Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: Messrs Shan Associates through Sole Proprietor VS Respondent: Messrs Getz Pharma Private Limited through Chief Executive Officer and 3 others
Court Name: Sindh High Court Judge(s): Yousuf Ali Sayeed Title:Messrs Shan Associates through Sole Proprietor vs Messrs Getz Pharma
Private Limited through Chief Executive Officer and 3 others Case No.: Suit No. 212 of 2019 Date of Judgment:2019-10-09 Reported As: 2020 CLD 808 Result: Applications dismissed Judgment ORDER YOUSUF ALI SAYEED, J.---The Defendant No.1 apparently published a tender inviting bids in relation to Heating, Ventilation and Air Conditioning (HVAC) and mechanical and plumbing works involved in the construction of a new manufacturing facility termed the "Astola Project", with the Plaintiffs bid in that regard being accepted in terms of a Letter of Award dated 24.03.2015 (the "LOA") for a final offer price of Rs.809,388,215/- (the "Contract Price"), following which the Plaintiff and the Defendant No.1 entered into a Contract Agreement dated 01.06.2015 (the "Contract"), incorporating various addenda as specified in Clause 2 thereof, including but not limited to the LOA and the Volume of the Tender Documents setting out the Instructions to Tenderers- as well as the General and the Special Conditions of Contract, wherein the Plaintiff and Defendant No.1 were referred to as the "Contractor" and "Employer", with the Defendants Nos.2 and 3 being the designated "Engineer" and "Consultant" respectively. 2. Clause 21 of the LOA read with Clause 15 of the Instructions to Tenderers envisaged the submission of a Performance Bond, which was to remain valid till completion of the maintenance period under the Contract, whereas Clause 10 of the LOA read with Clause 78 of the General Conditions, provided inter alia that a "Mobilization Advance of up to 10% of the Contract Price shall be paid to the Employer in two equal parts upon submission by the Contractor of a Mobilization Advance Guarantee/Bond for the full amount of the advance in the specified form from a Scheduled Bank in Pakistan or an approved Insurance company". In compliance of such obligations, the Plaintiff accordingly arranged for a Performance Bond and Mobilization Advance Bond (hereinafter collectively referred to as the "Bonds") in favour of the Defendant No.1 through the Defendant No. 4, each being dated 01.06.2015, for the like amount of Rs.80,938,821/- accordingly. 3. Following a reference to the Contract, the operative parts of the Bonds were worded as follows:
---
## Page 2
The Performance Bond: "We, M/S ADAMJEE INSURANCE COMPANY LTD. (the Guarantor), waiving all objections and defense under the Contract, do hereby irrevocably and independently guarantee to pay to the Employer without delay upon the Employer's first written demand without cavil or arguments and without requiring the Employer to prove or to show grounds or reasons for such demand any sum or sums up to the amount stated above, against the Employer's written declaration that the Principal has refused or failed to perform the obligations under the Contract which payment will be effected by the Guarantor to Employer's designated Bank and Account Number. PROVIDED ALSO THAT the Employer shall be the sole and final Judge for deciding whether the Principal (Contractor) has duly performed his obligations under the Contract or has defaulted in fulfilling said obligations and the Guarantor shall pay without objection any sum or sums up to the amount stated above upon first Written Demand from the Employer forthwith and without any reference to the Principal or any other" The Mobilization Advance Bond: "NOW, THEREFORE, the Guarantor hereby guarantees that the Contractor shall use the advance for the purpose of above mentioned Contract and if he fails and commits default in fulfillment of any of his obligations for which the advance payment is made, the Guarantor shall be liable to the Employer for payment not exceeding the aforementioned amount. Notice in writing of any default, of which the Employer shall be the sole and final Judge, on the part of the Contractor, shall be given by the Employer to the Guarantor and on such first written demand, payment shall be made by the Guarantor of all sums then due under Guarantee without any reference to the Contractor and without any objection. The Guarantee shall remain in force until the advance is fully adjusted against payment from the Interim Payment Certificates of the Contractor or until 30-11-2016 whichever is earlier. The Guarantor's liability under his Guarantee shall not in any case exceed the sum of Rs.80,938,821/- (Rupees Eighty millions nine hundred thirty eight thousand eight hundred twenty one only) is Guarantee shall remain valid up to the aforesaid date and shall be null and void after the aforesaid date or earlier if the advance made to the Contractor is fully adjusted against payments from Interim Payment Certificates of the Contractor is fully adjusted against payments from Interim Payment Certificates of the Contractor provided that the Guarantor agrees that the aforesaid period of validity shall be deemed to be extended if on the above mentioned date the advance payment is not fully adjusted." 