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Petitioner: SHIPYARD K. DAMEN INTERNATIONAL VS Respondent: KARACHI SHIPYARD AND ENGINEERING WORKS LTD.
Court Name: Supreme Court of Pakistan Judge(s): Javaid Iqbal, Muhammad Nawaz Abbasi, Tanvir Ahmed Khan Title:SHIPYARD K. DAMEN INTERNATIONAL vs KARACHI SHIPYARD AND ENGINEERING
WORKS LTD. Case No.:Civil Petitions for Leave to Appeals Nos,' 1120 and 112.1 of 2002Civil Petition No,292-K of 2001Petition No,292-K of 2001Appeals Nos,' 1120 and 112.1 of 2002C.As. Nos,16 and 17 of 2002C.P. No,383-K of 2002 Date of Judgment:2002-07-11 Reported As: 2003 CLD 1 Result: Petition dismissed Judgment ORDER ' JAVED .IQBAL, J.---The above captioned civil petitions for leave to appeal (C.Ps. Nos,1120 and 1121 of 2002) are directed against the judgment dated 9-5-2002 whereby H.C.A. No,16 of 2002 and H.C.A. No,17 of 2002 have been dismissed by learned High Court of Sindh, Karachi, and the order of learned. Single Judge in Chamber dated 22-1-2002 passed in Suits Nos,1435 and 1436 of 2001 refusing the prayer for interim orders to restrain the respondents from encashment of Performance Bank Guarantees has been kept intact. 2. Precisely stated the facts of the case as enumerated in the impugned judgment are to the effect that "in H.C.A. No,16 of 2002 appellants seek orders to restrain the respondent from encashment of two Performance Bank Guarantees of ABN Amro Bank bearing No,G/330/01/ 0088 and No,G/330/01/0089 both dated 20-3-2001 for US$ 200,000 each (hereinafter referred to as the said guarantees). The said guarantees were furnished in pursuance to the terms of Contract No,FP- 1081/SDP-136, dated 30-6-1999 for supply of materials and making tugs. On unsatisfactory performance respondents vide their letter dated 16-10-2001 called for encashment of the said guarantees. Appellants challenged the encashment by way of institution of an application under section 20 of the Arbitration Act, 1940 alongwith an application for interim orders to restrain the encashment of the said guarantees. The learned Single Judge while alongwith the application under section 20 of the Arbitration Act, 1940 declined to restrain the encashment of the said guarantees. In H.C.A. No,17 of 2002 appellants seek orders to restrain the respondent from
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encashment of Performance Bank Guarantees of ABN Amro Bank bearing No,G/330/ 01/0090, dated 20-3-2001 for US$ 200,000 (hereinafter referred to as the said guarantee) furnished in pursuance to the terms of Contract No, FP-1007/SB-232, dated 30-6-1999 for supply of materials and making togs. On unsatisfactory performance respondents vide their letter dated 16-10-2001 called for encashment of the said guarantees. Appellants challenged the encashment by way of institution of an application under section 20 of the Arbitration Act, 1940 alongwith an application for interim orders to restrain the encashment of the said guarantees. The learned Single Judge while allowing the application under section 20 of the Arbitration Act, 1940 'declined to restrain the encashment of the said guarantees. Hence these appeals". Being aggrieved, H.C.A. No,16 of 2002 and H.C.A. 17 of 2002 assailing the order of learned Single Judge in Chamber were preferred but to no avail. The same were dismissed vide judgment impugned. We intend to dispose of the above captioned civil petitions for leave to appeal arising out of the common judgment by this order. 3. It is mainly contended by Mr. M.S. Baqir, learned Advocate Supreme Court on behalf of petitioners that the learned High Court has erred while holding that performance guarantee furnished under the terms of Contract is in independent contract and the principles laid down in case M/s. Jamia Industries Limited v. Pakistan Refinery Limited (PLD 1976 Kar. 644) were ignored without-any rhyme and reason which resulted in serious miscarriage of justice. It is next contended that the built in condition concerning breach of terms was never invoked by the respondent which aspect of the matter escaped notice of the learned High Court resulting in grave prejudice. It is argued that notice dated 1-10-2000 is indicative of the existence of the dispute between the parties which could only be determined under the Arbitration Act, 1940 and Arbitration Clause was also provided in the contract and without resorting to it the respondents should have been restrained from encashment of the performance guarantees. It is next contended that the expression "Sole Judge" as used in clause 2.7 of the Contract regarding performance guarantees have been misinterpreted and misconstrued which could not be read in isolation but the other relevant provisions of the Contract should have been kept in view such as clause 15-1, clause 15-2(A) (B), clause 15-3(B) read with clause 17 of the Contract. 4. We have carefully examined the contentions as agitated on behalf of the petitioners in the light of relevant provisions of law and record of the case. We have also perused the order dated 6-3- 2002 passed by learned Single Judge in Chamber and judgment impugned. In our considered view the pivotal question which needs determination is as to whether the performance guarantee furnished by the petitioners under clause 2.7 of the Contract could be encashed by the respondents at this juncture or otherwise? Before dilating upon the said question it seems proper to reproduce the performance guarantees which is as under:-- "This guarantee is unconditional and it is expressly understood that the Sole Judge for deciding whether seller has performed the purchase contract and fulfilled the terms and conditions of the purchase contract shall be buyer." 5. A bare perusal would reveal that the performance guarantee has been couched in a plane and simple language which being free from any ambiguity hardly calls for scholarly interpretation. The performance guarantee makes it abundant clear that:-- (i) The guarantee is unconditional which means that no condition or embargo whatsoever has been imposed for its encashment. (ii) The buyer shall be the Sole Judge to determine as to whether the seller has performed the purchase contract and fulfilled all the conditions as enumerated in the purchase contracts. (iii) On the question of satisfaction of the buyer the only mechanism which has been evolved resolved around the buyer himself and no role whatsoever has been assigned to any other person/entity.
