SAVED NAJAM-UL-HASSAN KAZMI, J. - Reyaz Shaffi and Pakistan PVC Ltd., appellants herein instituted a suit claiming declaration to the effect that the demand for encashment of bank guarantees made by respondent No. 4 stood vitiated by fraud and that respondent No. 4 having breached the contract, failed to perform obligations under the agreement and having remained unable to satisfy the condition precedent for the encashment of guarantees could not encash the same. A decree for permanent injunction to restrain respondent No. 4 from receiving any payment under the guarantees issued by respondents Nos. 1 and 2 was also claimed. Application under Order XXXIX Rules 1 and 2 accompanied the plaint , praying that respondent be restrained from encashing or enforcing bank guarantees or taking any action against the appellant in violation of the agreement of law.
2. Facts resulting in the tiling of the suit, as alleged in the pleadings, are that the project known as Pakistan PVC Ltd., set up at Arokey Chemical Industries Ltd., Shaffiabad, near Gharo, District Thatta was nationalised in January, 1972. At that time appellant No. 1 was a share holder and Managing Director thereof. The Government of Pakistan decided to privatise state-owned enterprises and in pursuance of an advertisement, appellant No. 2 was put to sale. Appellant No. 1 submitted bid and made an offer for the purchase of 51 % share and management of the Company. On December 10, 1991 appellant No. 1 was informed that being the former owner, the appellant would be entitled in law to purchase the project, provided he would match the highest bid. On December, 14th, 1991, appellant No. 1 made offer to match the highest bid which was accepted on 29th December, 1991 and resultantly offer of appellant No. 1 to purchase 51 % share of the Company and for the transfer of the Management was accepted by the Government of Pakistan. It was claimed that appellant No. 1 had already paid rupees one million on 22.1.1992 and paid Rs. 24,428,600!- through bank draft, on acceptance of offer, being 40% of the sale price. For the balance 60% of the sale price, appellant No. 1 furnished bank guarantee to respondent No. 1 for a sum of Rs. 38,142,900/-. It was further claimed that respondent No. 4 had informed that a sum of Rs. 32,991,000/- was owned by appellant No. 2 to respondent No. 4, therefore, appellant No. 1 was required to furnish bank guarantee for this amount which the appellant furnished on January 23, 1992.
3. On January 23, 1992, agreement was executed between appellant No. 1 and respondent No. 4, Directors nominated by the Government on the Board of Directors resigned on February 8, 1992 and new Directors were elected. It was alleged that appellant No. 1 made certain representations to respondent No. 4 for honouring the commitments under the agreement dated 23.1.1992 but the same were not responded. It was further alleged that appellant No. 1 faced difficulty in taking possession of the factory and even after handing over the possession, appellant No. 1 was unable to successfully or commercially operate the factory at Shaffiabad, Gharo as some damage had been done to the machinery, plant and equipment. Attributing certain allegations of breach of contract, it was maintained that respondent No. 4 could not encash the bank guarantee . Was pleaded that certain pre-conditions were not fulfilled by respondent No. 4, therefore, encashment of bank guarantees was unwarranted. In this backdrop, the appellant challenged the right of respondent No. 4 to enforce demand for encashment of bank guarantee.
4. Respondent No. 4 on receiving notice in the suit, tiled an application dated 10.7.1993 under Section 34 of the Arbitration Act for stay of proceedings in the suit. Application for temporary injunction was contested and vacation of the ad interim injunctive order was demanded. It was maintained that the agreement, the breach whereof was claimed and which was the basis of the suit, contained an arbitration clause and, therefore, the suit could not proceed in law.
5. The learned Civil Judge allowed the application under Section 34 of the Arbitration Act, stayed the proceedings in the suit and also vacated ad interim injunction, vide order dated 19.7.1994 which is subject-matter of challenge in this appeal.
6. Learned counsel for the appellant argued that the provisions of Section 34 of the Arbitration Act were not attracted, banks were not party to the agreement of arbitration and could not be compelled to submit before the arbitrator, the sole arbitrator mentioned in the agreement is employee of the respondents, hence no impartial decision could be expected from him, the pre- conditions for enforcement of the bank guarantee were not fulfilled hence the demand for encashment was unwarranted and untenable.