4. Whilst the Performance Bond was initially specified as remaining in force from 01.06.2015 to 30.11.2016, vide Endorsements dated 08.08.2017 and 09.08.2018 the period thereof was extended with the amount secured being reduced vide the first endorsement from Rs.80,938,821/- to Rs.63,734,647/-, with the second of these endorsements stipulating inter alia that: "Notwithstanding anything contained herein to the contrary, it is hereby declared agreed that the validity period of the within mentioned Performance Bond is hereby extended with effect from 31-07-2018 to 30-07-2019 for Construction Period and with effect from 31-07-2019 to 30-07-2020 for Maintenance Period Rs. 63,734,647/= (rupees Sixty Three Millions seven hundred thirty four thousand six hundred forty seven only). Subject to known ox reported loss/ litigation till date. All other terms and conditions of the above-mentioned bond remain unaltered." [Sic] 5. Similarly, an Endorsement dated 09.08.2018 issued by the Defendant No.4 in respect of the Mobilization Advance Bond provided as follows: "Notwithstanding anything contained herein to the contrary, it is hereby declared agreed that the validity period of the within mentioned Mobilization Advance Bond is hereby extended with effect from 31-07-2018 to 30-07- 2019 for the reduced amount From Rs. 70,297,252/- by Rs. 13,588,140/- to Rs.56,709,112/-. Subject to known or reported loss/ litigation till date. All other terms and conditions of the above-mentioned bond remain unaltered." [Sic]
---
## Page 3
6. Apparently, a dispute subsequently arose between the Plaintiff and Defendant No.1 as to (i) alleged delays in execution of works under the Contract, as well as (ii) the quality of the works undertaken, and following correspondence on the matter, the Contract then came to be terminated by the Defendant No.1 in terms of a letter dated 25.01.2019 (the "Termination Notice"), invoking sections 92(a) and 84(a) thereof, thereby calling upon the Plaintiff to convey the factum of termination onwards to all sub-contractors and suppliers, stop all works and quit the project site, and to refund the unutilized Mobilization Advance amount quantified at Rs.54,592,656/- as well as liquidated damages in accordance with the terms of the Contract. Vide separate letters dated 25.01.2019 and 28.01.2019, addressed to the Defendant No.4, the Defendant No.1 also made calls for encashment in respect of the Performance Bond and the Mobilization Advance Bond respectively. 7. The operative parts of the aforementioned letters dated 25.01.2019 and 28.01.2019 addressed by the Defendant No.1 to the Defendant No.4 injelation to the Bonds proceed in the following terms: The letter dated 25.01.2019 in respect of the Performance Bond: "We refer to the subject Bond executed by Adamjee Insurance Company in favour of Getz Pharma (Pvt.) Limited ("Employer"), guaranteeing to pay the Employer an amount of Rs.63,734,647 in the event Shan Associates ("Principal") fails or refuses to perform the works under "Package No. C-600-001 (Mechanical, HVAC and Plumbing Works, Astola Project ("Works") in accordance with the contract dated June 1st, 2015 ("Contract"). The relevant clause of the aforesaid bond is reproduced herein below for ease of your reference: We hereby notify you by declaring in writing that the principal has failed and committed default in performing his obligations under the Contract. Therefore, we demand you to pay us Rs.63,734,647/- immediately as guaranteed under the bond without any reference to the principal and without any objection. Copy of the Bond along with extension is attached." The letter dated 28.01.2019 in respect of the Mobilization Advance Bond: "We refer to the subject Bond executed by Adamjee Insurance Company Ltd. ("Surety or Guarantor") in favour of Getz Pharma (Pvt.) Limited ("Employer") on request of Shan Associates ("Contractor"), guaranteeing to pay the Employer the mobilization advance amount in the event Contractor commits default of any of its obligations under the Contract, for which the advance payment is made. Per the Contract dated 1st June, 2015, signed between the Employer and the Contractor ("Contract"), the Employer paid an advance amount of Rs. 73,497,846/- to the Contractor an interim payments returnable on pro- rata basis upon performance of Works. Through this demand letter, we declare that the Contractor has committed default in performing his obligations, which resulted into termination of Contract. Till date, the Employer has recovered only Rs. 18,905,190 from contractor's running bills out of total mobilization advance of Rs. 73,497,846/-. We demand you to pay us the remaining Mobilization Advance amount of Rs. 54,592,656 immediately as guaranteed under the bond without any reference to the Principal and without any objection." 