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Petitioner: China Harbour Engineering Company Limited VS Respondent: Karachi Port Trust & another
Court Name: Sindh High Court Judge(s): Yousuf Ali Sayeed Title:China Harbour Engineering Company Limited vs Karachi Port Trust &
another Case No.: Suit No. Nil (- 392) of 2018 Date of Judgment:2019-12-18 Reported As: 2020 SHC 78 Result: Suit dismissed Judgment ORDER YOUSUF ALI SAYEED, J. The Plaintif f and Pemcon Geo-Engineerin g (Private) Limited ("Pemcon") entered into a Joint Venture Agreement dated 11.07.2009 for purpose of tenders invited in relatio n to the works to be carried out for construction of the quay wall of the Pakistan Deep Water Container Port being developed by the Defendant No.1 (the "Project"), and their tender in the sum of PKR 18,256,166,070 (the "Contract Price") was accepted in terms of a Letter of Acceptance dated 12.01.2010, bearing reference No. P&D-G (560)/2007/VI/299 (the "LOA"), following which the Plaintif f along with Pemcon entered into a Contract Agreement dated 04.05.2010 (the "Contract") with the Defendant No.1, incorporating various addenda as specified in Clause 2 thereof, including but not limited to the LOA, the Instructions to Bidders, as well as the General and the Special Conditions of Contract. 2. As per the requirement of the bid, the Joint Venture of the Plaintif f and Pemcon deposited a Performance Security with the Defendant No. 1 equivalent to 10% of the Contract Price in the shape of a Letter of Guarantee for the sum of PKR, 1,369,212,455/- plus Chinese Yuan 38,353,290/- issued by the Defendant No.2 on 23.02.2010 (the "Guarantee"), operatively worded as follows: "To The Trustees of the Port of Karachi, Karachi Know all men by these presents, that in pursuance of the terms of the bidding documents and its acceptance as conveyed vide letter of acceptance (hereinafter called the documents) vide letter No. P and D-G (560)/2007 /vi/299 dated January 12, 2010, and at the reque st of the said contractor . We, the guaran tor above named, are held and firmly bound unto the Trustees of the Port Of Karachi (hereinafter called the employer) in the sum of the amount stated above i.e. PKR. 1,369,212,455/- (Pakistani Rupees One Billion Three Hundred Sixty Nine Million Two Hundred Twelve Thousand Four Hundred and Fifty Five Only) and CNY 38,353,290/- (Chinese Yuan Thirty Eight
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Million Three Hundred Fifty Three Thousand Two Hundred And Ninety Only) for the payment of which sum well and truly to be made to the said employer , we bind ourselves, our heirs, executors, administrators and successors, jointly and severally , firmly by these presents. The condition of this obligation is such that the contractor shall submit a performance bond in the shape of bank guarantee for faithful performance of the works relating to quay wall construction works contract for the Pakistan Deep W ater Container Port (PDWCP). Now the condition of the bond is, if the contractor shall well and truly perform and fulfill all the undertakings, covenants, terms and conditions of the said documents during the original terms of the said documents and any extensions thereof that may be granted by the employer , with or without notice to the guarantor , which notice is, hereby , waived and shall also well and truly perform and fulfill all undertakings, covenants terms and conditions of the contract and of any and all modifications of said, documents, that may hereafter be made, notice of which modifications to the guarantor being hereby waived, then, this obligation to be void, otherwise to remain in full force and virtue till all requirements of clause 49, defects liability , of conditions of contract are fulfilled. But in any case the validity of this performance security should not be later than February 28, 2014. Our total liability under this guarantee is limited to the sum stated above PKR. 1,369,212,455/- (Pakistani Rupees One Billion Three Hundred Sixty Nine Million Two Hundred Twelve Thousand Four Hundred and Fifty Five Only) and CNY 38,353,290 (Chinese Yuan Thirty Eight Million Three Hundred Fifty Three Thousand Two Hundred and Ninety Only) and it is a condition of any liability attaching to us under this guarantee that the claim for payment in writing shall be received by us within the validity period of this guarantee, failing which we shall be discharged of our liability , if any , under this guarantee. We, Bank Alfalah, Limited Main Branch Karachi (the guarantor), waiving all objections and defences under the contract, do hereby irrevocably immediately and independently guarantee to pay to the employer without delay , upon the employer's first written demand through chief accounts officer, KPT 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 sated above i.e. PKR, 1,369,212,455/- (Pakistani Rupees One Billion Three Hundred Sixty Nine Million Two Hundred Twelve Thousand Four Hundred and Fifty Five Only) and CNY 38,353,290 (Chinese Yuan Thirty Eight Million Three Hundred Fifty Three Thousand Two Hundred and Ninety Only), against the employer's written declaration that the contractor has 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 contractor has duly perfo rmed 