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6. Now here at this juncture we would like to dilate upon the pivotal question as mentioned hereinabove i,e, as to whether the performance guarantees can be encashed by the ,buyer being a Sole Judge to determine and decided whether seller has performed the purchase contract and fulfilled the terms and conditions of the purchase contract. We have ,examined the plethora of law from different jurisdiction on the subject before answering the said question detail whereof is as under:-- ' Province of West Pakistan v. Mistry Patel & Co. PLD 1969 Supreme Court 80, W.J. Younie and others v. Tulsi Ram Jankiram and others AIR 1942 Cal. 382, Farr Smith & Company Ltd. v. Messers Limited (1928) 1 K B 397, Printpac (Pvt.) Ltd. v. Rice Export Corporation of Pakistan Ltd. 1992 M LD 1161, M/s. Jamia Industries v. M/s. Pakistan Refineries Limited, Karachi PLD 1976 Kar. 644, Sirafi Trading Establishment v. Trading Corporation of Pakistan Limited (1984 CLC 381), Law relating to. Bonds and Guarantees by S.N. Gupta, Vol. II, ,2nd Edition, page 288, United Commercial Bank v. Bank of India AIR 1981 SC 1426, National Construction. Company Limited v. Aiwan-e-Iqbal PLD 1994 Supreme Court 311, MacDonald Layton & Co, Ltd. v. Pakistan Service Limited and others 1983 CLC 2252,1 Pakistan Engineering Consultants v. Pakistan International Airlines Corporation and BCCI and others (1993 CLC 882), Lord Denning, ,Edward Oven Engineering Ltd. v) Barclays Bank International Ltd. (1978) 1 AER 976 at p. 903, Punjab National Bank Ltd. v. Vikram Cotton Mills Ltd.(1970) 50 Comp. Cas. 927 (SC), United Commercial Banks v. Bank of India and others AIR 1981 SC 1526, The Interads Advertising (P) Ltd. v. Palmex Enterprises (1983) 58 Comp. Cas. 550, Interads Advertising (P.) Ltd. v. Bentrex & Co. And others (1983) 53 Comp. Cas. 646, United Commercial Bank v. Hanuman Synthetics Ltd. And others (1987) 61 Comp. Cas. 245, Tarapore & Co. v. V/O Tractoroexport (1970) 40 Corn. Cas. 447 (SC), Hamzeh Malas & Sons v. British Imex Industries Ltd. (1958) 2 QB 127 (CA) (at page 129), B.S. Aujla Co (P.) Ltd. v. Kaluram Mahadev Prasad AIR 1983 Cal. 106, United Commercial Bank v. Bank of India (1982) 52 Comp. Cas. 186 (SC), Sztejn v. Henry Schroder Banking Corporation (1941) 31 NYS 2d 631, United Commercial Bank v. State Bank of India (1982) 52 Comp. Cas. 198 (SC), Hamzeh Malas & Sans v. British Imex Industries Ltd. (1958) 2.QB 127 (CA), U.P. Cooperative Federation Ltd. v. Singh Consultants & Engineers (P) Ltd. (JT '1987 (4) SC 406), Nangia Construction (India) (Pvt.) Lai. v. National. Buildings Construction Corporation Ltd. And others (II (1990) 51 BC); 41 (1990) DLT 359, G.S. Atwal & Co. (Engineers) (Pvt.) Ltd. v. National Projects Construction Corporation Ltd. (1990) 69 SC 601, S.C.I.L. (India) Ltd. v. Indian Bank (1994) 79 Comp. Cas. 693, Suresh Arjundas Bekhtiani v. Union of India (1992) 74 Comp. Cas. 192 (Born.), Hindustan Paper Corporation Ltd. v. Keneilhouse Angami (1990) 68 Comp. Cas. 361 (Cal.), Jaipur Udyog Ltd. v. Punjab University (1980) 82 Punj., LR 597, State Bank of India v. Jaipur Udyog AIR 1986 Delhi 357, Taj Trade and Transport Co. Ltd. v. Oil and Natural Gas Commission (1994) 80 Comp. Cas. 740, Syndicate Bank v. Vijay Kumar (1992) 74 Comp. Cas. 597, The Law Relating To Bank Guarantees in India by Dr. Mohammad Akram Mir, The Banking Law in. Theory and Practice, Third Edition, Vol.2, by S.N. Gupta, John F. Dolan, Letters of Credit, Article 5 Warranties, Fraud and the Beneficiary's Certificate. The Business Lawyer, Vol, 41, No,2 pp.186, 347, Michhal Stern, The independence Rule in Stand by Letters of Credit. The University of Chicago LR Vol. 52, 185, Nussbaum, Temporary Restraining Orders and Preliminary injunctions. The Federal Practice, 26 S.W.L.J. 265, 273 (1972) cited by Edward L. Symons, JR., Letters of C. Fraud, Good Faith and the Basis or injunctive Relief, Tulance Law R., Vol. 54, 1979, p. 380 (1980). 7. After having gone through the precedented law as mentioned hereinabove the judicial consensus seems to be as follows:-- (i) The performance of guarantee stands on the footing similar to an irrevocable letter of credit of Bank, which gives performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier has performed his contracted obligation or nOt, nor with the .Question whether the supplier is in default or not. The Bank must pay