8. Being aggrieved, the Plaintiff has brought this suit, assailing the termination of the Contract and encashment of the Bonds, eliciting final relief in the following terms: "A. Declare that the Termination Notice dated 25.01.2019 is void as the same has been issued in utter violation of the agreed terms and conditions of the Contract Agreement and the Defendant No.1 is not entitled for the termination of the contract unilaterally without adopting to the terms and conditions of the contract, further, the construction time is still available upto 30th July, 2019. B. Declare that the demand of the Defendant No.1 to seek encashment of the Performance Bond and Mobilization Bond executed on 09.08.2018 for the construction period available upto 30.07.2019, is unlawful and the Defendant No.1 is not entitled to for the encashment of the same and Performance Bond is not liable to for encashment as the amount of the Receivables/pending running bills of the work done by the Plaintiff are about Rs.267,974,804/-. C. Direct the Defendant No.4 not to encash the Performance Bond till resolution of the dispute between the Plaintiff and the Defendants Nos.1 and 2.
---
## Page 4
D. Restrain the Defendants, their agents, employees and persons working under them from encashment of the Performance Bond and Mobilization Bond. E. Mandatory Injunction cancelling the Termination Notice/Letter as the same is illegal, mala fide and void being based upon fraud, misrepresentation, coercion and undue influence. F. Permanent Injunction restraining the Defendants Nos.1 and 2 from denying the full access of the Plaintiff to their assets available at site. G. Restrain the Defendant No.1 from the tendering the remaining work under the said contract, to any third party, unless the matter is settled. H. Any other better or consequential relief that this honourable Court may deem appropriate in the circumstances of the case. J. Costs." [sic] 9. It is in this framework that separate applications have been filed, firstly under Order XXXIX, Rules 1 and 2, C.P.C. and secondly under section 94(c), C.P.C., being C.M.As. Nos. 1806/2019 and 1847/2019 (collectively the "Injunction Applications") in relation to the Performance Bond and Mobilization Advance Bond respectively, with interim Orders being made on 04.02.2019 and 06.02.2019 restraining encashment thereof. 10. Thereafter, an Application bearing C.M.A. No.4702/2019 (the "Stay Application") has also been filed under section 34 of the Arbitration Act, 1940, quite remarkably on behalf of the Plaintiff, seeking that the Suit be stayed in light of the provision for settlement of disputes set out in Clause 94 of the Contract. It is these three Applications that are being addressed, as follows herein below. The Stay Application 11. In respect of the Stay Application learned counsel for the Plaintiff placed reliance on the judgments reported as Pakistan State Oil Company Limited v. Messrs Jilani (Pvt.) Limited and another 2018 MLD 1770, Ch. Abdur Rauf v. Mrs. Zubeda Kaleem and others 2001 CLC 664 and Arbab Abdul Qadir v. Mst. Bibi Fatima 1984 CLC 546, which dilate upon the general principle applicable in relation to the stay of proceedings under section 34 of the Arbitration Act, 1940, in a suit between parties to an arbitration agreement, and sought to contend that the option to invoke section 34 was equally applicable to a plaintiff in as much as the same envisaged "any party to such legal proceedings" making an application in that regard. 12. As none of the authorities cited on behalf of the Plaintiff deal with a matter such as the one at hand, where the application seeking that the proceedings be stayed emanates from the side of the Plaintiff, it would serve no useful purpose to unnecessarily burden this judgment by embarking on a discussion thereof. Suffice it to say that for appreciating the scope and mandate of Section 34 in the context of the dispute for purposes of the Stay Application, a plain reading thereof is sufficient, the section providing as follows:- S. 34. Power to stay legal proceedings where there is an arbitration agreement.---Where any party to an arbitration agreement or any person claiming under him commences any legal proceedings against any other party to the agreement or any person claiming under him in respect of any matter agreed to be referred, any party to such legal proceedings may, at any time before filing a written statement or taking any other steps in proceedings, apply to the judicial authority before .which the proceedings are pending to stay the proceedings; and if satisfied that there is no sufficient reason why the matter should not be referred in accordance with the arbitration agreement and that the applicant was, at the time when the proceedings were commenced, and still remains, ready and willing to do all things necessary to the proper conduct of the arbitration such authority, may make an order staying the proceedings. 13. What immediately stands out from an examination of section 34, is that the term "any party to such legal proceedings", as emphasized by learned counsel for the Plaintiff, is followed by the qualification "at any time before filing a written statement or taking any other steps in proceedings". Needless to say, only a defendant to a suit would file a written statement, a priori it is apparent that Section 34, when read as a whole and in its proper context, does not cater to an application from the side of a plaintiff. 14. Furthermore, as pointed out by learned counsel or the Defendant No.1, the scheme of the relevant clause of the Contract providing for Dispute Resolution is not such as even otherwise admits to an immediate referral of