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 contractor or any other person. Notwithstanding anything stated herein above to the contrary our total liability is restricted to PKR. 1,369,212,455/- (Pakistani Rupees One Billion Three Hundred Sixty Nine Million Two Hundred Twelve Thousand Four Hundred and Fifty Five Only) and CNY 38,353,290 (Chinese Yuan Thirty Eight Million Three Hundred Fifty Three Thousand Two Hundred and Ninety Only) payable in Pakistani Rupees and shall not exceed this amount in any case. Claims if any must be received in writing at our counter s on or before the expiry date February 28, 2014. After this date no claims will be entertained and we shall be absolved and discharged of all liabilities hereunder whether this guarantee is returned to us or not. Claims if any, shall be paid in Pakistani Rupees at the exchange rate prevailing on the date of encashment. In witness whereof,..." 3. Whilst the Guarantee was initially specified as remaining in force up to 28.02.2014, vide several Amendments the validity thereof was extended from time to time. 4. Apparently , a dispute subsequently arose between the Plaintif f and Defendant No.1 as to alleged delays in execution of works under the Contract, and vide a letter dated 15.02.2018 addressed to the Defendant No.2, the Defendant No.1 made a call for encashment of the Guarantee. 5. The operative part of the aforementioned letter dated 15.02.2018 addressed by the Defendant No.1 to the Defendant No.2 in relation to the Guarantee proceeds in the following terms:
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"Manager , Bank Alfalah Limited, Karachi Main Corporate Branch, B.A Building I.I Chundrigar Road, Karachi . SUB: "ENCASHMENT OF BANK GUARANTEE" With reference to subject matter , it is to inform that B/G No.CPBD/0298/100005 dated. 23-02-2010 for Rs. 1,369,212,455/- and CNY 38,353,290/- of M/s. China Harbour Engineering Company Ltd, is going to be expired on 30-09-2018. In accordance with terms and conditions laid down in the above Guarantee you are hereby called upon to pay the Karachi Port Trust the sum of Rs. 1,369,212,455/- (Pakistani Rupees One Billion Three Hundred Sixty Nine Million Two Hundred Twelve Thousand Four Hundred and Fifty Five Only) and CNY 38,353,290/- (Chinese Yuan Thirty Eight Million Three Hundred Fifty Three Thousand Two Hundred and Ninety Only) plus liquidated Damages, immediately as the contractor has failed to complete the subject project in stipulated time period. Kindly arrange a pay order equivalent to the amount of above mentioned Bank guarantee in favour of Karachi Port Trust at your earliest please." 6. Being aggrieved, the Plaintif f has brought this suit, assailing the letter seeking encashment of the Guarantee, and praying that this Court be pleased to:- "a) declare the Performance Guarantee as extended from time to time valid and still in operation as per the terms and conditions provided in the Performance Guarantee until its final extension dated September 30, 2018. b) declare that the Impugned Notice / any subsequent Notice in respect of encashment of Performance Guarantee as extended from time to time to be without jurisdiction, malafide, illegal, void ab-initio, of no legal effect, unlawful and without any legal standing and hence is liable to be set aside. c) permanently restrain the Defendant No. 1, their officers/ agents/privies/cronies from issuing any encashment notice in respect of the Performance Guarantee as extended from time to time and prevent the Defendant No. 1 form taking any adverse action in any manner in respect thereof, including and not limited to issuing any such notice or subsequent encashment notice thereof; d) grant costs and special costs; e) grant permission to amend and add any further relief under the circumstances of the case; and f) grant any other adequate relief deemed fit in the circumstances." 7. It is in this framework that an Application has been filed under Order 39, Rules 1 and 2 CPC, being CMA No. 2582/18 (the "Injunction Application" ), with an interim Order having been made on 19.02.2018 restraining the Defendant No.2 from proceeding with encashment of the Guarantee. 8. It is also pertinent to mention that at the time of the institution, upon presentation of the Plaint on 19.02.2018, the Office had raised an Objection with reference to the Power of Attorney in favour of the signatory through whom the Suit had been instituted, namely one Wang Xiaoping, which remained unaddressed. The Suit accordingly remained unnumbered and the competence of the signatory also came to be denied by the Defendant No.1 in terms of its Written Statement, with the maintainability of the Suit being impugned during the course of proceedings on the ground that the suit had been filed without authorization, hence was not maintainable and ought to be dismissed. 9. As such, it is the Injunction Application and the question of maintainability that were proceeded on and are addressed as follows herein below . 10. Turning firstly to the Injunction Application, it was contended by learned counsel for the Plaintif f that the Letter dated 14.02.2018 addressed by the Defe ndant No.1 to the Defendant No.2 making a call for encashment of the Guarantee proceeded on the assertion of the Plaintif f?s failure to complete the Project within the stipulated timeframe, whereas the Project had been substantially completed and, at the time, the Defects Liability Period was valid up to 14.12.2018, and in view of such validity as well as the absence of any prior notice to the Plaintif f under Clause 10.3 of the Contract or having recourse to the mechanism for settlement of claims and disputes, as provided, the call for encashment of the Guarantee was unwarranted and unlawful. 11. Reliance was also placed on the judgment of a learned Division Bench of this Court reported as Pakistan Engineering Consultants vs. Pakistan International Airline Corporation & others 1993 CLC 1926 , where
