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Petitioner: Wartsila Pakistan (Pvt.) Limited through Authorized Representative VS Respondent: Gul Ahmed Energy Limited and another
Court Name: Sindh High Court Judge(s): Muhammad Junaid Ghaffar Title:Wartsila Pakistan (Pvt.) Limited through Authorized Representative vs Gul
Ahmed Energy Limited and another Case No.: Suit No. 2349 of 2018 Date of Judgment:2019-04-05 Reported As: 2023 CLD 1511 Result: Application dismissed Judgment
ORDER MUHAMMAD JUNAID GHAFFAR, J. This is a Suit for Declaration and Permanent Injunction; whereas, through C.M.A. No.1794112018, the Plaintiff seeks a restraining order against the Defendants from encashment of the Performance Guarantee No. 779020406114-T for US$ 2,284,426/-. 2. Learned Counsel for the Plaintiff submits that the Plaintiff entered into an Operation and Management Agreement dated 18.09.1996, inter alia, for operation, management and maintenance of a Power Plant of Defendant No.1 for 136.17 M.W at Korangi Industrial Area, Karachi, and thereafter there were supplemental Agreements executed on 15.11.2001 and 12.10.2007, which are deemed to be an integral part of the main Agreement. Per learned Counsel Clause-9 of the Agreement provided for the price and payment; whereas, clause 9/relates to maintenance and in clause 9.3.3 terms of payment has been provided, whereby, the Invoices raised by the Plaintiff for its services were to be paid within 30 days from the date of Invoice, and if there is any delay in payment interest at prime rate plus 2% was to be charged. According to him in terms of Clause 9.5, a payment guarantee was to be provided through an Escrow Management; whereas, it is the case of the Plaintiff that an amount of EUR 3,408,368.00 is outstanding till 14.12.2018 and despite several assurances, the Defendant No.1 has failed to make payment and has defaulted. He submits that pursuant to the Agreement in question, a Performance Guarantee for US $ 2,284,426/- has also been furnished by the Plaintiff through Defendant No.2, whereas, after delay in payments, the Plaintiff has invoked the termination Clause 16.1.1 through a Notice dated 07.12.2018, which provides that if the Customer i.e. Defendant No.1 fails to comply with any other material obligation under this
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Agreement, and such failure is not remedied or cured within 60 days, the Contractor (Plaintiff) can terminate the Agreement. According to him instead of responding to this notice, the defendant No.1 has approached Defendant No.2 for encashment of the Performance Guarantee; hence instant Suit. He further submits that in the counter affidavit, various objections have been raised regarding non-performance of the Agreement by the Plaintiff in respect of defects in transformer, short supply of spare parts, maintenance issues, turbo charger problem and exhaust stacks; however, through a detailed rejoinder all such objections have been responded to, with supporting documents i.e inspection reports and other material generated from time to time, which fully satisfies the objections so raised on behalf of Defendant No. 1. According to him the amount is overdue and instead of making payment of the same, Defendant No.1 has come up with objections and intends to seek encashment of the Performance Guarantee, which is not justified and is rather illegal. 3. On the other hand learned Counsel for Defendant No.1 has read out Clause-9 as well as 16 of the Agreement in question and submits that the dispute, if any, between the parties is to be referred to Arbitration and for that a separate application has already been filed by Defendant No.1; however, for the present purposes according to him in terms of Clause 9.5 no Escrow Account was ever established as it was only relevant when the Project was being financed by the Lenders Le. Banks, who have since been repaid w.e.f. 2009; whereas, during the entire period of the Agreement, the Plaintiff has never pressed upon opening of an, Escrow Account or for making any other arrangement in respect of Clause 9.5. Per learned Counsel the interim order has been obtained by misrepresentation and concealment of facts as there is no Performance Guarantee involved in this case, and rather a Letter of Credit has been established by Standard Chartered Bank, U.K in favor of Defendant No.1; whereas, even the said Bank has not been jointed as a Defendant and it is only the Advising Bank in Pakistan, which has been arrayed as Defendant No.2. Per learned Counsel there is huge amount outstanding against the Plaintiff as detailed in Paras-21 and 22 of the Counter Affidavit and even if the claim of the Plaintiff is set off, an amount of Rs.800 Million approximately is still outstanding against the Plaintiff; therefore, no case is made out. Learned Counsel has then referred to Section 126 of the Contract Act, 1872 and submits that the Letter of Credit in question has to be honoured by the Guarantor without any