2016 PLP 136 (CLCN)

Present Regular First Appeal has been filed against the order dated 19.02.2011 passed by the learned Civil Judge Ist Class, Lahore whereby the application under section 31(2), section 32 of Arbitration Act, 1940 read with Order VII, Rule 11 and Order II, Rule 2, C.P.C. for rejection of plaint was accepted.

2. Facts necessary for the disposal of the present appeal are that appellant entered into a contract with the respondents vide agreement dated 13.02.1991 for construction of overhead bridge at Chichawatni District Sahiwal. During the execution of contract some dispute erupted between the parties therefore appellant filed application under Section 20 of the Arbitration Act, 1940 before Civil Judge, Lahore. The said application was allowed and the matter was referred to Joint Arbitrators. The arbitrator gave award on 23.02.1997 whereby held that appellant is entitled for payment amounting to Rs.34,964,861/-. An application was filed to make the award rule of court, however, the civil court set aside the award vide order dated 27.06.2002. Appellant preferred an appeal before this court F.A.O. No.495/2002 which was allowed by this Court. However, the amount of award was reduced to Rs.31,560,861/- vide order dated 08.12.2005. Respondents challenge the order dated 08.12.2005 before the Hon'ble Supreme Court in C.A. No.190/2006. The said C.P. was allowed and the award was set aside and the matter was remanded to the Civil Court to decide the application under Section 20 of the Arbitration Act, 1940 afresh.

3. On 22.08.1997, after the pronouncement of the award in favour of the appellant by the Arbitrators, respondents unilaterally rescinded the contract and forfeited the security deposit as well as retention money. This termination gave fresh cause of action to the appellant and therefore, the appellant filed a fresh suit for declaration and recovery of Rs.5,731,318/- against the respondents. The said suit was contested by the respondent by filing written statement. The learned Civil Court on the basis of divergent pleadings of the parties, following issues were framed on 10.02.1999:- ISSUES

1. Whether the suit is not maintainable in its present form? OPD

2. Whether the plaintiff has not come to the Court with clean hands? OPD

3. Whether the plaintiff has no locus standi to file the suit? OPD

4. Whether the plaintiff has no cause of action against the defendants and the plaint is liable to be rejected? OPD

5. Whether the suit is time barred? OPD

6. Whether this Court has no jurisdiction to try the suit and the same is liable to be dismissed? OPD

7. Whether after acceptance of tender the plaintiff motilized its staff and posted it at site but the site was not handed over to the plaintiff until 14.09.1991? OPD

8. Whether the work at site remained held up due to non-supply of revised design of piles for main bridge from 24.02.1991 to 30.07.1992? OPP

9. Whether the plaintiff has been complaining to the defendants about over changing design/drawings by the defendants, resulting in delay in completion of project? OPP

10. Whether the defendants have been giving extension of time from time to time to the plaintiff for the completion of project in its application detailing reasons for delay? OPP

11. Whether the defendants failed to honour their contractual liabilities with respect to supply of complete design/drawings and running payments to the plaintiff? OPP

12. Whether the action of defendant No.3 declaring the plaintiff as defaulter under clause 2 of the agreement vide its letter dated 7.8.1997 is illegal? OPP

13. Whether the recision of contract by the defendants and the forfeiture of security vide letter dated 22.8.1997 is illegal, arbitrary, mala fide and of no legal effect? OPP

14. Whether apart from legitimate dues of plaintiff, the defendants have been illegally deducting the amounts from the running bills of plaintiff and whether the plaintiff had to suffer losses due to inordinate delay in the completion of works which was mainly due to defendants and it had also to keep its staff at the site and had to pay them without there being any work for considerable time? OPP

15. Whether the plaintiff is entitled to recover the amounts detailed in para 27 of the plaint from the defendants? OPP

16. Relief.

4. Both the parties were directed to file list of witnesses within seven days and matter was adjourned for recording of appellant/ plaintiff's evidence. On 24.06.2010 respondents filed an application under section 31(2), section 32 of Arbitration Act, 1940 read with Order VII, Rule 11 and Order II, Rule 2, C.P.C. for rejection/dismissal of plaint/suit. The said application was contested by the appellant by filing reply to the application, however the learned trial court after hearing arguments dismissed the suit vide impugned order dated 19.02.2011.