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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 vs. Pakistan International Airline Corporation & others 1989 SCMR 379. Reliance was also placed on single-bench Judgments of this Honble Court where the encashment of this Court in the cases reported as Messers Zeenat brother (Pvt) Limited vs. Aiewan-e-Iqbal Authority through Chairman, Aiwan Iqbal Complex Lahore & 3 others PLD 1996 Karachi 183; and Messrs Continental Cable (Pvt.) Ltd. V. Messrs China Harbor Engineering Co. Lts. And another 2011 CLD 1625 . 12. 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(s) as a result of which the completion of the entire Project had been impeded. Attention was invited to correspondence wherein it was reflected that works had been delayed. 13. It was submitted that it is a well settle d position that performance under a bank 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 party furnishing such guarantee has performed his contracted obligation or not, nor with the question as to whether that party is in default or not and the issuer of the bank guarantee must make paym ent thereunder upon a demand being made in accordance with its terms and without proof or conditions, if so stipulated, 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 Plaintif f that encashment of the Guarantee ought to be restrained in view of the alleged existence of a dispute and the plea as to existence of a mechanism under the Contract for resolution thereof was fallacious and untenable. 14. It was argued that a restraint could not be imposed in relation to the encashme nt of an instrument of the nature of the Guarantee 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-Iqbal Authority PLD 1994 Supreme Court 311, and it was pointed out that in the instant case, the Plaintif f had not even alleged fraud or demonstrated that there were any special equities operating in its favour . It was also pointed out that that whilst the Contract had and Pemcon, and the Guarantee had been furnished accordingly , it was only the Plaintif f that had come forward individually , in the absence of Pemcon and without even impleading such participant in the Joint V enture as a party . 15. Having considered the submissions advanced at the bar, it merits consideration at the outset that the seminal authority from our jurisprudence defining the parameters for interference by a Court in relation to the encashment of a performance guarantee is the decision of the Honourable Supreme Court in the case of Shipyard K. Damen (Supra), where various precedents on the subject of guarantees were examined by the Apex Court, including various judgments of the Supreme Court of India as well the decisions of the English Courts in the cases of RD Harbottle (Mercantile) Ltd v National Westminster Bank Ltd [1978] QB 146 and Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 , from which the following principles were distilled: "(i) The performance of guarantee stand s 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 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. (i) 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. (ii) 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
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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. (iii) 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 . (iv) 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. (v) The Bank guarantee is an autonomous contract and imposes an absolute obligation on the bank to fulfill the terms and the payment on the bank guara ntee becomes due on the happening of a contingency on the occurrence of which the guarantee becomes enforceable. (vi) 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. (vii) 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. (viii) The unqualified terms of guarantee could not be interfered with by Courts irrespective of the existence of dispute." 16. As can be discerned, the basic premise is that a guarantee is independent of the contract between the parties giving rise to its issuance. This follows what is known as the "autonomy principle" , which recognizes the autonomy of the issuer institution to I respond to a compliant call on an unconditional guarantee in fulfilment of its promise to pay, and in the absence of the "fraud exception", is neither obliged nor entitled to consider the contract between the parties. 