reference or objection of the Plaintiff. According to him this is not a Performance Guarantee as usually executed in such matters, but it is a Letter of Credit, and in terms of International Banking Standards notified as CCP-600 (Articles 4 and 5 thereof), the Bank in question is not supposed to seek permission or attend to objections of the Customer as it is a matter between the Bank and the beneficiary i.e. Defendant No.1. In support of his contention he has relied upon the case reported as Haral Textile Mills Limited v. Banque Indosuez Belgium, S.A. and others (1999 SCMR 591) and submits that this Judgment of the Hon'ble Supreme Court clearly defines the distinction between a Performance Guarantee and a Letter of Credit and the mode and manner in which a Letter of Credit is to be honoured. In view of such position he has prayed for dismissal of the Injunction Application. 4. Learned Counsel for Defendant No.2 submits that they are only a proforma party and are acting as an Advising Bank to the Letter of Credit in question and has got nothing to do with the merits of the case and will abide by the orders of the Court as may be passed. 5. While exercising his right of rebuttal, learned Counsel for the Plaintiff has contended that the instrument in dispute is not a Letter of Credit but a Standby Letter of Credit Performance Bond; hence reliance on the case of Haral Textile Mills Limited (supra) is not relevant. As to the observations of the Court in its Order dated 14.3.2019, he submits that through Affidavit, all relevant documents have been filed and it was never the intention of the Plaintiff to conceal any document; whereas, as a Counsel he has acted upon the instructions of the Plaintiff. According to him, the documents were not annexed as they were all expired documents, therefore, no concealment
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could be alleged. As to the objection regarding Arbitration Clause in the Agreement, learned Counsel submits that before invoking the Arbitration Clause, there is a condition precedent, which has to be satisfied as per Clause-18 thereof, and since the Defendant No.1 has failed to enter into any consultation; therefore, this clause within itself cannot be acted upon until such conditions are met or satisfied. In support he has relied upon the cases reported as Pakistan Engineering Consultants v. PIA and others (1993 CLC 1926), Pakistan Engineering Consultants v. PIA and others (1989 SCMR 379), Shaukat and Raza (Pvt.) Ltd. v. Pakistan Steels Corp. Ltd and others (1988 CLC 342) and Eckhardt and Company and another v. Muhammad Hanif (PLD 1986 Kar. 138). 6. I have heard all the learned Counsel and perused the record. Facts have been briefly discussed hereinabove to the effect that Plaintiff entered into an Operation and Management Agreement dated 18.09.1996 for operation and maintenance of the Power Plant of Defendant No.1 at Karachi. Clause 4 of the Agreement deals with Performance Bond and provides that "The Contractor (Plaintiff) shall submit a performance bond (the "Performance Bond") to the Customer before start of commissioning in the form of a letter of credit, conditioned on the timely and satisfactory compliance by the Contractor with its obligations under this Agreement". Before proceeding further it is very important for the Court to first deal with this issue. It is the case of the Plaintiff that the instrument in question is a performance guarantee bond and not a letter of credit; whereas. Defendant No.1's case is that it is a Letter of Credit and in view of the dicta laid down by the Hon'ble Supreme Court in the case of Haral Textile Mills Limited (supra), this Court cannot, and must not, pass any injunctive order against its encashment/honoring. Alternatively, as argued in rebuttal, the case of the Plaintiff is that at most, this is a Standby Letter of Credit; hence the dicta laid down by the Hon'ble Supreme Court in the case of Haral Textile Mills Limited (supra), which was in respect of a Letter of Credit and not a Standby Letter of Credit, is not applicable. In view of this position, first it is to be examined that as to whether the instrument in question is a Performance Guarantee simpliciter, or a Letter of Credit. Performance Guarantee. Bond is defined as a business agreement between a client and a contractor for the contractor to perform all of their obligations under the contract. A performance guarantee might also include a clause to protect the client against losses incurred in case the contractor fails to perform and enforcement action is required or an alternative Contractor Needs to be engaged. <http://www.businessdictionay.com/definition/performance>. A performance bond is issued to one pain of a contract as a guarantee against the failure of the other party to meet obligations specified in the contract. It is also referred to as a contract bond. A performance bond is usually provided by a bank or an insurance company to make sure a contractor completes