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according to its guarantee all demand if so stipulated without proof or conditions. Only exception is when there is a clear fraud of which Bank has notice. (ii) There is an absolute obligation upon the banker to comply with the terms and conditions as enumerated in the guarantee and to pay the amount stipulated therein irrespective of any disputes there may be between buyer and seller as to whether goods are up to contract or not. (iii) The bank guarantee should be enforced on its own terms and realization against the bank guarantee would not affect or prejudice the case of contractor, if ultimately the dispute is referred to arbitration for the reason, once the terms and conditions of the guarantee were fulfilled, the bank's liability under the guarantee was absolute and it was wholly independent of the dispute proposed to be raised. (iv) The contract of bank guarantee is an independent contract between the bank and the party concerned and is to be worked out independently of the dispute arising out of the work agreement between the parties concerned to such work agreement and, therefore, the extent of the dispute and claims or counter-claims were matters extraneous to the consideration of the question of enforcement of the bank and were to be investigated by the arbitrator. (v) Where the bank had undertaken to pay the stipulated sum to respondent, at any time, without demur, reservation, recourse, contest or protest, and without any reference to the contractor, no interim injunction restraining payment under the guarantee could be granted. (vi) The Bank guarantee is an autonomous contract and imposes an absolute obligation on the bank to fulfil the terms and the payment on the bank guarantee becomes due on the happening of a contingency on the occurrence of which the guarantee becomes enforceable. (vii) When once bank guarantee is discharged, the obligation of the bank ends and there is no question of going behind such discharge bank guarantee. Courts should refrain from probing into the nature of the transactions between the bank and customer, which led to the furnishing of the bank guarantee. (viii) In the absence of any special equities and the absence of any clear fraud, the bank must pay on demand, if so stipulated and whether the terms are such must be have to found out from the performance guarantee as such. (ix) The unqualified terms of guarantee could not be interfered with by Courts irrespective of the existence of dispute. 8. We have also examined various other important cases on the subject, for instance, U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. (JT 1987 (4) SC 406) wherein while dilating upon identical issue it was held as under : "The provisions of section 41 of the Arbitration Act, 1940 and Order XLI, rules 1 and 2 of the Code of Civil Procedure, 1908 were duly examined by the Court. The nature of the performance guarantee and the obligations arising out of the same in the light of the claim for irretrievable injustice or damage was also examined. After giving a detailed and micro analysis of the entire English and Indian Law governing the grant of injunctions against the enforcement of the bank Guarantees, the Supreme Court; Held that the net effect of injunction is to restrain the bank from performing the bank guarantee. That cannot be done. One cannot do indirectly what one is not free to do directly. But a maltreated man in such circumstances is not remediless. The respondent was not to suffer any injustice which was irretrievable. The respondent can sue the appellant for damages. In this case, there cannot be any basis for apprehension that irretrievable damages would be caused if any. I am of the opinion that this is not a case in which injunction should be granted. Held further that an irrevocable commitment either in the form of confirmed Bank-guarantee or irrevocable letter of credit cannot be interfered with except in case of fraud or in case of question of apprehension of irretrievable injustice has been made out.