5. Learned counsel for the appellant submits that while passing the impugned order learned Civil Judge has failed to consider the relevant section of the Arbitration Act, 1940. Submits that under section 34 of the Arbitration Act, 1940 only proceeding can be stayed and that too if the application is filed before taking any step in the suit. Whereas in the present case not only written statement was filed by the respondents but also issues were framed when the respondents moved the application for rejection of plaint. Submits that bar contained under Order II, Rule 2, C.P.C. was not applicable to the present case as every breach gives fresh cause of action to the appellant. In support of his contentions learned counsel has relied upon (PLD 2006 Supreme Court 196), Muhammad Farooq v. Nazir Ahmad and others (2000 MLD 33) Habib and Sons Government Contractors through Habib Khan v. Government of N.W.F.P through Collector, Tank and 8 others (2000 MLD 1537) Messrs Gulf Pacific Fetilizer, Claifornia, U.S.A. through Attorney v. Messrs Ali Akbar Enterprises and 2 others, (PLD 2002 Karachi 420) Itehad Cargo Services, National Hotel, Lahore through Managing Partner and 2 others v. Rana Rafaqat Ali and 3 others, (2008 CLC 1476) Surgeo Munawar Ali v. Health Vision and others, (PLD 2013 Sindh 290) Arabian Sea Enterprises Limited v. Abid Amin Bhatti, (2013 CLD 885) Messrs Sprint Energy (Pvt.) Limited through Advisor v. Ahsaan Ullah and 2 others.

6. On the other hand, learned counsel for the respondents submits that even on termination of the contract, the appellant had no right to file suit for recovery but they were required to issue fresh arbitration proceeding however, they filed recovery suit which is not maintainable as the parties had arbitration agreement. Submits that the order passed by the trial court was in accordance with law.

7. We have heard the arguments of the learned counsel for the parties and have also gone through the record of the case.

8. Learned trial court has rejected the suit of the appellant on the ground that once the dispute between the parties relating to any matter has been referred to arbitration the only remedy open to the party is under Arbitration Act and not to any suit. In this regard learned civil court has relied upon sub-clauses 2 and 4 of the section 31 of the Arbitration Act, 1940, which states:- "(1) Subject to the provisions of this Act, an award may be filed in any Court having jurisdiction in the matter to which the reference relates. (2) Not withstanding anything contained in any other law for the time being inforce and save as otherwise provided in this Act, all questions regarding the validity, effect or existence of any award or an arbitration agreement between the parties to the agreement or person claiming under them shall be decided by the court in which the amount under the agreement has been or may be filed and by no other court". (3) All applications regarding the conduct of arbitration proceedings or otherwise arising out of such proceedings shall be made to the Court where the award has been, or may be, filed, and to no other Court. (4) Not withstanding contained else where in this act or in any other law for time being inforce where in any reference any application under this Act has been made in a court competent to entertain it that court alone shall have jurisdiction over the arbitration proceedings and all subsequent application arising out of the reference and the arbitration proceeding shall be made in that court and in no other court." and section 32 of the Arbitration Act, 1940 states as under:- "Not withstanding any law for time being inforce, no suit shall lie on any ground whatsoever for a decision upon the existence, effect on validity of an arbitration agreement on award be set aside amended modified or in any way effected otherwise than as provided in this Act."

9. Section 31 is with reference to an award whereas section 32 deals with bar to the suit with regard to existence, effect or validity of an arbitration agreement. For the purpose of the present case, the relevant provisions in this regard is section 34 of the Arbitration Act, 1940, which reads as under:- "

34. Power to stay legal proceedings where there is an arbitration agreement.

Where any party to an arbitration agreement or any person claiming under him commences any legal proceedings against any other party to the agreement or any person claiming under him in respect of any matter agreed to be referred, any party to such legal proceedings may, at any time before filing a written statement or taking any other steps in the proceedings, apply to the judicial authority before which the proceedings are pending to stay the proceedings; and if satisfied that there is no sufficient reason why the matter should not be referred in accordance with the arbitration agreement and that the applicant was, at the time when the proceedings were commenced, and still remains, ready and willing to do all things necessary to the proper conduct of the arbitration, such authority may make an order staying the proceedings."

10. The above clause required that when any party to an arbitration agreement commence any legal proceeding against other party of the arbitration agreement, then the other party against whom legal proceedings have been commenced should before taking an other step in the proceeding approached the judicial authority/court for stay of the proceeding under the above section.

11. In the case in hand, respondents have approached the court for rejection of the suit under section 31(2), section 32 of Arbitration Act, 1940 read with Order VII, Rule 11 and Order II, Rule 2, C.P.C. and the Court rejected the suit. Relying upon the above provision of Civil Procedure Code 1908 as well as the Arbitration Act, 1940.