designated projects. <https://www.investopedia.com/terms/p/performancebond.asp>. Performance Guarantee means any guarantee by any person of the performance of the obligation of another person (other than obligations in respect of payments, indebtedness or other monetary obligation of any kind) under contracts of such other person to design, develop, manufacture, construct or products or production facilities (and related nonmonetary obligations) or to provide services related to any of the foregoing. https://www.lawinsider.com/dictionaryiperformance-guarantee. On the other hand a Letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. This is a direct payment method in which the issuing bank makes the payments to the beneficiary, whereas, a standby letter of credit is a secondary payment method in which the bank pays the beneficiary only when the holder cannot. <http://www.investopedia.com/terms/1/letterof credit.asp>
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7. The above definitions reflect that in fact a Performance Bond within itself is not an instrument; rather it is a form of document which guarantees something in Agreement and Contracts. It can be through a Bank Guarantee or and Insurance Guarantee or for that matter via a Letter of Credit or even a Standby Letter of credit. Perusal of the record reflects that pursuant to the Agreement in question the instrument executed and as required was in the form of a Standby Irrevocable Letter of Credit. Initially the Letter of Credit was from another Bank, however, in 2011, the same was issued by Defendant No.2. The last instrument is dated 24.04.2014 for an amount of US $ 2,219,820/-. It is to be noted that this document having Reference Transaction No:779020406114-T was never placed on record by the Plaintiff; but by Defendant No.1 through its counter affidavit of Defendant No.1, and while confronted it was argued on behalf of the Plaintiff that it was an expired document: hence, was not deemed necessary. However, it appears that notwithstanding its expiry from time to time, the same instrument with same Reference Number, as and when needed, was extended after its expiry and so also amended in respect of the amount in question. But, the document itself remained the same, the one, which was established for the first time between the parties i.e. the Standby Letter of Credit. Various amendments have been placed on record, which also reflects that these are in respect of the same Letter of Credit be it "standby" as contended. On the other hand, the Plaintiff in its Plaint has made an attempt to call this instrument as a "Performance Guarantee". It would be advantageous to refer to Paras-9 and 10 of the Plaint, which reads as under: 9. However, to the utter shock and distress of the plaintiff, the defendant No.1 rather than curing the defects and making good its material obligations to make timely payments to the plaintiff, under the O&M Agreement; has threatened to seek encashment of the entire Performance Guarantee (in the sum of USD 2,284,426.-) and is playing a fraud against the plaintiff. True copy of the Performance Guarantee is attached and marked as "G". 10. It is submitted that, in the even the encashment of the said Performance Guarantee takes places, the plaintiff would suffer from irretrievable harm and injustice and may very well have to cease operations in Pakistan due to the immense financial loss. It is further submitted that one hand, the plaintiff has been deprived of its rightful payment of EUR 3,408,368/- (as of the date of this suit) for the effective and efficient services rendered under the O&M Agreement and on the other hand, the defendant No.1 seeks to fraudulently, unjustly enrich itself through encashment of the Performance Guarantee. It is submitted that, there is prima facie case of fraud on part of the defendant No.1 and special equities operate in favour of the plaintiff from in the form of preventing irretrievable harm and injustice being caused to the plaintiff." 8. It has never been the case of the Plaintiff that any Letter of Credit was ever issued in favour of Defendant No.1 and through Annexure "G" at Page-399, a document has been placed on record calling it as a Performance Guarantee, which was also crucially considered at the time of granting the ad-interim injunction; but later on it has transpired after filing of counter affidavit and hearing the parties, that that the said document is in fact an amendment in the main Letter of Credit bearing Transaction No:779020406114-T. It is in fact insertion of a Clause in field 77-C, which referrers to some Performance Bond; however, it remains a fact that the instrument in question was not a Performance Guarantee but a Standby Letter of Credit for performance. It would be advantageous to refer to original Clause 77-C of the instrument in question, wherein, the amendment was carried out through Annexure "G". Clause-77C reads as under:- 77C DETAIL OF GUARANTEE WE HEREBY ISSUE OUT STANDBY IRREVOCABLE LETTER OF CREDIT AS FOLLOWS. PLEASE ADVISE THE SBLC TO THE BENEFICIARY ADDING YOUR CONFIRMATION. QUOTE BENEFICIARY:
