2011 C L C 323
[Karachi]
B e f o re Ms. Rukhsana Ahmed, J
ARABTEC PAKISTAN (PVT.) LTD. Through Chief Executive---Plaintiff
Versus
ENSHAANLC DEVELOPMENTS (PVT.) LTD. through its Chief Executive and another---
Defendants
Suit No. 1354 and C.M.As. Nos. 8816, 10628, 10630 of 2009, decided on 13th October, 2010.
Arbitration Act (X of 1940)---
----Ss. 20 & 41---Civil Procedure Code (V of 1908), O. XXXIX, Rr. 1 & 2---Arbitration
agreement, filing of---Dispute between parties relating to construction contract---Application
by plaintiff to restrain defendant from encashing Bank Guarantee---Plaintiff's plea that such
guarantee was conditional upon default of contractual obligations by plaintiff; that defendant
had stopped construction for redesigning project, thus. plaintiff stood released from
performance and that what was owed to plaintiff by defendant was more than total value of
such Guarantee---Validity---Question involved was as to whether any payment was due to
plaintiff or whether defendant had paid to plaintiff more than what was due---Such question
could successfully be decided by Arbitrator appointed by court with consent of both parties---
High Court accepted such application by observing that such Guarantee would remain intact
till making of award by Arbitrator.
AIR 1988 Dehli 207; PLD 1996 Kar. 183; 2002 SCMR 1781; 2008 CLC 726; PLD 1976 Kar.
644; PLD 2003 SC 191; 1993 CLC 1926; 1993 MLD 1234 and PLD 1994 SC 311 ref.
Zahid F. Ebrahim for Plaintiff.
Munir A. Malik for Defendant No. 1.
Ijaz Ahmed for Defendant No. 2.
ORDER
Ms. RUKHSANA AHMED, J.---Through this common order the main application along with
all the listed applications except CMA. No.10630 of 2009 are being disposed off. However,
CMA. No.10630 of 2009 is not being pressed by the defendant No.1 and hence the same is
dismissed as not pressed.
The briefly the facts of the case are that Plaintiff who is a private limited company and is
engaged in the business of construction is subsidiary of the highly reputed UAE based
construction contract, Arabtec LLC which is considered as the leader in the construction industry
in the Middle East has filed present suit under section 20 R/W section 41 of the Arbitration Act,
1940. The defendant No.1 is also a private limited company and recently developing Karachi
Financial Towers Project. On 17-12-2007 the plaintiff and defendant No.1 entered into a "Letter
of Agreement" LOA, for construction of the Karachi Financial Towers- Project. As per clause of
the said Agreement the plaintiff arranged for two bank guarantees:--
(1) Performance Guarantee dated 20-2-2008 and;
(2) Advance Payment Guarantee dated 10-10-2007 favoring defendant No.1 drawn by
defendant No. 2 Dubai Islamic Bank Pakistan Limited, Karachi.
According to clause 5 of the said "LOA" WHEREIN it is provided that any dispute arising out of
the agreement would be first settled amicably and within 30 days thereafter if not possible the
matter shall be referred to the Arbitration of Sole Arbitrator to be nominated with the consent of
the parties and further that decision of the Arbitrator shall take place at Karachi and shall be
precondition to any action at law and such Arbitration would be governed by the Arbitration Act,
1940. After execution of this Agreement both plaintiff and the defendant No.1 entered into
"Enabling Works Agreement", EWA dated 17-1-2008, wherein by clause 5.2 it was clearly
provided that LOA shall have priority over all other contract documents.
At this stage due to economic downturn in 2008 the defendant No. 1 was struggling to keep the
project alive with limited sources but the defendant No.1 not only instructed the plaintiff to
suspend works vide Notice 15-10-2008 issued through the Project Manager, but also sought
complete re-design of the KFT Project. However, the employer was unable to respond positively
'to the plaintiff's notice seeking permission to resume suspended works and unpaid invoices of
the plaintiff which accumulated to an alarming proportion. On 12-3-2009 the Employer admitted
that KFT Project was in financial difficulties and thus an indefinite HOLD on the Enabling
Works Contract was sought. According to the plaintiff there was no provision/clause regarding
HOLD and thus it was agreed by the plaintiff that parties will move towards an amicable
termination of Enabling Works Agreement. Accordingly on 16-3-2009 a 14 day Termination
Notice in pursuance of clause 69.1 of the Conditions of Contract was issued by the plaintiff.
