After having heard the learned counsel on 25-9-1997 I reserved the' matter for consideration of the correct legal position and found that the judgment of Haziqul Khairi, J. (as he then was) in the above quoted case had been reversed by a Division Bench of this Court in the case reported as Cotton Export Corporation of Pakistan (Pvt.) Ltd. v. Messrs Asif Cotton Ginners and 5 others 1995 CLC 1024, I issued notice of rehearing to the learned counsel and Mr. Chundrigar sought time to verify whether an appeal against the aforesaid Division Bench judgment had been referred. On 10-10- 1997 both the learned counsel appeared and stated that to their knowledge no appeal had been so preferred. In the aforesaid Division Bench judgment which needless to say is binding upon me the Court proceeded to hold that only the pleadings in the plaint could be looked into for the purpose of deciding an application for stay under section 34 of the Arbitration Act and the plaint showed that the suit was based not upon the agreement between the parties, but the promissory note executed by the defendant. As such their Lordships came to the conclusion that there was no arbitral dispute and the proceedings could not have been stayed under section 34 of the Arbitration Act.
9. It may also be pertinent to refer to a Division Bench judgment of the Madras High Court in the case of Messrs Vasanji Navji & Co. v. K.P.C. Spinners and others AIR 1983 Mad. 31, relied upon by Mr. Shakir Naqshbandi. In this case too there was a contract for sale of cotton which contained an arbitration clause. Some cheques made by the defendant towards payment of the sale consideration were dishonoured and the plaintiff filed a suit for recovery of the amount stated in the dishonoured cheque. The defendant filed an application for stay of the suit. It was held that the dishonouring of the cheques furnished an independent cause of action and section 34 of the Arbitration Act was not applicable. In view of the above I am of the opinion that the application under section 34 of the Arbitration Act must fail and the application for leave to defend is to be decided on its own merits.
10. I have carefully examined the contents of the defendants' application for leave to defend and considered the arguments of the learned counsel in support of the application. There is no dispute relating to the price of the goods and the mode of payment. It has also been admitted that the quantity of the goods mentioned in the plaint was actually delivered. Admittedly the plaintiffs have not been paid the agreed price for the quantity of the goods actually delivered though such price was payable upon delivery. The defendants have alleged that the plaintiffs committed breach of contract by failing to deliver of the contracted goods upto the agreed date i,e, 20-6-1995. It is nevertheless admitted that deliveries were accepted upto 19-10-1995 and there is nothing on record to indicate that while accepting late delivery the defendants reserved their right to claim damages for delay. The dishonoured cheque was drawn as late as on 17-6-1996. Even the earlier payment of Rs,12,874,000 was made by cheque, dated 8-8-1995 i,e, after the expiry of the original stipulated date of completion of supplies. As such it is prima facie apparent that the date of delivery stood extended and time was not of the essence of the contract. Another ground raised is that the plaintiff committed breach of contract by supplying defective goods and the defendant had a right to reject. It is however, admitted that goods worth Rs,726,880 were actually rejected and the plaintiffs have deducted this amount from their claim. Mr. Chundrigar argued with great emphasis that the plaintiffs were required to furnish bank guarantee for the amount disbursed to them by way of advance to the extent of 15% of the total value of the contracted goods and upon their failure to extend the bank guarantee after 10-4-1996 they were not entitled to any payment.
He contended that the cheque was drawn without consideration and only because the plaintiffs requested that they will not encash the cheque but it will only facilitate them for obtaining a bank guarantee. I am afraid I find little merit in this submission. In the first place there is nothing on record to indicate any understanding between the parties to the effect that the cheque will not be presented for encashment. The remittance advice issued by the defendants accompanying the cheque only mentions that the cheque was made by way of adhoc payment to the extent of Rs,15 million (after withholding 5% by way of income-tax deduction) against the plaintiff's Invoice No,10499-501, dated 19-10-1995 for Rs,15,862,754. Moreover, the question of renewal of bank guarantee falls into insignificance, inasmuch as the plaintiffs have claimed that they are entitled to a payment of Rs,7,673,260.95 by way of price for goods actually delivered even after adjusting the entire amount received by way of advance. The agreed price and the factum of, delivery has not been disputed by the defendant. It may also be proper to mention that while the defendants have referred to a letter purported to be dated 17-6-1996 addressed to their bankers stating that the cheque was issued on the condition that the plaintiffs would revalidate the bank guarantee and that it may not be encashed prior to the defendants' approval, the bank's endorsement on the cheque on 25-6-1996 appears to be "effects not yet cleared please present again on 27-6-1996".
The cheque was returned with same endorsement on 30-6-1996, though no date for present it again was given. Both these endorsements do not state that payment was stopped by the drawer or required the cheque to be referred to the drawer. Therefore, I find substance in Mr. Naqshbandi's contention that the plea relating to revalidation of bank guarantee was an afterthought. In the circumstances while it may not be proper to comment any further on the merits of the defenses alleging breach of Lon tract on the part of the plaintiffs, I am satisfied that the defendants have not been able to show a bona fide plausible defence entitling them to grant of unconditional leave to defend. I would, therefore, grant leave only subject to the condition that the defendants furnish solvent surety to the satisfaction of the Nazir of this Court for the amount claimed in the suit within thirty (30) days from the announcement of this order, failing which the suit shall stand decreed.