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GUL AHMED ENERGY LIMITED 35-B BLOCK 06, PECHS KARACHI, PAKISTAN APPLICANT; WARTSILA NSD PAKISTAN (PVT) LIMITED 6-KILOMETER, RAIWIND ROAD LAHORE PAKISTAN MAXIMUM AMOUNT OF CREDIT: USD 2,219,820.00 EXPIRY DATE: 15TH APRIL 2015 PARTIAL DRAWINGS: PERMISSIBLE AVAILABILITY: PAYABLE AT SITE AGAINST PRESENTATION OF THE FOLLOWING ORIGINAL DOCUMENTS: BENEFICIARY'S DRAFT DRAWN ON US MENTIONING DRAWN UNDER STANDARD CHARTERED BANK, LETTER OF CREDIT NO. 779020406114-T. BENEFICIARY'S DULY SIGNED DRAWING CERTIFICATE IN THE FORMAT ATTACHED HERETO AS ATTACHMENT NO.1 FORMING AN INTEGRAL PART OF THIS LETTER OF CREDIT. UPON RECEIPT OF DOCUMENTS AT SCB, PAKISTAN COUNTERS IN STRICT COMPLIANCE WITH LETTER OF CREDIT TERMS WE WILL REMIT PROCEEDS IN PAK RUPEE EQUIVALENT OF INVOICE VALUE AT THE PREVAILING OD BUYING RATE AT THE TIME OF NEGOTIATION, IN ACCORDANCE WITH YOUR INSTRUCTIONS AS PER LC TERMS. OTHER INSTRUCTIONS: THIS LETTER OF CREDIT IS SUBJECT TO THE UCP, ICC PUBLICATION NO.600. THIS LETTER OF CREDIT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH (PAKISTAN) LAW AND SHALL BE SUBJECT TO THE JURISDICTION OF (PAKISTANI) COURTS CONFIRMATION INSTRUCTIONS: CONFIRM." 9. Similarly at the same time it would also be advantageous to refer to Annexure "G" at Page-399, which has been termed and called as a Performance Guarantee by the Plaintiff in its pleadings. The same reads as under: 79 NARRATIVE PLEASE INCLUDE THE FOLLOWING CLAUSES IN FIELD 77C. THE PERFORMANCE BOND SHALL BE VALID FOR A PERIOD OF ONE (1) YEAR AND SHALL BE VALID FOR A PERIOD OF ONE (1) YEAR AND SHALL BE RENEWED ANNUA LLY ONE (1) MONTH BEFORE ITS EXPIRY PROVIDED THAT (SAVE IN LAST CONTRACT YEAR) ANY PERFORMANCE BOND WILL NOT EXPIRE UNLESS AND UNTIL THE PERFORMANCE BOND FOR THE FOLLOWING YEAR HAS BEEN PROVIDED TO THE BENEFICIARY. PROVIDED HOWEVER THAT THIS GUARANTEE WILL EXPIRE ON 02 NOVEMBER 2019 AT THE LATEST, AFTER WHICH DATE OUR LIABILITY WILL CEASE AND THIS GUARANTEE SHALL BECOME NULL AND VOID WHETHER THE ORIGINAL HAS BEEN RETURNED TO US OR NOT. ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED." 10. Perusal of the above clearly reflects that the instrument being called as a Performance Guarantee or a Bank Guarantee by the Plaintiff is, and in fact, an additional insertion in main Clause 77C of the Standby Letter of Credit in question. Therefore, on the face of it the assertion of the Plaintiff to this effect that the instrument in question is a Bank Guarantee (for Performance) is incorrect and appears to be an attempt to mislead the Court by concealing facts. A party coming to the Court must disclose all facts and should not conceal facts. Whereas, it is also mandatory on the party coming to the Court for an injunctive relief to place on record all relevant and related documents. In the plaint it has not been disclosed that the Performance of the Plaintiff was secured by means of a Letter of Credit (be it Standby). On the contrary it has been termed as a Performance Bank Guarantee. Both may have somewhat similar implications; but for the purposes of indulgence by the Court in its honoring it is to be treated differently. Though ordinarily even in Bank Guarantees, the Banks are obliged to honor them as and when encashment is sought; however, it has become a practice unfortunately in this Country, that every now and then, the
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Banks do approach the Customer, and are involved in providing enough leverage and cushion time to the Customer to seek a restraining order from the Court. Even Bank Guarantees furnished to the Nazir of this Court are being dishonored on flimsy grounds that Customer has objected or funds are not available. On the other hand a Letter of Credit or even a Standby Letter of Credit is not an instrument in which the Customer or an Applicant can interfere. It is only dependent on the presentation of documents as mentioned in the credit itself, and if they are in order and as per the credit, the Bank is obliged to honor and pay. There is no ifs and buts attached to this kind of an instrument. 