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Also held that (1) The Court should not, in transaction between a banker and banker, grant an injunction at the instance of the beneficiary of an irrevocable letter of credit, restraining the issuing bank from recalling the amount paid under reserve from the negotiating bank, acting on behalf of the beneficiary against a document of guarantee, or indemnity at the instance of the beneficiary. (2) The commitments of banks must be honoured free from interference by Courts. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases that is to say in case of fraud or in case of irretrievable injustice be done, the Court should interfere. (Emphasis provided). (3) ' This is not a case where irretrievable injustice would be done by enforcement of bank guarantee. This is also not a case where there was strong prima facie case of fraud in entering into a transaction was made out. If that is the position, then the High Court should not have interfered with the bank guarantee." 9. Similarly in case titled National Thermal Power Corporation Limited v. Flowmore Private Ltd. And another (1995) 84 Comp. Cas. 97), it was held while allowing the appeal and vacating the injunction "that looking to the obligation assumed by banks under performance guarantees and 'guarantees to secure advances, bank cannot be prevented by the party at whose instance the guarantee or letter of credit was issued, from honouring the credit guaranteed. The Court should not lightly interfere with a performance bond or guarantee, unless there is fraud of the beneficiary". (Sevenska Handelbanken v. Indian Charge Chrome (1994) 79 Comp. Cas. 589 (SC) and U.P. Cooperative Foundation Ltd. v. Singh Consultants and Engineers (Pvt.) Ltd. (1989) 65 Comp. Cas. 283 (SC). 10. Another important case on the subject is Hindustan Steel Works Construction Ltd. v. G.S. Atwal & Co. (Engineers) (Pvt.) Ltd. (decided on September 13, 1995), wherein it was held as follows:-- "On appeal to the Supreme Court alongwith the appeal it was held by Honourable Mr. Justice Paripoornan, J., that in case of confirmed bank guarantees/irrevocable letters of credit the Court will not interfere unless there is fraud and irretrievable damages are involved in the case and the fraud has to be an established fraud. The sums claimed by the appellant were covered by the guarantees. The guarantees furnished by the bank to the appellant were unconditional and the appellant was the sole Judge regarding the question as to whether any breach of contract had occurred and if so, the amount of loss to be recovered by the appellant from the respondent. The entire dispute was pending before the arbitrator. Whether and if so, what was the amount due to the appellant had to be adjudicated in the arbitration proceedings. The fact that the bank had issued a guarantee in a standard form, covering a wider spectrum than agreed between the respondent and the bank and the fact that the appellant had ' not quantified the loss and mentioned it, were not grounds to restrain the appellant from invoking the unconditional bank guarantees. The order of injunction was liable to be set aside." (Emphasis provided). 11. In case Larsen & Toubro Ltd. v. Maharashta State Electricity Board and others (1996) 85 Comp. Cas. 214) the entire law on the subject was examined by the Indian Supreme Court and it was held that "after a survey of the earlier decisions of this Court in United Commercial Bank v. Bank of India (1982) 52 Comp. Cas. 186; (1981) 2 SC 766, U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. (1989) 65 Comp. Cas. 283; (1988) 1 SCC 174, General Electric Technical Services Company Inc. v. Punj. Sons (P) Ltd. (1992) 74 Comp. Cas. 624; (1991) 4 SC 230 and the decision of the Court of Appeal in England in Elian & Rabbath v. Matsas & Matsas, (1966) 2L Lloyd's List Law Reports 495 and a few American decisions, this Court in Svenska Handelbanken v. Indian Charge Chrome, (1994) 1 SC 502, 423-524, 526-27; (1994) 79 Comp. Cas. 589, 616-617, 620 laid down the law thus: ' in the case of confirmed Bank-guarantees/ irrevocable letters of credit, they cannot be interfered with unless there is fraud and irretrievable injustice involved in the case and fraud has to be an established fraud."