---
## Page 5
the matter to arbitration, as the same envisages a determination by the Engineer prior to arbitral proceedings being necessitated and commenced. 15. Accordingly, it is apparent that the Stay Application is misconceived, hence is dismissed accordingly. The Injunction Applications 16. Turning then to the Injunction Applications, so as to facilitate appreciation of the dispute in its proper perspective, within the framework of the Contract, it is pertinent to note that, Clause 92(a) and 84(a) thereof, as invoked for purpose of termination, read as follows: 92. Termination of Employer a) If the Contractor shall commit breach or fail to perform or fulfill conditions of contract relating to quality, design, progress, time of performance of the work or any part thereof or if without reasonable cause suspend, the execution or performance of the works or substantial or material part thereof, before completion or if he fails to proceed with the work with reasonable diligence, speed and progress or if he refuses or neglects to comply with notice in writing from the Engineer requiring him to remove defective work or improper materials and or requiring him to take appropriate measures to the satisfaction of the Engineer to expedite the progress of work, and if the Contractor shall continue such above breach or failure for fourteen (14) days after a notice by Registered Post specifying the same has been given to him by the Employer, the Employer may, without prejudice to his other rights or remedies, by further written notice by Registered Post terminate the employment of the Contractor under the Contract. 84. Employer's Right Employer shall have power to adopt any a the following courses as they may deem best suited to the interest of Employer: a. To terminate the Contract (to which termination, 14 (fourteen) days' notice in writing to the Contractor under the hand of Employer shall be conclusive evidence) and in which case the Security Retention of the Contractor shall stand forfeited, and be absolutely at the disposal of Employer. 17. Pressing his case for interim relief, learned counsel for the Plaintiff contended that (a) the Performance Bond was security for payment of liquidated damages, which could not be granted without evidence, (b) that the terms of the Bonds were vague and ambiguous, requiring evidence for purpose of proper interpretation so that the intention of the parties could be correctly discerned, (c) that the Bonds were a conditional security, therefore evidence was required to be recorded prior to encashment, (d) that as the Bonds were insurance guarantees, the principle of encashment applicable to a bank guarantee would not apply, and (e) that no breach of the Contract had occurred on part of the Plaintiff as the delays were attributable to the Defendant No.1, hence termination of the Contract and encashment of the Bonds was unwarranted. 18. Expounding on such contentions, it was submitted that there had been no breach on the part of the Plaintiff and a significant portion of the contract had already been performed by the Plaintiff, with substantial sums having fallen due and remaining payable on account of the works, carried out to date. It was contended that at the time of extension of the Bonds vide the Endorsements, the same were made conditional by inclusion of the term 'Subject to known or reported loss/litigation till date'. It was averred that the inclusion of such term made the Bonds conditional as encashment could not then be sought on account of losses that had materialized prior to extension, meaning that if a contractual term has not been complied with or it has been breached prior to the extension then the performance security could not be invoked. It was submitted that the term 'loss' as mentioned in the said extension of security, is to be construed in a broader context so as to entail loss of time or loss by way of any breach that may have been committed by any party. 19. Reliance was also placed on SRO No. 696(1)/2018 dated 01.06.2018 issued by the Securities Exchange Commission of Pakistan in exercise of powers conferred under the Insurance Ordinance, 2000, containing an `Explanation' stating as follows: `Explanation: The guarantee/bonds issued under this rule shall not be construed as bank guarantees issued by commercial banks and such guarantees/bonds shall be claimable in accordance with the terms and conditions