17. The parameters for application of the "fraud exception in interlocutory procee dings in respect of performance Bond and guarantees was considered by the Privy Council in Alternative Power Solution Ltd v Central Electricity Board [2015] 1 WLR 697, on appeal from the Supreme Court of Mauritius, and came to be distinguished from ordinarily applicable test formulated by the House of Lords in the case of American Cyanamid Co v Ethicon Ltd [1975] AC 396. In the context of performance Bond and guarantees, the relevant test was then succinctly set out by the Privy Council in the following terms: "in interlocutory proceedings the correct test for application of the fraud exception to the strict general rule that the court would not intervene to prevent a banker from making payment under a letter of credit following a compliant presentation of documents was whether it was seriously arguable that on the material available the only realistic inference was that the beneficiary could not honestly have believed in the validity of its demands under the letter of credit and that the bank was aware of such fraud." 18. Hence, once a call had been made, as in the instant case, the Court cannot then grant injunctive relief against the beneficiary as the right to payment under the instrument already stands crystallised when the call is made, and so far as injunctive relief against the issuer is concerned, in such situations, an injunction could be granted, in theory , only if the fraud exception were satisfied. However , in the present case, no plea has been raised as to fraud underpinning the call for encashment of the Guarantee or indeed that such call is not within the validity of the Guarantee or otherwise not in consonan ce with the terms thereof, and, instead, the pleas taken all relate to the merits of the dispute under the Contract. 19. As to such pleas as have taken with reference to the provisions of the Contract for settlement of disputes, it is pertinent to note that the judgment of the Honourable Supreme Court in the case of Messrs National Construction Ltd. v. Aiwan-e-Iqbal Authority PLD 1994 Supreme Court 311 as well as that of the Supreme Court of India in the case of State of Maharashtra and another v. M/s. National Construction Company ,
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Bombay and another (decided on July 9, 1969), as referred to in Shipyard K. Damen (Supra), squarely address and answer this aspect of the case set up by the Plaintif f. 20. In the case of Messrs National Construction (supra) , it was held by the Apex Court as follows: In the instant case, therefore, the bank guarantees furnished by the appellants contain categorical undertaking and impose absolute obligations on the banks to pay the amount, irrespective of any dispute which may arise between the parties regarding the breach of contract. In our view the Courts must given effect to the covenants of the bank guarantees, the performance guarantees, for the smooth performance of the contracts. Those guarantees are independent contracts and the bank authorities must construe them, independen t of the primary contracts. They should encash them notwithstanding any dispute arising out of the original contract between the parties. In the instant case, therefore, the encashment of the bank guarantees cannot be postponed pending decision of the arbitration proceedings, which may take years to conclude. 21. Additionally , in State of Maharashtra and another v. M/s. National Construction Company , Bombay and another 1996 SCC (1) 735 , as referred to in the case Shipyard K. Damen (Supra), it was observed that:-- "At this juncture it seems necessary to analysis the law relating to bank guarante es. 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 the bank under a performance guarantee is created by the document itself. Once the documents are in order , the bank giving the guarantee must honour the same and 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 disputes 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." 22. As to the contention that the Guarantee was security for payment of liquidate d damages, which could not be granted without evidence, it merits consideration that in Hindustan Steel Works Construction Ltd. v. Tarapore & Co. and another 1996 SCC (5) 34 , as similarly referred to in Shipyard K. Damen (Supra), it was concluded that:-- "The High Court also committed a grave error in restraining the appellant from invoking bank guarantees on the ground that on India only reasonable amount ca be awarded by way of damages even when the parties to the contract have provided for liquidated damages and that a term in a bank guarantees making the beneficiary the sole judge on the question of breach of contract and the extent of loss or damages would be invalid and that no amount can be said to be due till and adjudication in that behalf is made either by a court on an arbitrator , as the case may be. In taking that view the High Court has overlooked the correct position that a bank guarantees is a independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the primary contract betw een the person at whose instance the bank guarantee is given and the beneficiary . What the High Court has observed would applicable only to the parties to the underlying transaction or the primary contract but can have no relevance to the bank guarantee given by the bank, as the…
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