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Petitioner: Sambu Construction Co. Ltd VS Respondent: Laraib Energy Limited and others
Court Name: Islamabad High Court Judge(s): Miangul Hassan Aurangzeb Title: Sambu Construction Co. Ltd vs Laraib Energy Limited and others Case No.: F.A.O. No.38 of 2021 Date of Judgment:2021-07-26 Reported As: 2021 CLC 1914, 2022 [M] CLR 711, 2022 PCTLR 780 Result: Appeal allowed
JUDGMENT
JUDGMENT MIANGUL HASSAN AURANGZEB, J.----Through the instant appeal under Section 104 read with Order XLIII, Rule 1 Of the Civil Procedure Code, 1908 ("C.P.C."), the appellant, Sambu Construction Co. Ltd., impugns the order slated 13.04.2021 passed by the Court of the learned Additional District Judge, Islamabad, dismissing the appellant's application for interim injunction filed under Order XXXIX, Rules 1 and 2, C.P.C. along with its suit for declaration, perpetual and mandatory injunction. In the said application, the appellant had prayed for the grant of interim injunction to restrain the responde nts from encashing the bank guarantee dated 11.09.2018 for an amount of US Dollars 600,000. 2. The facts essential for the disposal of this appeal are that on 19.06.2009, the appellant and respondent No.1, Laraib Energy Limited, entered into a contract for the supply of equipment for the 84 Megawatt New Bong Escape Hydro-Electric Power Complex in Azad Jammu and Kashmir ("the contract "). The contract price was agreed to be US Dollars 85 million. Clause 1.4 of the contract provides that the contract shall be governed and construed in accordance with the law of England. Under Clause 4.3 of the contract, the appellant was required to furnish security for the performance of its obligations in the amount of 15% of the contract price. This performance security was to be in the form of an unconditional bank guarantee issued by a bank acceptable to respondent No.l. Furthermore, it was to be in the form annexed at Annex-B of the contract. Clause 4.3(f) provides that respondent No.1 shall return the performance securi ty to the appellant within 21 days after the appellant became entitled to receive the performance certificate. It is an admitted position that till date a perfo rmance certificate has not been issued to the appellant, and in the suit the appellant has pleaded inter alia that respondent No l's failure to issue the performance certificate is without any legal justification. 3. In fulfillment of its obligations under Clause 4.3 of the contract, the appellant initially furnished a bank guarantee issued by Korea Eximbank. Subsequently , this bank guarantee was replaced with bank guarantee
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No.0332PBG001718, dated 11.09.2018, for an amount of US Dollars 600,000 issued by respondent No.2, Faysal Bank Limited. This bank guarantee is valid up to 10.09.2021. 4. Apparently , the appellant has fulfilled its obligations under the contract and respondent No.1 has taken over the project by issuing taking over certifica tes. It is an admitted position that respondent No.1 commenced its commercial operations on 23.03.2013. For the operation and maintenance of the project, respondent No.1 has engaged the services of a company which has nothing to do with the appellant. 5. On 22.10.2009, respondent No.1 had entered into a Power Purchase Agreement ("PPA") with the Central Power Purchasing Agency (Guarantee) Limited ("CPPA-G"). Under the terms of the PPA,. respondent No.1 was allowed a certain number of hours of energy outages for each year. Clause 9.2 read with Schedule 6 of the PPA made respondent No.1 liable to pay Liquidated Damages ("LDs") to CPPA-G for each kilowatt hour ("kWh ") of excess outage energy in the amount equal to 100% of the prevailing indexed fixed energy purchase price per kWh for the relevant year , if the forced or partial forced outages exceeded the agreed allowances by 200 hours. 6. Clause 4.2(b)(ii) of the contract sets out the appellant's covenant to ensure that its acts or omissions and those of its personnel, including sub-contractors of any tier, shall cause or contribute to any breach by respondent No.1 or any of respondent No.1's obligations under or pursuant to the Project Documents. "Project Documents" has been defined in the contract to include the PPA executed between respondent No.1 and CPPA-G. Clause 4.2(b)(iii) of the contract provides inter alia that the appellant shall indemnify , defend and hold harmless respondent No.1 from and against all losses suffered or incurred by or brought against respondent No.1 arising out of any breach of the said clause of the contract. 7. Vide letter dated 08.11.2013, respondent No.1 informed the appellant that an amount of Rs.213,817,161/- was payable to CPPA-G under the terms of the PPA as LDs for 514.43 excess forced outage hours up to 31.10.2013.. The position taken by respondent No.1 was that the excess outage hours were for reasons entirely attributed to the appellant. Respondent No.1 notified the appellant of its entitlement to recover the said amount from the appellant. Vide letter dated 03.06.2014, respondent No.1 reiterated the position taken in its earlier letter dated 08.11.2013. Vide letter dated 18.06.2014, the appellant disputed respondent No. l's claim for LDs and denied having caused any excess forced outage hours. 