---
## Page 6
provided in the contract of guarantee; The insurer shall clearly state such disclaimer on the contract of guarantee while issuing guarantees/bonds'. It was submitted that in view of the Explanation, the principles of encashment applicable to bank guarantees would not apply. 20. Reliance was also placed on the judgment of a learned Division Bench of this Court reported as Pakistan Engineering Consultants v. Pakistan International Airline Corporation and others 1993 CLC 1926, where whilst holding that no order could be passed restraining the encashment of a Mobilization Advance Bond, the encashment of a Performance Bond had been restrained on the basis that it would not be just and proper to allow its encashment as the same was dependent on the commission of default. It was pointed out that such judgment had been upheld in appeal before the honourable Supreme Court in terms of its decision reported earlier in time as Pakistan Engineering Consultants v. Pakistan International Airline Corporation and others 1989 SCMR 379. Reliance was also placed on single-bench Judgments of this Hon'ble Court where the encashment of this Court in the cases reported as Crescent Steel and Allied Products Limited v. Messrs Sui Northern Gas Pipe Line Limited and another 2013 CLD 1110; Messrs Zeenat Brother (Pvt.) Limited v. Aiwan-e-lqbal Authority through Chairman, Aiwan Iqbal Complex Lahore and 3 others PLD 1996 Karachi 183 and Messer Jamia Industries Limited v. Messrs Pakistan Refinery Limited, Karachi PLD 1976 Karachi 644. 21. Conversely, it was submitted by learned counsel for the Defendant No.1 that the termination of the Contract had ensued for good cause, as various works were not completed on the agreed completion date as a result of which the completion of the entire project had been impeded. Attention was invited to a Letter dated 28.09.2018, whereby the Plaintiff has himself acknowledged that certain works had been inordinately delayed, as well as to an Interim Payment Certificate dated 17.01.2019, which has been duly acknowledged and received by the Plaintiff, reflecting that only 21.53% of the total works had been completed as en the date thereof. It was submitted that even if the 10th and 11th Running Bills submitted by the Plaintiff, as were currently under process of verification, were factored in, in the context of the Contract Price it was apparent that less than 24% of the work required under the Contract had been carried out by the Plaintiff, despite the lapse of almost four years. 22. It was submitted that it is a well settled position in that the performance of a bond/guarantee stands on a footing similar to an irrevocable letter of credit and it is not concerned in the least with the issue as to whether the supplier of such bond/guarantee has performed his contracted obligation or not, nor with the question whether the supplier is in default or not and the issuer of such a bond/guarantee must make payment thereunder upon a demand being made in accordance with its terms, if so stipulated, without proof or conditions, and encashment cannot be interfered with irrespective of the existence of a dispute nor could an injunction restraining payment be granted on such a ground. It was submitted that the plea advanced on behalf of the Plaintiff that encashment of the Bonds ought to be restrained in view of the alleged existence of a dispute and the plea for the referral thereof to arbitration was thus misconceived and untenable. 23. It was emphasised that the amount of Mobilization advance which was guaranteed through the Mobilization Advance Bond was the Defendant No. l's money which had been advanced/loaned to the Plaintiff so that he could perform his obligations under the contract without any financial constraints and now this money of the Defendant No.1 had been wrongly retained by the Plaintiff despite the termination of the Contract. 24. It was argued that a restraint could not be imposed in relation to the encashment except in cases of fraud or in light of special equities. Reliance was placed on the judgments of the Honourable Supreme Court in the case reported as Shipyard K. Damen International v. Karachi Shipyard and Engineering Works Ltd. PLD 2003 SC 191 and Messrs National Construction Ltd. v. Aiwan-e-lqbal Authority PLD 1994 Supreme Court 311. 25. It was pointed out that in the instant case, the Plaintiff had not even alleged fraud and as far as special equities is concerned, it was submitted that there were none operating in favour of the Plaintiff. 26. It was submitted further that the principles laid down by the Courts in relation to Performance Bonds and Mobilization Advance Bonds issued by banks were equally applicable to such bonds when issued by insurance companies, reliance being placed on the judgment of a learned single Judge of the Islamabad High Court in the case reported as Montage Design Build v.…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.