12. It is admitted that there was an arbitration agreement between the parties and as per clause 25-A of the arbitration agreement/contract dated 13.02.1991 in case of dispute between the parties the same were to be referred to the arbitration. The said clause reads as under:- "

25-A. In the event of any disagreement arising out of the contract the matter shall first be referred to the Superintending Engineer for decision who shall after making such enquires as he may deem fit give his decision in writing not later than three months after the reference is made to him. This period for decision of the case by the Superintending Engineer may however, be extended by the Chief Engineer under special conditions according to the circumstances/justifications available in each case. The contractor shall forthwith give effect to the decision of the Superintending Engineer and shall proceed with the work with due diligence whether arbitration is intended or not. If the contractor be dissatisfied with the decision of the Superintending Engineer or if his decision is not forthcoming within the stipulated or extended period/periods and desires arbitration under the Arbitration Clause as hereinafter provided he shall give a notice in writing of such intention within a period of 28 (twenty eight) days of the receipt of the Superintending Engineer's decision, or in case no decision is given, at the end of the period/periods within which the Superintending Engineer was to give his decision. The said notice shall contain the cause of action material facts of the case and relief sought failing which the decision of the Superintending Engineer shall become final, conclusive and binding and the contractor shall be deemed to have forfeited and departed from the claim in excess of that allowed by the Superintending Engineer. No subsequent inflation/increase in the amount of the claim once preferred in the said notice shall be allowed nor shall any other claim in respect of the same work be entertained from the contractor at any later stage. A reference for arbitration shall be made by the contractor in writing not later than three months after completion of the work. Failure to make such a reference within this period shall be deemed that the contractor has waived all claims in respect of any dispute. a) Disputes which may be referred for Arbitration shall be limited to:- i) Any question, difference or objection whatsoever which shall arise in any way connected with or arising out of the contract or/and ii) The meaning of the operation of any part of the contract or/and iii) The rights, duties or liabilities of either party or/and iv) Whether the contract should be terminated or has rights and obligations of the parties as the result of such termination. Provided these matters for which provision has been made in the contract for final and binding decision by the Superintending Engineer or the Executive Engineer shall be excluded from Arbitration. b) The venue of the Arbitration shall be in Punjab. c) In the event of any dispute arising in accordance with the limitation provided in sub-clause (a) of this clause the same shall be referred to the decision of a sole Arbitrator to be appointed by the Chief Engineer Incharge of the work from among the officers of the department not below the rank of Superintending Engineer and other than the Superintending Engineer Incharge of the contract/work. In case of claims preferred for an amount upto Rs.1 (one) lac only, the decision of the sole arbitrator in such cases shall be final and binding on the parties concerned. In case the amount of the claim preferred is over Rs.1(one) lac the dispute shall be referred to the award of the two arbitrators to be appointed from Superintending Engineer of the department other than the Superintending Engineer Incharge of the work, one to be nominated by the Chief Engineer and the other by the Contractor. In the case of the said two Arbitrators not agreeing the case shall be referred to the award of an Umpire who shall be an officer of the department not below the rank of the Chief Engineer to be appointed by the Government in the Administrative Department. The decision of the two arbitrators/Umpire as the case may be shall be final and binding on the parties concerned. Where the matter involved claims for the payment or recover or reduction of money only the amount if any awarded in Arbitration shall be recoverable in respect of the matter so referred."

13. Respondents in the application under section 31(2), section 32 of the said Act did not refer to the above clause of the contract dated 13.02.1991 nor to Section 34 of the Arbitration Act, 1940. Learned Civil Judge also while passing the impugned judgment not only ignored the above clause of the contract dated 13 02.1991 but also the section 34 of the Arbitration Act, 1940 which requires that in case of arbitration agreement proceedings of suit shall be stayed and that too if the application is made "before taking any other step" in the proceeding of the suit.

14. In the present case the application, was moved after filing written statement and framing of issues, which cannot be allowed even to stay of the proceeding of the suit. However, learned Civil Judge rejected the plaint which order cannot be passed in any circumstances.