8. On 09. 1.2015, a settlement agreement was executed between the appellant and respondent No. 1. Clause 3.5 of the said agreement is reproduced herein below:- "Sambu agrees and undertakes to pay to the Employer the liquidated damages for excess Forced or Partial Forced Outages, caused by Sambu, imposed by the Power Purchaser and payable by the Employer , within twenty-one (21) days of receipt by the Employer (as notified to. Sambu by the Employer) of the invoice issued by Power Purchaser for such purpose. The commitment to pay liquidated damages for excess Forced or Partial Forced Outages, caused by Sambu, shall remain effective during the Extended DNP Term." 9. In the said settlement agreement, respondent No.1 also undertook to pay US Dollars 1,824,560 withheld in respect of an interim payment statement dated 26.03.2013 within' a period of three days, Furthermore, the Defects Notification Period ("DNP ") was extended up to 30.06.2016. It was also agreed that the payment of the amounts specified in Clause 3 of the settlement agreement would be deemed to be full and final settlement of all liabilities, claims and/or dues payable by either party to the other party under the contract. 10. On 06.03.2017, CPPA-G sent an invoice for the payment of LDs aggregating Rs.214,576,249/- due to excess outage energy for the period between 23.03.2013 and 22.03.2014. On 10.03.2017, respondent No.1 informed the appellant about CPPA-G's invoice for LDs, and requested the appellant to provide an irrevocable and unconditional bank guarantee of Rs.215 million with a validity period until 31.12.2017 to secure respondent No. l's financial exposure. The appellant was also cauti oned that if it failed to furnish a bank guarantee for the said amount, respondent No.1 would encash the bank guarantee for US Dollars 600,000 already furnished by the appellant and which is due to expire on 10.09.2021. 11. The appellant, in its letter dated 14.03.2017, took the position that since the appellant and respondent No.1 had agreed to resolve and close all their outstanding claims by executing the settlement agreement, and since CPPA- G's claim for LDs due to excess outage energy pertains to the period prior to the execution of the settlement
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agreement, respondent No.1 was not justified in requesting the appellant to secure respondent No. l's financial exposure against CPPA-G. Furthermore , the appellant asserted that by executing the settlement agreement, respondent No.1 had relinquished its right to make a claim against the appellant with respect to the excess outage energy . 12. Vide letter dated 12.10.2020, CPPA-G informed respondent No.1 that it had adjusted/recovered LDs amounting to Rs.214,576,249/- plus interest amounting to Rs.61,702,899/- from respondent No.1's pending invoices. 13. Respondent No.1 has invoked the dispute resolution clause in the PPA against CPPA-G and presently arbitration proceedings under the Rules of the International Chamber of Commer ce ("ICC") are pending between said, parties. Respondent No.1 filed its request for arbitration on 19.11.2020. In this dispute resolution process, the expert had given a decision on 12.10.2020 upholding CPPA-G's claim for LDs amounting to Rs.214,576,249/- against respondent No.1. The dispute taken by respondent No.1 to arbitration against CPPA-G primarily relates to the method and formula adopted by CPPA-G for the calculation of LDs. It remains to be seen whether the Arbitral Tribunal upholds the expert's said decision. 14. Vide letter dated 19.01.2021, respondent No.1 informed the appellant that CPPA-G had recovered Rs.276,279,148/- as LDs for excess outage energy , and that it had filed a reques t for arbitration against CPPA-G with the ICC Secretariat on 19.11.2020 and is confident to get an arbitration award in its favour which should substantially reduce the amount of the LDs. Furthermore, the appellant was requested to enhance the amount of the performance security from US Dollars 600,000 to US Dollars 1 million to secure respondent No.1 against the amount recovered from it by CPPA-G as LDs. The appellant was threatened with the encashment of the bank guarantee in the event it failed to enhance its quantum to US Dollars 1 million. 15. On 15.02.2021, the appellant filed a suit for declaration, perpetual and mandatory injunction before the Court of the learned Additional District Judge, Islamabad praying for a declaration to the effect that the dispute between respondent No.1 and CPPA-G regarding excess outage energy has no nexus with the appellant, and that respondent No.1's demand for LDs again st the appellant is without justification and contrary to the terms of the contract. The appellant had also sought a direction to respondent No.1 to return the bank guarantee furnished by the appellant. Along with the said suit, the appellant filed an application for interim injunction to restrain respondent No.1 and the issuing bank/respondent No.2 from encashing the bank guarantee for US Dollars 600,000. 