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The Courts should Honor Arbitration Agreements unless a party has unequivocally demonstrated an intention to abandon Arbitration by taking steps that aid in the Progress of the Suit --- Islamabad High Court, Islamabad

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Islamabad 05-10-2024: In a significant decision, the Islamabad High Court has stayed the civil suit proceedings in the dispute between Hajvairy Associates (Pvt.) Limited and M/s Power Construction Corporation of China Limited, directing the parties to resolve their issues through arbitration as stipulated in their Joint Venture Agreement (JVA). The judgment, delivered by Mr. Justice Miangul Hassan Aurangzeb, was announced on September 26, 2024, and set aside the earlier order passed by the learned Civil Judge, Islamabad.

The dispute originated from a joint venture between the Pakistani and Chinese companies formed to undertake the Keyal Khwar Hydropower Project awarded by the Water and Power Development Authority (WAPDA). The partnership soured after WAPDA terminated the project contract, citing delays in construction. Subsequently, M/s Power Construction Corporation of China Limited filed a suit against Hajvairy Associates, seeking recovery of funds and other related claims.

The conflict began when the Hajvairy-Sinohydro Joint Venture (JV) encountered delays, allegedly due to the appellant’s failure to construct an access road to the project site. Following a series of unsatisfactory correspondences and WAPDA’s termination of the contract, the Chinese company initiated legal proceedings, which Hajvairy Associates moved to stay, citing the arbitration clause in the JVA.

The appellant’s counsel argued that the learned Civil Judge wrongly dismissed their application under Section 34 of the Arbitration Act, 1940. It was contended that the appellant had not taken any steps in the civil proceedings that would disqualify them from seeking arbitration. Raising a jurisdictional objection does not amount to waiving the right to arbitration, the counsel emphasized, relying on the case law General Electric Company vs. Renusagar Power Company.

The respondent’s counsel, however, asserted that the appellant had taken steps in the proceedings by allegedly filing an application under Order VII, Rule 10 of the Code of Civil Procedure, 1908, which should bar them from invoking arbitration.

Mr. Justice Miangul Hassan Aurangzeb, delivering the judgment, highlighted that the objections raised by the appellant regarding territorial jurisdiction did not constitute taking steps in the proceedings as contemplated under Section 34 of the Arbitration Act, 1940. The Court found that the appellant had raised only preliminary objections without delving into the merits of the case and, therefore, had not waived its right to arbitration.

The Court referenced the Supreme Court of India’s decision in General Electric Company vs. Renusagar Power Company, emphasizing that objections regarding jurisdiction or maintainability are hurdles to the progress of the suit rather than steps in aid of it. Thus, the appellant retained the right to invoke the arbitration clause.

The Islamabad High Court allowed the appeal and set aside the impugned order dated October 21, 2021, passed by the Civil Court. The Court granted the application under Section 34 of the Arbitration Act, 1940, staying the civil suit proceedings and directing the parties to resolve their disputes through arbitration as per the terms of the JVA.

The ruling reinforces the principle that Courts should honor arbitration agreements unless a party has unequivocally demonstrated an intention to abandon arbitration by taking steps that aid in the progress of the suit. It underscores the judiciary’s inclination to favor arbitration as a preferred method of dispute resolution, promoting efficiency and respect for contractual agreements.

This decision is expected to have a broad impact on similar cases, where the distinction between procedural objections and substantive steps in proceedings under Section 34 of the Arbitration Act, 1940, remains critical.