Instead of responding to the said notice or meeting the defendant No.1 issued a unilateral notice
of Termination of Letter of Agreement vide letter dated 18-3-2009 which was duly responded by
the plaintiff vide correspondence dated 21-3-2009 and the defendant No.1 in response thereto has
only reiterated its position of forcing the plaintiff to continue expending resources without
payment of long outstanding invoices further the defendant No.1 also engaged the plaintiff in
discussion for amicable settlement.
However, after a meeting held on 27-3-2009 the Parties signed a letter on 31-3-2009 whereby it
was inter alia provided that:
(i) Without prejudice both parties withdraw all adverse notices
(ii) Both parties to commence negotiations for amicable settlement.
(iii) Both parties acknowledge that efforts for amicable will not be a waiver of any right
or obligation under the LOA or the Enabling Works Agreement.
(iv) if parties fail to amicably settle they may take such action as they may be advised in
accordance with law.
However, according to plaintiff he took every step to get the dispute resolved but the defendant
No.1 has failed to response positively and is trying to linger on the matter to avoid its
outstanding payment obligations. Looking to such circumstances the plaintiff was compelled to
reinstate its Termination Notice vide letter dated 13-5-2009. The defendant No.1 vide letter dated
20-5-2009 passed on its contractual burden on one of its shareholders with whom there was no
privity of contract. Nevertheless, on the same date the defendant No.1 issued another letter
regarding finalizing the sums due to the plaintiff and in response to such letter the plaintiff vide
letter dated 21-5-2009 plaintiff welcomed the same but informed that both the parties must
attempt to meet the deadline of end of May 2009, but according to the plaintiff the said deadline
ended and only defendant No.1 purchased dewatering equipment on site from plaintiff after the
meeting held on 3-6-2009.
According to the plaintiff on 8-6-2009 NLC one of the share holder of the defendant No.1
informed the plaintiff that in terms of the agreement dated 4-6-2009 the defendant No.1 took
over the site and equipment on 10-6-2009. The equipment sold by the plaintiff to the defendant
No.1 under the agreement dated 4-6-2009 was to be paid vide post dated cheques. However,
another correspondence received by the plaintiff on 9-9-2009 from the defendant No.1 whereby
defendant No.1 admitted shortage of funds and restrained the plaintiff from encashment of the
said cheques.
Yet another correspondence received by the plaintiff from the defendant No.1 whereby defendant
No.1 requested for extension of aforesaid Performance Guarantee. In response to such
correspondence plaintiff vide letter dated 15-9-2009 asked from the defendant No.1 that under
what provision such demand is being made especially when Enabling Works Contract had been
terminated on 13-5-2009 and Site has been taken over by the defendant No.1 on 10-6-2009 and
the plaintiff also requested for return of Bonds and the Guarantees. However, plaintiff also
addressed a correspondence to the defendant No.2 Bank informing all the situation arose
between the plaintiff and the defendant No.1, but on 24-9-2009 the defendant No. 2 informed
plaintiff that the defendant No.1 has lodged a claim on the Performance Guarantee. It was further
submitted that Project Manager of the defendant No.1 himself approved and verified the
plaintiff's invoices in total sum of USD 9.7 millions which is in excess of the sums guaranteed.
Nevertheless, according to the plaintiff he claims much larger amount against the defendant No.1
along with interests, costs and loss of profits. Plaintiff further asserted that plaintiff has not been
paid its dues and as per defendant No.1 own Project Manager letter dated 9-1-2009 which though
only shows invoices 11 to 16 but the same are also in the sum of USD 9.7 millions, whereas,
defendant No.1 is bent upon to encash Performance and Advance Payment Guarantees.
Therefore, plaintiff through the instant suit has prayed as under:--
PRAYER
(1) Permit the filing of the arbitration agreement as provided in the LOA in this Hon'ble
Court.
(2) Refer the dispute between the plaintiff and the defendant No.1 as raised in notices dated
16-3-2009, 18-3-2009, 14-5-2009 and 15-9-2009 to arbitration to be conducted at
Karachi by an arbitrator to be appointed by the mutual consent of the parties or as the
Hon'ble Court may direct.