16. Vide order dated 13.04.2021, the learned Trial. Court dismissed the appellant's application for interim injunction. The said order has been assailed by the appellant in the instant appeal. 17. Two days after the dismissal of the appellant's application for interim injunction, respondent No.1, vide letter dated 15.04.2021, called upon respondent No.2 to encash the bank guarante e. Vide ad-interim order dated 19.04.2021, this Court restrained the respondents from encashing the bank guarantee. 18. The appellant's suit is still pending adjudication before the learned Civil Court, and respondent No.1 has filed an application under Section 4 of the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act, 2011 ("the 2011 Act") praying for the proceedings in the suit to be stayed on the basis of the arbitration clause in the contract. This application has not been decided as yet. CONTENTIONS OF THE LEARNED COUNSEL FOR THE APPELLANT :- 19. Learned counsel for the appellant, after narrating the facts leading to the filing of the instant appeal, submitted that the appellant has fulfilled its obligations under the contract, and as far back as 23.03.2013, respondent No.1 issued taking over certificates and commenced its commercial operations by generating electricity; that from 23.01.2013 onwards respondent No.1 had engaged the services of an operations and management contractor who had no nexus with the appellant; that the excess outage energy was caused due to poor operating methods and/or the negligence of respondent No.1's project contractor; that the period for which CPPA-G imposed LDs on respondent No.1 (i.e. between 23.03.2013 and 22.03.2010, respondent No. l's project operator was responsible for the operations of the power plant; that the LDs had been imposed by CPPA-G on respondent No.1 under the terms of the PPA to which the appellant is not privy; that the terms of the contract between the appellant and respondent No.1 do not envisage an enhancement in the quantum of the bank guarantee to protect respondent No. l's financial exposure to a claim made by a third party; that the demand made by respondent No.1 for the encashment of the
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bank guarantee due to the appellant's refusal to enhance its quantum is unjustified; that if respondent No.1 is permitted to encash the bank guarantee, it would cause irretrievable injustice to the appellant; that since the arbitration proceedings between respond ent No.1 and CPPA-G are still pending, special equities existed in the appellant's favour entitling it to an interim injunction to restrain respondent No.1 from encashing the bank guarantee; and that since the appellant had not committed any default- in its obligations under the contract, respondent No. 1's demand for the encashment of the bank guarantee must be termed as fraudulent. 20. Furthermore, it was submitted that respondent No.1's claim against the appellant for LDs predates the execution of the settlement agreement dated 09.01.2015 between the appellant and respondent No.1; that with the execution of the said agreement, all matters and disputes between the parties, including the dispute regarding the excess outage energy stood settled; that Clause 3.7 of the said agreement clearly provides that payment of the amounts specified in the said agreemen t shall be deemed to be "full and final settlement of all liabilities, claims and/or dues payable by either party to the other party; " and that all three ingredients for the grant of an injunction in the appellant's favour are present in this case. Learned counsel for the appell ant prayed for the appeal to be allowed and for the impugned order dated 13.04.2021 to be set-aside. CONTENTIONS OF THE LEARNED COUNSEL FOR RESPONDENT NO.1:- 21. On the other hand, learned counsel for respondent No.1 submitted that Clause 4.2(b)(ii) of the contract provides that the appellant shall commit no act or omission which causes or contributes to any breach of respondent No. l's obligations to CPPA-G under or pursuant to the PPA; that CPPA-G had deducted LDs amounting to Rs.214,576,249/- from respondent No. l's invoices pursuant to the provisions of the PPA; that respondent No.1 has disputed the method adopted by the CPPA-G for the calculation of the LDs; that the appellant is under a contractual obligation to pay to respondent No.1 the amount deducted from the latter's invoices as LDs; that respondent No.1 is justified in requiring the appellant to enhance the quantum of the bank guarantee to an amount equivalent to the one deducted from respondent No.1's invoices since the excess outage energy during the DNP were caused by the appellant; that the appellant remains responsible to reimburse the LDs that are