11. A learned Division Bench of this Court in the case of Kohinoor Trading (Pvt.) Limited v. Mangrani Trading Co. and 2 others reported as 1987 CLC 1533 has been pleased to hold (speaking through Ajmal Mian, J. as his lordship then was), that under an irrevocable Letter of Credit payment cannot be stopped on the ground that there was some breach on the part of the vendor as to the quality of the goods as it is a negotiable document in the commercial world which is negotiated inter alia inter-se between the banks and therefore, the Court cannot lightly cause its dishonoring by one bank to another, unless prima facie a sufficiently grave cause is shown. The relevant finding is as under; The above cases cited by Mr. Nasim Farooqui and the passages from the Book referred to by him indicate that generally an irrevocable letter of credit cannot be dishonoured by a bank but there may be exceptions to the above general rule, for example, where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent but the evidence on the question of fraud and as to the bank's knowledge must be clear, or when there is challenge to the validity of the letter of credit. In the Present case respondent No.3 Bank was to remit L/C amount to: their counterpart in Switzerland on the basis of the commitment made by them. The appellants obtained the documents from respondent No.3 without any protest and without pointing out that there was any breach as to the terms of the L.C. It is also apparent that though the alleged survey report (which according to the learned counsel for the respondents 1 and 2 is an ex parte carried out after several weeks from the date of the delivery) indicates that the packing of the goods were allegedly found in damaged condition, the appellants had taken the delivery of the goods from the carrier without any protest. The question, whether the goods were dispatched by respondent No.2 in accordance with the description given in the letter of credit or whether there was any breach as to the quality would be an issue at the trial. In our view, under an irrevocable letter of credit payment cannot be stopped on the ground that there was some breach on the part of the vendor as to the quality of the goods. An irrevocable letter of credit is a negotiable document in the commercial world which is negotiated inter alia inter se between the banks and, therefore, the Court cannot lightly cause its dishonouring by one bank to another, unless prima facie a sufficiently grave cause is shown. If we were to accept the contention of Mr. Nasim Farooqui it will gravely impair reliability and sanctity of an irrevocable letter of credit and will lead to commercial uncertainty. An irrevocable letter of credit is open in favour of a foreign exporter through a bank, which in turn makes commitment to a foreign bank, which in turn makes the payment generally against the bill of lading and other necessary documents after the shipment of the goods. We may also observe that the reliance upon rule 2 of Order XXXIX, C.P.C. by Mr. Nasim Farooqui is not warranted in the instant case as the alleged breach/injury had already been committed/caused by respondent No.2 before the filing of the suit. We are, therefore, of the view that the learned Single Judge has exercised discretion properly in the matter and has rightly declined to withhold the payment of any of the amount under the irrevocable letter of credit in question. The appeal has no merits and, therefore, it is dismissed in limine.
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12. Similarly, the Hon'ble Supreme Court in the case of Haral Textile Mills Limited (supra) had the occasion to interpret the implication of refusing or restraining encashment of a Letter of Credit and the Hon'ble Supreme Court has been pleased to observe that an irrevocable Letter of Credit is to substitute the issuing Bank for the buyer as to the person, who undertakes to buy the shipping documents and this undertaking is absolute in the sense that so long as the documents are in accordance with the terms of the Contract, the Bank is under an obligation to accept the same, regardless of any dispute between the seller and the buyer as to the quality of goods or services or otherwise. The only exception according to the Hon'ble Supreme Court is that where it is proved that any demand for payment already made or will thereafter be made is clearly fraudulent or when there is a challenge to the validity of a Letter of Credit on a ground akin to fraud or concealment of material facts. It would be advantageous to refer to the finding of the Hon'ble Supreme Court at Para-12, which reads as under: 12. From the above-cited case-law and the celebrated treatises on the subject, it appears that the effect of an irrevocable Letter of Credit is to substitute the issuing bank for the buyer as to the person who undertakes to buy the shipping documents and this undertaking is absolute in the sense that so long as the documents of title to the goods which the seller tenders to the bank are in accordance with the terms of the contract, the bank is under an obligation to accept the same regardless of any dispute between the seller and the buyer as to the quality of the goods or otherwise. Any dispute between the seller and the purchaser is extraneous in such a case. On the basis of the above legal position an elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character which do not call for interference by a Court of law. The above system would break down completely if a dispute as between the seller and the purchaser was to have the effect of freezing the sum in respect of which the Letter of Credit was opened. It is only in…
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