(3) Till the making of the Award by the Arbitrator, restrain the Defendants from either
directly or indirectly encashing the Performance Guarantee or the Advance Payment
Guarantee in any manner whatsoever.
(4) To grant any other relief(s) which this Hon'ble Court may deem just and equitable in the
circumstances.
On the other hand, learned counsel for the defendant No.1 argued that plaintiff and defendant
No.1 entered into Letter of Agreement for construction of Karachi Financial Towers Project. The
total contract value was USD 163,775,640 and under clause 16, the plaintiff was required to
arrange two irrevocable Bank Guarantees in favour of defendant No.1. However, after the LOA
the parties entered into Enabling Works Agreement dated 17-1-2008 and according to the
defendant No.1 the plaintiff has caused severe delay in starting the work as the plaintiff was
under obligation to price the Issued for Construction (IFC) drawings and the Bill of Quantity in a
manner enabling the formalization of the main contract, but the plaintiff with mala fide intentions
only partly submitted concrete works BOQ's. He further argued that plaintiff significantly
increased the costs of concrete works contrary to the terms of WA and as required by the
approved IFC drawings. Further the value of engineering confirmed that the initial workings of
the plaintiff were not workable and when the defendant No.1 asked the plaintiff upon which the
plaintiff submitted costs estimate by increasing the project cost. Though the defendant No.1
several times asked the plaintiff to submit cost break up but he failed to respond to the defendant
No.1 and such attitude of the plaintiff is clear defiance of clause 3 of the LOA. Learned counsel
for the defendant No.1 further argued that according to the latest submission made by the
plaintiff, the costs of the project were again increased to more than 61% of the agreed costs of
LOA. It was further argued that performance of the plaintiff's sub-contractors were below the
required standards and even safety and security measures have not been followed by the plaintiff,
therefore, defendant No.1 having no other option but to request Messrs Projacs to suspend the
works as re-evaluation was required of the structural design of the project had been necessitated
because of the plaintiff's departure from the basic design criteria which had resulted in excessive
project costs contrary to clause 3 of the LOA. Learned counsel further argued that defendant
No.1 under the LOA continued to make the monthly payments to the plaintiff, whereas, upon
assessment and reconciliation of the actual work done by the plaintiff at the site by Messrs
Projacs (Project Manager) and it was found that work is not being done by the plaintiff in
accordance with the required standards as provided under LOA. However, learned counsel for
the defendant No.1 has asserted that according to clause 17 if at the time of reconciliation, the
actual works done are in variation of more than +/- 5% from the expected progress of work, the
payment schedule was to be changed/adjusted accordingly. When work was assessed by the
Project Manager it transpired that variance of actual work was -13% from the expected progress
of work. Further that the design .criteria submitted by the plaintiff also did not match with the
required design criteria under LOA which caused colossal loss to defendant No. 1. He further
argued that the plaintiff has concealed such information from the Court and in fact has relied
upon a baseless claim of invoices which have not yet been assessed by the Project Manager. He
further argued that plaintiff though was repeatedly required by Project Manager to submit
adjusted cash flows and catch up measure but no response was shown by the plaintiff. Further
that on 12-3-2009 a meeting was held by the defendant No.1 in the presence of the Project
Manager as well as the plaintiff wherein violations by the plaintiff were discussed and it was
agreed that the matter would be amicably resolved, but the plaintiff negated the said intent by
sending a unilateral 14 days termination notice to the defendant No.1 on 16-3-2009, therefore,
the defendant No.1 was compelled to terminate LOA as said project had become commercially
non-viable due to the exorbitant project costs being charged by the plaintiff.
In order to resolve the dispute, the defendant No.1 again sent a letter dated 21-3-2009 by
reminding Plaintiff his contractual obligations and in response to which the plaintiff met with the
representatives of the defendant No.1 on 27-3-2009 and the defendant No.1 with all good
intentions conceded to the request of the Plaintiff to initiate the settlement process once again
and accordingly a letter was signed by both the parties on 31-3-2009. Nevertheless, again the
plaintiff on 13-5-2009 sent another termination notice to the defendant No.1, which shows that
the plaintiff does not want to resolve the matter amicably and on the other hand is charging
excessive and undue amounts refused to agree to the fair assessment of the Project Manager and
translated such mala fide intention in the form of above said letter of termination.