15. The effect of arbitration clause in the contract is that if a civil suit is filed, the same will be stayed but the suit cannot be rejected. In (2000 MLD 1537) Messrs Gulf Pacific Fertilizer, California, U.S.A. through Attorney v. Messrs Ali Akbar Enterprises and 2 others this Court has held that:- We have considered the submissions made by the learned counsel for the parties, as far as the rejection of the plaint on the ground that the contract contained an arbitration clause is concerned, it is unsustainable. The effect of an arbitration clause in an agreement is that the defendant can claim stay of the proceedings in the suit under section 34 of the Arbitration Act. It appears that the learned trial Court was totally unmindful of the aforesaid provisions."

16. Further the order impugned is also liable to be set aside as the application was filed after taking steps in the suit. Whereas section 34 of the Arbitration Act, 1940 requires that the same be moved before taking any other step. In the case in hand the application was moved under section 31(2), section 32 of the Act after filing written statement and framing of issues. Therefore, the learned trial court should have dismissed the same but the court not only entertained the same but also allowed. In (PLD 2006 (Supreme Court) 196) Muhammad Farooq v. Nazir Ahmad and others the Hon'ble Supreme Court has held as under:- The admitted position is that the appellant/defendant for the first time appeared in the Court on 28th of March, 1998 when the same was adjourned to 17.04.1998 for submission for the written statement and filing power of attorney. The written statement was not filed as such suit was adjourned to 30.04.1998 when the learned Presiding Officer was on leave. The suit was accordingly adjourned to 13.05.1998 yet on the said date written statement was not filed. Learned counsel for the appellant/defendant requested for adjournment to file written statement which was allowed and suit was adjourned to 18.05.1998 but as the Presiding Officer was on leave, therefore the suit was again adjourned to 30.05.1998 when application under section 34 of the Arbitration Act was moved. From the above proceedings in the Court it would be clear that the appellant even after the receipt of notice of the plaint got three clear dates for filing written statement but the application under Section 34 of the Act was moved on the fourth date. Above acts of the appellant on number of dates stated above would show that he intended to participate and defend the suit before the Court. In this process he engaged a counsel and filed adjournment application or required for adjournment on the above dates. We may also observe that test for determining whether an act is a step in the proceedings or not, this Court in the case of Pakistan International Airlines Corporation v. M/s. Pak Saaf Dry Cleaners PLD 1981 SC 553 at page 559 in the last para has observed:-- "As would be seen from above, the mere existence of a clause providing for arbitration does no bar a suit or other legal proceeding in Court. It only entitled a party to have the legal proceedings stayed. In order that a stay may be granted under the provisions of this section, certain conditions must be fulfilled. The party must take the objection and apply for stay proceedings before taking any step, for example, the filing of the written statement, that is, before he placed his cards on the table. The provisions of the section, further imply that the Court should, first of all, examine whether the arbitration clause applies to the dispute, and if it does, whether the nature of the dispute is such that the ends of justice will be better met by the decision of the Court than by that of private forum chosen and agreed upon, and to which the parties had made themselves bound to adhere and adopt in case that type of dispute arose between them. The Legislature has, of course, clearly implied in the language used in the section that the arbitration clause should be respected, but has also made it abundantly clear that the party seeking to avail of the provisions of stay under this section must clarify his position at the earliest possible opportunity, so as to leave no manner of doubt that he wishes to have resort to arbitration proceeding. If he hesitates in this regard, or allows the suit to proceed in any manner, that conduct would indicate that he has abdicated his claim to have the dispute decided under the arbitration clause, and to have thereby forfeited his right to claim stay of the proceedings in the Court." In Para. 3 at page 564 of the above cited decision this Court has observed:- "In my opinion, the true test for determining whether an act is a step in the proceedings is not so much the question as to whether the party sought an adjournment for filing the written statement although of course that would be a satisfactory test in many cases but whether taking into consideration the contents of the application as well as all the surrounding circumstances that led the party to make the application display an unequivocal intention to proceed with the suit, and to give up the right to have the matter disposed of by arbitration. An application of such nature, therefore, should prima facie be construed as a step in the proceedings within the meaning of section 34 and the whole burden should be upon the party to establish why effect should not be given to the prima facie meaning of the application."

17. In the case in hand the application under section 31(2), section 32 of Arbitration Act, 1940 read with Order VII, Rule 11 and Order II, Rule 2, C.P.C. was filed after filing written statement as well as after framing of issues. Therefore, the suit cannot be stayed even in presence of the arbitration clause between the parties.

18. For what has been discussed above, the order dated 19.02.2011 passed by the Civil Judge Ist Class, Lahore is set aside. Resultantly the suit is deemed pending before the learned trial court which will be decided by the court in accordance with law. ZC/J-2/L Appeal accepted.