Arbitration Clauses cannot be misused to deny access to Judicial Remedies, particularly when Non-Signatory Parties are Involved --- Islamabad High Court, Islamabad
Islamabad 06-02-2025: The Islamabad High Court (IHC) has ruled in favor of PEB Steel Alliance Limited by overturning a lower Court’s decision to stay proceedings in a contractual dispute against ERRA, PERRA, and joint venture partners A&ACC & Buildcore. The decision, delivered by Mr. Justice Miangul Hassan Aurangzeb and Ms. Justice Saman Rafat Imtiaz, emphasizes that arbitration clauses cannot be misused to deny access to judicial remedies, particularly when non-signatory parties are involved.
The dispute stems from a 2008 contract between the Earthquake Reconstruction & Rehabilitation Authority (ERRA) and PEB Steel Alliance Limited, a Bangladeshi company, for the construction of 124 earthquake-resistant school buildings in Khyber Pakhtunkhwa. PEB, in a joint venture (JV) with A&ACC & Buildcore, secured the contract for $3.99 million.
PEB later alleged financial irregularities, claiming that payments meant for them were wrongfully deposited into the JV’s local bank account, which only A&ACC and Buildcore could access. Among its grievances were:
- $423,469 should have been paid via Letter of Credit (L/C) in Bangladesh but was instead deposited in a Pakistani bank account.
- $291,106 deducted in withholding tax was allegedly wrongful as the payment should have been tax-exempt.
- Non-payment of Rs. 3.74 million for unused material and Rs. 5.85 million for warehouse expenses.
When PEB’s requests for dispute resolution were ignored, the company filed a civil suit in the Islamabad Civil Court in February 2018, seeking damages from ERRA, PERRA, A&ACC, and Buildcore.
Following the lawsuit, the A&ACC & Buildcore (PEB’s JV partners) invoked an arbitration clause in the JV agreement and sought to stay the suit under Section 34 of the Arbitration Act, 1940. The ERRA & PERRA filed an application under Order VII, Rule 11 of the Code of Civil Procedure, 1908, seeking rejection of the suit, arguing that there was no direct contractual relationship with PEB. The Islamabad Civil Court initially ruled in favor of the JV partners, allowing a stay on proceedings while rejecting ERRA & PERRA’s plea to dismiss the suit.
Dissatisfied with the stay order, PEB filed an appeal before the Islamabad High Court (IHC) [F.A.O. No. 108/2019], while ERRA & PERRA also filed a Civil Revision Petition [C.R. No. 136/2019] challenging the lower Court’s refusal to dismiss the suit.
After reviewing contractual documents, arbitration clauses, and financial transactions, the Islamabad High Court (IHC) ruled in favor of PEB, making the following determinations:
The Court set aside the stay order, holding that arbitration clauses do not automatically oust Court jurisdiction. ERRA and PERRA were not signatories to the arbitration agreement, meaning they could not compel arbitration. Eckhardt & Co. Marine GmbH Vs. Muhammad Hanif (PLD 1993 SC 42). Courts have discretion to refuse a stay even if an arbitration clause exists.
The Court noted that arbitration agreements should not be misused to frustrate litigation, especially when multiple parties outside the arbitration agreement are involved. Tradesmen International (Pvt.) Ltd. Vs. Federation of Pakistan (2005 MLD 541). Arbitration clauses do not bar judicial jurisdiction when all claims do not fall under arbitration.
The Islamabad High Court (IHC) ruled that PEB’s claims against its JV partners and ERRA/PERRA were intertwined. If arbitration were forced, the same dispute would be litigated in two different forums, leading to contradictory outcomes. National Development Leasing Corporation Ltd. Vs. Chairman, Banking Tribunal / Court (2000 YLR 1769). Courts should avoid bifurcating proceedings when multiple claims exist.
The Court allowed PEB’appeal [F.A.O. No. 108/2019]. The stay order on proceedings is lifted. The suit will proceed in the Islamabad Civil Court. ERRA & PERRA’s Revision Petition [C.R. No. 136/2019] is DISMISSED. Arbitration cannot be imposed on PEB for claims involving non-signatory parties.
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