However, as regards the Performance Guarantee, learned counsel for the defendant No.1 argued
that the same is irrevocable and unconditional as per the LOA and is thus separate contract. He
stated that invoices referred to by the plaintiff amounting to USD 9.7 millions are not payable as
they are not assessed or confirmed by the Project Manager. He therefore, prayed that matter may
please be referred to the sole Arbitrator in accordance with clause 5 of LOA but simultaneously
he also prayed to allow encashment of Performance and Advance Payment Guarantees.
The learned counsel for the defendant No. 2 who is but a performa party has contended that the
bank guarantees are not irrevocable and the bank is not a party to the arbitration proceedings, and
has asked the court to specify the amount at which the adjustment has to be made by the
defendant No.2/bank when the order is being passed.
I have heard the counsel at length and have perused the material placed on record, at the very
onset this order will be disposing of the main application filed under section 20 r/w section 41 of
the Arbitration Act, 1940 which is granted and as the learned advocates had jointly suggested for
the appointment of Arbitrator the name of Retd. Justice Salman Talibuddin, the Court appoints
him as Sole Arbitrator. The Arbitrator's fee will be determined by the Arbitrator at the start of the
proceedings before him.
While starting his arguments the advocate of the defendant No.1 did not press CMA 10630 of
2009 which is an application for the encashment of the Performance Guarantee by defendant
No.1 and the same is disposed off as not pressed.
CMA 10628 of 2009 is another application filed by the defendant No. 1 where in it has been
prayed for encashment of the Advance Payment Guarantee issued by defendant No. 2 in favor of
defendant No. 1 as the same is alleged to be unconditional and irrevocable guarantee.
To this application, counter affidavit has been filed by the plaintiff wherein it has been
specifically denied that the Advance Payment Guarantee is unconditional, and the conditions for
the recovery of the advance payment are stipulated in clause 16 of the LOA, which states that the
"Advance Payments are to be recovered over the whole project programme starting with the first
monthly payment." And it is the contention of the plaintiff that a portion of the advance Payment
has already been recovered in the monthly payments and the conditions governing the recovery
of the balance portion in the case where the contract has been terminated are specified by sub-
clause 65.8 of the general conditions of the contract dealing with the "payment if contract
terminated".
The balance amount if any should be determined by the engineer and if the recovery if` any left
after deducting what is due to the contractor, should be made from the final payment.
In the present case the final payment has long been with held by the defendant No. 1 and is in
fact much more than the advance received by the plaintiff. It is further contended that the exact
final amount can only be determined after all the claims of the contractors have been presented
and considered in the proposed arbitration. The penultimate paragraph of the guarantee has
additional conditions specified such that the original full value of the guarantee may not be
called in when portions there off have already been recovered by the defendant No.1 via the
contractual mechanism of monthly payments. A request to the contrary by the defendant No. 1 is
not only misleading but tantamount to being an additional fraudulent act.
It has been denied that the plaintiff had acted with mala fide and obtained the order dated 25-9-
2009 without disclosing true facts. The guarantees are issued under the specific provision of the
agreements entered into between the parties and the same cannot be read or treated as
independent of such covenants. Further it has been specifically denied that the defendant No. 1
has continued to make monthly payments. After the initial 2 two monthly payments and partial
payment in March 2008, which was made after a delay of 4 months, the defendant No.1 had
actually stopped paying even before the first revision of progress of work of the project, even
though the plaintiff was working up to the required standards and not in contravention of the
schedule. The standard of work was witnessed by the consulting engineers on site and attested by
the consultant engineer hired by the defendant No. 1. Plaintiff has not suppressed any material
information from the court and the allegation to the contrary by the defendant No. 1 is denied.
The invoices cited by the plaintiff were not baseless as alleged and not assessed by the Project
Manager was false and belied by the record and neither had the defendant No. 1 made enormous
extra payments to the plaintiff, and at no point did the plaintiff have any responsibility associated
with the design of works. The Design Criteria as set out in Appendix C of the LOA was agreed to
form the basis for the prices in the LOA and it was the responsibility of the defendant No.1 to
ensure CPG'S Design was in accordance with the Design Criteria and due to this very fact the
same led to increase in project cost which is a matter of record. The responsibility of this
increase did not lie with the plaintiff but on CPG, the firm hired by the defendant No. 1.