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' irretrievable injustice which was made the basis for grant of injunction really was on the ground that the guarantee was not encashable on its terms..." ' there should be prima facie a case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Mere irretrievable injustice without a prima facie case of established fraud is of no consequence in restraining the encashment of bank guarantee." 12. In case State of Maharashtra and another v. M/s. National Construction Company, Bombay and another (decided on July 9, 1969) it was observed as follows:-- "A bank issuing a guarantee is not concerned with the underlying contract between the parties to the contract. Unless there is an allegation of fraud, the Courts will not interfere a bank guarantee is ordinarily a contract quite distinct from the underlying contract and gives rise to a separate cause of action. ' At this juncture it seems necessary to analyse the laws relating to bank guarantees. The rule is well-established that a Bank issuing a guarantee is not concerned with the underlying contract between the parties to the contract. The duty of Bank under a performance guarantee is created by the document itself. Once the documents are in order, the bank giving the guarantees must honour the same the make payment. Ordinarily, unless there is an allegation of fraud or the like, the Courts will not interfere directly or indirectly to withhold payment, otherwise trust in commerce, internal and international, would be irreparably damaged. But that does not mean that the parties to the underlying contract cannot settle their dispute With respect to allegations of breach by resorting to litigation or arbitration as stipulated in the contract. The remedy arising ex-contract is not barred and the cause of action for the same is independent of enforcement of the guarantee. (Emphasis provided). See UCO Bank v. Bank of India 1981 (3) SCR 300 at 325; Centax (India) Ltd. v. Vinmar Impex Inc. JT 1986 SC 174: 1986 (4) SC 136; and U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., JT 1987 (4) SC 405; 1988 (1) SC 174." 13. Another important case on the subject is Hindustan Steel Works Construction Ltd. v. Tarapore & Co. And another (decided on January 6, 1996), wherein it was concluded as follows:-- ... On the facts, that the special circumstances and/or special equities which had been pleaded were that there was a serious dispute on the question who had committed breach of the contract, that the contractor had a counter-claim against the appellant, that the disputes between the parties had been referred to the arbitrators and that no amount could be said to be due and payable by the contractor to the appellant till the arbitrators declared their award. These factors were not sufficient to make this an exceptional case justifying interference by restraining the appellant from enforcing the bank guarantees. The High Court was, therefore, not right in restraining the appellant from enforcing the bank guarantees." 14. "The guarantee has been defined in Halsbury's Laws of England, Volume 20, Fourth Edition, page 49, page 101 as 'a guarantee is 'an accessory contract whereby the promisor undertakes to be answerable to the promisee for the debt, default or miscarriage of another person whose primary liability to the promise must exist or be contemplated'. The contract of guarantee is of very ancient date, perhaps to be "Coeval with the first contracts recorded in history". It seems that the words warranty and guaranty were the same, the ?Letter 'g' of the Norman French being convertible with `w' of the German and English, as in the names William or Guillaume. They are sometimes used indiscriminately, but in general, warranty is applied to a contract as to title, quality or quantity of a thing sold and guarantee is held to be the contract by which one person is bound to other for the due fulfilment of a promise or engagement of a third party. Guarantee is the Low Latin guarantia or garantia, which is merely a variant spelling of warrantia: Ultimately the word is Teutonic, and means "protect" "defend" and the like (Germwehren) a meaning which remained its exclusive sense for a long while. The legal use, however, is Later. The Statute of Frauds, which describes, what we call a guaranty, calls it, "a special promise to answer for the debt, etc. Of another". (De Colyar,
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The Law of Guarantees, 3rd Edn., 1897; Butterwirth & Co. 7 Fleet Street Law Publishers by Black Law Dictionary, 4th Edn., 833; Oxford Bank v. Haynes (1825) 25 Mass (8 Pick) 423, 428) it is said:-- "A guarantee differs in character from a surety, cannot be questioned, for he cannot be sued as a promisor, as the surety may, his contract must be specifically set-forth. That he differs from an indorser is equally clear and for the same and also because he warrants the solvency of the promisor which the indorser does not." "A guarantee often demanded by a banker as an additional security to reinforce a clean advance, or buttress a tangible security, which for one reason for the other is not considered adequate. The term guarantee or guaranty as it is called by some authorities is a collateral promise or undertaking by one person to another to answer for the payment of some debt or the performance of some contract or duty in case of the default of another person who in the first instance is liable for such payment or performance." (Ansons Law of Contract. The definition of guarantee is always reducible to this form: "Deal with X, and if he does not pay you, I will"). 15. The "guarantee" as defined and discussed hereinaoove would indicate that it contains the ingredients of "dedicated commitment", "absolute undertaking", "an…
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