imposed on it by CPPA-G due to excess outage energy for reasons attributable to the appellant during the DNP; that it was to address respondent No. l's financial expo sure that caused it to request the appellant to enhance the quantum of the bank guarantee from US Dollars 600,000 to US Dollars 1 million; that prior to the institution of the suit, respondent No.1 had not made a call on the guarantee; that it was only after the appellant had sought the discharge of the guarantee that respondent No.1 made a call on the guarantee and that too after the appellant's application for interim injunction was dismissed by the learned Civil Court; and that the contractual disputes between the appellant and respondent No.1 are to be resolved in accordance with the dispute resolution clause in the contract and, in this regard, respondent No.1 has already filed an application before the learned Civil Court for the proceedings in the suit to be stayed. 22. Furthermore, it was submitted that Clause 3.5 of the settlement agreement dated 09.01.2015 clearly provides that the appellant will pay to respondent No.1 LDs for excess outage energy caused by the appellant and that are imposed by CPPA-G on respondent No.1; that the invoice for LDs was issued to respondent No.1 by CPPA-G on 05.03.2017; that since a demand for payment of LDs had not been made by CPPA-G prior to the execution of the settlement agreement, it was untenable for the appellant to assert that the matter regarding the payment of LDs due to excess outage energy was settled between the appellant and respon dent No.1; that the settlement agreement provides a mechanism for the payment of LDs by the appellant to respondent No.1 as and when such damages are imposed by CPPA-G on respondent No.1; that since Clause 3.5 of the settlement agreement envisages the appellant's future obligation to pay LDs, such obligation had not been extinguished by Clause 3.7 of the said agreement; and that the bank guarantee had been renewed from time to time so as to secure the fulfillment of the appellant's obligations, including the obligation to pay LDs. 23. It was further submitted that the bank guarantee furnished by the appellant does not make its encashment contingent on establishing default of the appellant's obligations under the underlying contract; that respondent No. l's demand for the enhancement of the bank guarantee was not solely motivated by the appellant's failure to enhance the quantum of the bank guarantee; that ever since 2013 the appellant had been made aware of
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respondent No. 1 's claim for LDs due to excess outage energy caused by the appellant; that respondent No.1 was justified in making this claim under Clause 4.2 of the contract and Clause 3.5 of the settlement agreement; that even otherwise respondent No. l's deman d for the enhancement in the quantum of the bank guarantee cannot be termed as fraud of an egregious nature warranting the issuance of an injunction to restrain its encashment; that respondent No.1 's demand for an enhancement in the quantum of the bank guarantee was commercially reasonable; that the appellant had undertaken to indemnify . respondent No.1 for all losses incurred inter alia on account of LDs imposed or recovered by CPPA-G under the PPA; that the appellant can seek damages against respondent No.1 if it feels that respondent No.1 was not justified in making a call on the bank guarantee; that none of the ingredients for the grant of an interim injunction were present in the case at hand; and that the impugned order passed by the learned Trial Court does not suffer from any legal infirmity . Learned counsel for respondent No.1 prayed for the appeal to be dismissed. 24. I have heard the contentions of the learned counsel for the contesting parties and have perused the record with their able assistance. The facts leading to the filing of the instant appeal have been set out in sufficient detail in paragraphs 2 to 18 above and need not be recapitulated. 25. What is most relevant for the Court while deciding whether or not to issue an injunction to restrain the encashment of a bank guarantee are the terms incorporated therein. Bank guarantees which provide that they are payable by the guarantor on demand are considered to be unconditional. In such cases, the dispute between the beneficiary and the party at whose instance, the guarantee is given is immaterial and of no consequence. If a bark furnishes an irrevocable and unconditional bank guarantee, it is not open to the bank to raise objections to pay the amount under the guarantee. Courts ought not to interfere with obligations undertaken by a bank under an irrevocable and unconditional bank guarantee. In other words interim injunction cannot be granted to interfere with the bank's obligation to make payment to a beneficiary who makes a demand for the encashment of an irrevocable and unconditional bank guarantee. This is more so when the bank undertakes an obligation to pay on the beneficiary demand