Lastly it is submitted that adjusted cash flows and catch up measure sought by the Project
Manager were duly complied and the same is established by letters dated 10-6-2008, 11-8-2008.
In view of the suspension dated 15-10-2008, termination of the enabling works on 10-5-2009
taking over the project site by the defendant No. 1 on 10-6-2009 the plaintiff stood released from
performance and as such there was no basis for the renewal of the said guarantee and there was
no contractual provision on which an extension could have been justified. The reliance on the
termination of the EWA is entirely lawful as the terms thereof were made to govern the
performance guarantee. It was further being specifically denied that the plaintiff had not
complied with PROJACS request for the adjusted cash flow and catch up measures. The plaintiff
invoices were denied to be at variance with its contractual rights or otherwise inflated and it was
further denied that the invoices were not payable and were not assessed or confirmed by the
project Manager. The reference' to the adjusted cash flow, catch up measures and revised cash
flow were entirely misconceived as request of the Project Manager on such counts were duly
complied with to its full satisfaction by the plaintiff in fact it was after a detailed reconciliation in
November 2008 that the Project Manager verified and confirmed the invoices for payment.
The plaintiff retains their right to claim funds in excess of the approved reconciled amounts as
these were done upto a certain point and without due consideration to additional claims being
prepared. It is further stated that in wilful violation of its obligations, the defendant No.1 first
delayed and then resiled from its commitment to honour the same. The contentions of the
defendant No.1 have only validated the lawful apprehension of the plaintiff with regard to the
defendant No. 1's mala fide and fraudulent intentions regarding the guarantees. The defendant
No.1 owes the plaintiff, sums in excess of USD 9.7 millions as duly certified and approved by its
own Project Manager and in such circumstances any attempt to obtain payment under either of
the guarantees would not only be fraudulent but cause irretrievable harm and injustice to the
plaintiff. The balance of convenience weighs clearly on the side of the plaintiff and not the
defendant No. 1.
The defendant No.1 has filed their affidavit in rejoinder of one Naveed Jilani being the
authorized person and they have submitted that the plaintiff had already received the
consideration of dewatering equipment and denied having ever threatened the plaintiff and
further submitted that they were within their legal rights to demand extension of the guarantees.
The plaintiff's rigid attitude and non-performance of the terms of LOA and EWA, that defendant
No.1 was forced to exercise its lawful right for encashment of the guarantees. As to the invoices
being unpaid by 15 months was due to the fact that the same have neither been verified or
confirmed by the Project Manager and the performance of the plaintiff and its delay in work are
clearly identifiable from the correspondence of the Project Manager. The defendant No.1 did not
agree to the return of the performance guarantee as part of the settlement, in fact till the final
settlement it was agreed that the Guarantees will be extended in case it expires during the
negotiations. They have further stated that the invoices raised by the plaintiff are not indicative
of the actual work undertaken by the plaintiff as the appendix B to the LOA includes a pre-
agreed monthly payment schedule spreading out the entire costs of the Project and to avoid
delays it was agreed under clause 17 of the LOA that defendant No. 1 would continue to make the
pre-agreed monthly payments notwithstanding the value of the actual work carried out by the
plaintiff and these payments would then be reconciled after every quarter with the actual value of
the works..
It was further specifically denied that USD 9.7 millions worth of invoices have been verified by
the Project Manager. The invoices attached were not the final approved amounts payable to the
plaintiff as the same did not reflect the actual earned value of works by the plaintiff. All the
invoices included "preliminaries" which were still under negotiations and had not been finally
approved by the Project Manager. Therefore without prejudice to the fundamental contention that
the guarantees are encashable without any reference to the plaintiff, it is pertinent to mention
here that the actual works earned value upto December 2008 of the plaintiff as assessed by the
Project Manager is USD 6,795,656.00 whereas defendant No.1 has already made payments of
Rs.658,388,502.00 (far in excess to the earned value by the plaintiff). Moreover out of the
advance payment of Rs.503,907,782 extended to the plaintiff, the defendant No.1 has only
deducted Rs.31,115,688 whereas Rs.472,792,094 out of the total advance payment is still
outstanding, with the plaintiff thus there is no payment due to the plaintiff from defendant No.1.