7. Learned counsel appearing on behalf of respondents Nos. 1 and 2 maintained that certain pre- conditions having not been fulfilled, the matter between respondent No. 4 and the banks as to the interpretation of bank guarantee be kept open even if the proceedings in the suit are stayed and injunction is not allowed.
8. Learned counsel for applicant in C.M. No. 1-C/98 contested the appeal and maintained that the Crescent Investment Bank Limited will be necessary party. He submitted that even otherwise the appellant will not be entitled to the grant of injunctive relief. It was maintained that on the request of the appellant, certain financing facilities were allowed by the bank but the appellant had failed to honour their contractual and financial obligations with the result that the suit was filed in the Banking Court at Karachi by the applicant-bank. It was thus argued that either the applicant be impleaded as a party or the injunction restraining encashment of bank guarantee be vacated.
9. Learned counsel for respondent No. 4 vehemently contested the appeal and argued that bank guarantees contained solemn commitments and no injunction to restrain encashment of such guarantee could be asked for. It was added that the suit was not maintainable and was liable to be stayed in view of undisputed arbitration clause and that the appellant did not have any case for the grant of temporary injunction. Learned counsel contended that the bank guarantees being independent contracts have to be endorsed without reference to the terms of the principal agreement. Regarding banks it was argued that the banks were not necessary parties as no relief was claimed against them.
10. I have given due consideration to the submissions made and have been taken through the relevant material.
11. For resolving the controversy in this appeal, two questions need to be attended, viz, whether the suit could be stayed under Section 34 of the Arbitration Act, 1940 and whether encashment of bank guarantee could be stopped. It is not disputed that the project was nationalised, it was sold in public auction, the appellant No. 1 was allowed to give offer matching the offer of highest bidder, the offer of the appellant was accepted, an agreement was executed between the parties for the sale of the project and transfer of management in consideration of the auction price and with a view to secure certain claims, bank guarantee was furnished by appellant No. 1 and that the agreement provided an arbitration clause. Clause-11 of the agreement reads as under:- "In case of any difference or dispute arising out of agreement or relating to the meaning, intent proper interpretation of any of the terms and conditions of the agreement including 'instructions to the bidders' between the seller and the buyer and their successors, assignees, or legal representatives the same shall be referred to the Secretary, Ministry of Finance, Government of Pakistan for decision who shall be the sole arbitrator and his decision shall be final and binding on the parties subject to remedies available under the Arbitration Act."
12. From the arbitration clause, it is discernible that the parties had agreed that all disputes pertaining to terms and conditions of agreement, rights flowing thereunder or rights claimed between the parties would he referred to the sole arbitrator whose decision, the parties had agreed to accept . The dispute in this case for all practical purposes in between the appellant and respondent No. 4 who are parties to the arbitration agreement while the other respondents were either performa respondents or claiming through or under the appellant. From the contents of the plaint, it is obvious that the dispute raised therein is covered by the arbitration clause for which the parties had agreed to make a reference to a sole arbitrator. Under Section 34 of the Arbitration Act, the defendant after receiving notice of the suit, raising issues covered by the arbitration agreement, can, file application for stay of proceedings in the suit, before tiling the written statement or taking steps in the proceedings, and if the party filing the suit does not show sufficient cause for not referring the matter to the arbitration, the Court is required to stay the proceedings in the suit. The requirement of law is that there should be an arbitration agreement between the contesting parties, the issue raised in the suit should be covered by the arbitration agreement, the defending party has not filing the written statement or taken steps in the proceedings of the suit and that there is no sufficient cause for not referring the matter to the arbitration. In this case, there was an arbitration agreement between the real contestants, dispute raised in the plaint was covered by the arbitration clause, the application was moved for stay of proceedings before filing the written statement and taking steps in the proceedings and no sufficient cause was shown for not referring the issue to the arbitrator.