without any demur and regardless of any dispute between the beneficiary and the principal debtor under a contract pursuant to which the bank guarantee is furnished. Such a bank guarantee has been consistently held to be an independent autonomous contract between the bank and the beneficiary and this autonomy is ordinarily not affected by the underlying contract between the creditor and the principal debtor or the disputes that may arise between them. The only two exceptions where Courts may consider granting an injunction to restrain the encashment of a bank guarantee is (i) where fraud by the beneficiary is proved to the satisfaction of the Court and (ii) where a case of irretrievable injustice is made out by the party which furnished the bank guarantee. With this preface, I shall now decide whether the order passed by the learned Trial Court dismissing the appellant's application for interim injunction is liable to be interfered with. 26. Bank guarantee No.0332PBG001718 for the amount of US Dollars 600,000 issued by respondent No.2 (guarantor) at the instance of the appellant (principal debtor) in favour of respondent No.1 (beneficiary) is in conformity with the requirement of Claus e 4.3(b) of the contract which requires the performance security to be in the form annexed at Annex-B of the contract. The said guarantee is irrevocable and unconditional in nature and is valid up to 10.09.2021. It would be apposite to reproduce herein below the third and eleventh unnumbered paragraphs of the bank guarantee since the same are relevant for the purposes of this case:- "At the request of the Principal, we the undersigned bank, M/s. Faysal Bank Limited, a bank organized under the laws of the Islamic Republic of Pakistan, having its registered Head office at Faysal House, Street No.02, Shahrah- e-Faisal, Karachi through its Branch at 15-W est Blue Area, Islamabad. ("the Bank"), by this guarantee (the "Guarantee "), irrevocably and unconditionally undertake to pay you, the Beneficiary , as primary obligor and not as surety , any sum or sums not exceeding the Guaranteed Amount (as defined below), wholly or partially , forthwith upon receipt by us of your (or any person to which you have assigned the benefit of this Guarantee in accordance with this Guarantee) first demand in writing , and pursuant to one or more demands (provided that such demands and any prior demands do not in the aggregate exceed the Guaranteed Amount) substantially in the form of the demand set out in Schedule hereto (the "Demand") without any further proof or documents, and notwithstanding
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any objection by the Principal or by any other party of whatever capacity and without being entitled to enquire whether or not such payment is lawfully due and payable by the Principal. If this Guarantee is partially drawn by the Beneficiary , then the amount of this Guarantee shall be reduced by an amount corresponding to such drawing." "The Bank shall not in any way be released or discharged from any liability under this Guarantee by any invalidity , illegality or unenforceability of the Contract nor by any alteration, amendment or variation in the terms of the Contract nor by any allowance of time by the Bene ficiary under the Contract nor by any forbearance or forgiveness or indulgence in respect of any matter or thing concerning the Contract on the part of the Beneficiary nor by the insolvency , bankruptcy , winding up or reorganisation of the Beneficiary (or any analogous event or the exercise of any power of disclaimer arising or in such circumstances) nor by any dispute or disagreement whatsoever between the Beneficiary and the Principal under or in relation to the Contract." (Emphasis added) 27. Respondent No.1 vide its letter dated 15.04.2021 called upon respondent No.2 to encash the bank guarantee. In the said letter , respondent No.1 has not alleged any default against the appellant in the fulfillment of its obligations under the contract. Respondent No.1 has made a plain and simple demand for the encashment of the said guarantee. 28. The terms of the bank guarantee furnished by the appellant show that it is irrevocable and unconditional in nature; respondent No.2 is liable to forthwith pay respondent No.1 upon the latter's first demand in writing; the payment is to be made by respondent No.2 without requiring respondent No.1 to provide any other document and notwithstanding any objection by the appellant; respondent No.2 is to make the payment without inquiring as to whether the guaranteed amount is lawfully due and payable by the appellant; and respondent No.2 is not discharged from its liability under the guarantee by any dispute or disagreement between the appellant and respondent No.1 under the contract. These are the terms to which the appellant has agreed. 29. The liability of respondent No.2 to make payment to respondent No.1 under the said guarantee has not been made contingent on the proof of the appe…
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