In fact it is stated that the plaintiff has received payments in excess of actual works done and as
such the said amount is payable by the plaintiff to defendant No.1.
Defendant No.1 has prayed for this Court to set aside the order dated 25-9-2009 passed in CMA.
No.8816 of 2009 in the instant suit or vary such order to allow the defendant No.1 to encash the
advance payment guarantee No.98GTEP07283002 issued by the defendant No.2 in favour of
defendant No.1. The said guarantee is placed on page 39 of the pleadings and is not
unconditional and irrevocable as alleged. On perusal of the said guarantee a sum of Pak
Rs.503,907,782.00 (Pak Rs. Five Hundred Three Millions, Nine Hundred Seven Thousands,
Seven Hundred Eighty Two Only) was executed for the advance payment of an equal amount
being 5 PCT of the contract value for the above mentioned works. It came to effect as when the
amount of Rs.397,907,782.00 was received by Messrs Arabtec Pakistan (Pvt.) Limited, the
plaintiff in their account No. 009-0025681001 at the Bank's Clifton Branch at Karachi. The
validity of the Guarantee was until 15th September, 2010 whereupon the same would become
null and void whether or not returned to the Bank. Any claims hereunder should have been
submitted to the Bank in writing, within the business hours stating that Messrs Arabtec Pakistan
(Pvt.) Limited (Plaintiff) had failed to fulfil their contractual obligation under the said contract
and should have been received by the Bank within the validity of the Guarantee. The Bank would
not admit any claims whatsoever after the date of validity. However, as and when the advance
payment was recovered against progress payments then the amount of the Guarantee would
automatically be reduced to the extent of such recovery based on the progress payment certificate
evidencing recovery of advance payment. Lastly the Guarantee would be governed and
construed in all respects in accordance with the laws of Pakistan.
After hearing the arguments advanced by both the learned advocates who have also supported
their arguments with case laws. The plaintiff has fortified his arguments with the following:--
(1) AIR 1988 DEHLI 207. (Which is identical on facts of the present case).
(2) PLD 1996 Karachi 183.
(3) 2002 SCMR 1781.
(4) 2008 CLC 726.
(5) PLD 1976 Karachi 644.
(6) PLD 2003 SC 191.
(7) 1993 CLC 1926.
(8) 1993 MLD 1234.
(9) PLD 1994 SC 311.
The main contention of plaintiff has been that irretrievable injustice will be metted to plaintiff if
this Court allows the encashment of Bank Guarantee as they have continued to suffer due to the
internal level of confusion and disarray within the defendant No.1 and as admitted by themselves
that their finance were hardly envious and were in dire straits to raise funds.
The fact being that what was owed to plaintiff by defendant No.1 was more than the total value of
the Bank Guarantees.
The arguments of the plaintiff are further summarized as under:--
(1) The Language of Bank Guarantees are both conditional upon default of contractual
obligations.
(2) Admittedly work had been stopped by defendant No.1 for re-design Project.
(3) Reconciled and verified invoices payable to the plaintiff were far in excess to the Bank
Guarantee's.
(4) The conditions of calling the Bank Guarantees under clause 10.3 of General Conditions of
Contract has not been done by defendant No.1.
(5) Defendant No.1 agreed in writing for return of original Bank Guarantees to plaintiff vide
letter dated 31-3-2009 available at page 113 of the plaint. Further the Amicable
Settlement Referred to in email which is available at Page 939.
(6) Case of plaintiff is distinguishable.
The main contention raised by both advocates is centered as to whether payment is due to the
plaintiff or whether the defendant No. 1 has paid to plaintiff more than what is due. This would at
its best be successfully decided by the Arbitrator meanwhile, the Guarantees would remain intact
till the award is given on the Arbitration proceedings.
Therefore, the present application wherein the defendant No.1 has prayed for encashment of the
advance payment guarantee or in the alternative encashment of the advance payment guarantee
to the extent of unverified and undisputed invoices is dismissed. Lastly the application for
restraining the encashment of the Guarantees filed by the plaintiff in which a stay had been
already granted is disposed of accordingly. Suit is also disposed of.
S.A.K./A-121/K Order accordingly.
;