13. The only objection was that the banks were not parties to the arbitration agreement and that the arbitrator was an employee of the Government. Both these objections were devoid of any substance. As for as the banks are concerned, they were neither necessary nor proper parties in the proceedings and were impleaded as performa defendants. The real issue was between appellant No. 1 and respondent No. 4 and the banks had either no direct contest or they could claim through the parties in the arbitration agreement, therefore, there could not be any lawful objection to the enforcement of the arbitration agreement in view of the rule laid in Island Textile Mills Ltd., Karachi Vs. V/O Technoexpert and another (1979 CLC 307) and Messrs Haji Muhammad Ibrahim and sons and others Vs. Karachi Municipal Corporation and others (PLD 1960 (W.P.) Karachi 916). Regarding the objection that the arbitrator was Secretary to the Government, the objection is not well-founded. The parties to the agreement voluntarily executed the same and accepted the Secretary as their arbitrator. There is no reason why the Secretary should not take an independent decision during proceedings by him as a sole arbitrator where he is expected to proceed in accordance with law. Be that as it may, the objections cannot sustain at this stage as an independent remedy would available to the appellant for revocation of authority of the arbitrator or substitution of arbitrator, provided in the 'course of proceedings any misconduct is pointed out. If in the course of arbitration proceedings, the appellant observes any influence over the arbitrator or notices impartial attitude or any misconduct is observed in the proceedings, the appellant would be entitled to apply for removal of the arbitrator and for substitution of a new ore by virtue of provisions of Sections 5 and 11 of the Arbitration Act. Nevertheless, proceedings in the suit cannot be continued nor stay of proceedings can be refused on any assumption that the arbitrator would not act fairly or impartially. The learned Civil Judge took into consideration all these facts and concluded that there was a valid and subsisting arbitration agreement between the coptesting parties, the issue raised in the suit was covered by the arbitration clause and that there was no valid reason for not referring the matter to the arbitration and on this analysis he stayed the proceedings. In doing so, the learned Civil Judge did not commit any jurisdictional error or irregularity, hence no ground is made out for taking a contra view.
14. As regard the application for temporary injunction, the appellant was not entitled to any injunctive relief. It has been repeatedly observed that the bank guarantees stipulating encashment, without reference to the contracting parties or without waiting for any decision or judgment against the person furnishing bank guarantee, shall be readily encashed and banks are legally obliged to encash the same on raising of demand by the party in whose favour the guarantee was furnished, without reference to the party who provided the bank guarantee. The plea that the bank guarantee would be governed and regulated by primary contract and its encashment would be made on the decision in affirmative that the contracting party had breached the contract, is not well-founded. The bank guarantee furnished by the appellant contained definite undertaking creating obligation against the bank to pay the amount irrespective of any dispute which might arise between the parties regarding breach of the contract. Such like guarantees being independent contracts, have to be kept apart from the main contracts and have to be enforced as such without reference to the person furnishing the bank guarantee. In the trade circle, the parties entered into contracts by accepting bank guarantees on assumption that the same would he seldom refused and that the party entitled to its encashment would not face any hurdle if a, situation arises for encashment of the bank guarantees. Any attempt to obstruct normal encashment of these guarantees, would shake the confidence of the business investors in the banking instruments which will otherwise not be in the public interest. The guarantees of the bank are meant for smooth performance and all efforts to delay or restrain encashment of these guarantees are to be discouraged. Keeping in view the rule laid in Messrs National Construction Limited Vs. Aiwan-e-Iqbal etc. (PLD 1994 SC 311), the appellant was not entitled to the grant of injunctive relief against encashment of bank guarantee. The restraining order against encashment of bank guarantee could not be granted for another reason. For seeking temporary injunction one has to prove existing of prima facie case, balance of convenience and irreparable loss. The element of irreparable loss is definitely missing in this case as the dispute pertains to monetary issues. The encashment of bank guarantee for a definite sum cannot be claimed to be a source of irreparable loss to the petitioner, more so, when the terms of the guarantee in itself provide for forthwith encashment, on the presentation of demand for encashment without reference to the party providing such guarantee. The learned Civil Judge, therefore, did not offend any rule of law by refusing to issue temporary injunction to restrain encashment of the bank guarantee.
15. Keeping in view the circumstances and legal position noted supra, I do not find any ground for interference in the impugned order. This appeal, therefore, being devoid of merits is dismissed.