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Official Citation: 2024 CLD 153
Court / Jurisdiction: Lahore High Court
Year of Decision: 2023
Decision Date: 2023-05-26
Parties: M/s Paragon Technologies vs Sui Northern Gas Pipelines Limited and others
Ruling Summary: This decision was rendered by the Lahore High Court on 2023-05-26, officially reported as 2024 CLD 153. In this matter between M/s Paragon Technologies and Sui Northern Gas Pipelines Limited and others, the court adjudicated key questions of statutory construction, procedural regularity, and legal precedent under Pakistani law.
Core Holding: The honorable bench evaluated governing statutory provisions and judicial authorities to establish the rights of the parties, delivering the binding reasoning set out below.
Case cited as 2024 CLD 153
Court Name: Lahore High Court Judge(s): Shams Mehmood Mirza Title:M/s Paragon Technologies vs Sui Northern Gas Pipelines Limited and
others Case No.: W.P. No.4534 of 2023 Date of Judgment:2023-05-26 Reported As: 2023 LHC 4474, PLD 2024 Lahore 1, 2024 CLD 153 Result: Petition Dismissed Judgment ORDER The petitioner has approached this Court against the decision of the additional district judge upholding the judgment of the trial court which dismissed the application for restraining the respondent from making a demand on the bank guarantee issued on its behalf. 2. The relevant facts of the case are that by a written contract Sui Northern Gas Pipelines Limited (SNGPL) employed the petitioner to supply certain items from United States of America. The petitioner was required to supply the items within the period stipulated in the contract. Pursuant to the terms of the contract inter se the parties, the petitioner was required to submit an on-demand performance guarantee. The petitioner supplied to SNGPL the bank guarantee from Askari Bank Limited in the due amount. The guarantee is in standard form and there is no dispute that it was unconditional in nature and had no link with the main contract between the parties. SNGPL by the terms of the contract was obliged to provide an operative letter of credit in favour of the petitioner which it did. At the request of the petitioner, extension in the period of supply was also made and necessary amendment was made in the letter of credit. After the supply of the items, SNGPL demanded late payment charges from the petitioner and on its refusal made a call on the bank guarantee. The petitioner disputed the claim of SNGPL and in order to restrain it from encashing the bank guarantee, approached the civil court under section 20 of the Arbitration Act, 1940 (the Arbitration Act) through an application for filing the arbitration agreement in the court. In conjunction with the main application, the petitioner also applied for interlocutory injunction in terms of section 41 of the Act from the court restraining SNGPL from making any demand on the bank guarantee. The trial court dismissed the application for interim injunction on 07.11.2022. The
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petitioner, feeling aggrieved, filed a revision which was also dismissed on 20.01.2023 by the additional district judge. 3. Learned counsel submits that the petitioner had eminently made out a case for grant of restraining order in the facts and circumstances of the case which was not properly appreciated by the courts below. The petitioner submits that extension in the period of supply of goods was mutually agreed and that SNGPL had no right to demand late payment charges as it did not provide the operational letter of credit within the stipulated time. It is furthermore submitted that the petitioner shall suffer irretrievable injustice in case the performance guarantee was encashed. The learned counsel also placed reliance on the case of EFU General Insurance Limited v. Zhongxing Telecom Pakistan (Pvt.) Limited etc PLD 2022 SC 809 (EFU) to which I shall advert to in detail later in this judgment. 4. Learned counsel for SNGPL stated that supplies were made by the petitioner beyond the period and that as per the terms of contract the petitioner was liable for late payment charges. While supporting the orders of the courts below, the learned counsel relied on the case of Shipyard K. Damen International v. Karachi Shipyard and Engineering Works Limited PLD 2003 SC 191 (Shipyard). 5. It is worth looking at the legal nature of the on-demand guarantee as it is relevant to the extent to which payment on it can be restrained. I accept SNGPL's characterization of the guarantee being unconditional, which, in all fairness, was not seriously disputed by the petitioner. Law is fairly well settled that the fate of an unconditional bank guarantee or a letter of credit being independent contracts is not dependent upon any dispute between the contracting parties and that payment thereunder has to be made if an unconditional undertaking has been made by the issuer. The payment obligation under both the instruments is dependent on documentary demands and the issuer is barred from making any determination of objective facts. This is called the autonomy principle. The premise on which this principle rests is that as between parties to documentary credit transactions a dispute related to the underlying transaction has to be pursued through a separate action for breach of the underlying contract and not by withholding payment under the letter of credit. "pay first, sue later" is the core objective underlying the autonomy principle. This is the proposition advanced by SNGPL that payment under the bank guarantee is autonomous from any dispute arising in relation to the underlying contract. 6. Shipyard relied upon several judgments and cited the ratio thereof in paragraph No.7. Both the parties rely upon the said judgment to support their respective stance. The petitioner contends that the absolute rule laid down in the said judgment regarding payment under the bank guarantee regardless of the dispute between the contracting parties is subject to certain exceptions namely fraud and special equities. Learned counsel for SNGPL, on the other hand, refutes the stance of the petitioner by arguing that there was no cause for placing restriction on the right of SNGPL to receive amount under the bank guarantee. 7. Paragraph 7 of the judgment in Shipyard's case simply laid down the principles which were formulated in various judgments both from this jurisdiction and foreign for not interfering in unconditional bank guarantees/letters of credit. The actual ratio of the judgment is contained in paragraph No.23 of the judgment, which read as under: 23. The law is thus settled that extraneous claims and counter-claims do not bar the enforcement of the bank guarantee. The enforcement depends upon its terms and conditions. If bank guarantees are unconditional, there is no other option for the bank and moreso, the bank would have no defence, when its guarantee is sought to be enforced. The guarantee as provided could be scanned to ascertain, whether it is conditional, unconditional or an autonomous contract by itself or otherwise? If it is found unconditional, except in cases where a fraud has been alleged and notice by the bank, the commitment is to be honoured by enunciating the general principal of
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non-interference by the Courts in respect of the bank guarantee and letter of credit, the Courts only intended that the international trade and commerce should function smoothly without interference from Court...... 8. The fundamental rule of payment under the bank guarantee independent of any dispute between the contracting parties is excepted only where fraud is alleged as against the beneficiary of the bond/guarantee and the bank has notice of such fraud. This exception is based on a passage from the judgment of Sir John Donaldson M.R. in Bolivinter Oil SA v. Chase Manhattan [1984] 1 All ER 351: The unique value of such a letter, bond or guarantee is that the beneficiary can be completely satisfied that, whatever disputes may thereafter arise between him and the bank's customer in relation to the performance or indeed existence of the underlying contract, the bank is personally undertaking to pay him provided that the specified conditions are met. In requesting his bank to issue such a letter, bond or guarantee, the customer is seeking to take advantage of this unique characteristic. If, save in the most exceptional cases, he is to be allowed to derogate from the bank's personal and irrevocable undertaking, given be it again noted at his request, by obtaining an injunction restraining the bank from honouring that undertaking, he will undermine what is the bank's greatest asset, however large and rich it may be, namely its reputation for financial and contractual probity. Furthermore, if this happens at all frequently, the value of all irrevocable letters of credit and performance bonds and guarantees will be undermined." It was furthermore held in the judgment that:- The wholly exceptional case where an injunction may be granted is 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 must be clear, both as to the fact of fraud and as to the bank's knowledge. 9. The judgment in Shipyard's case has been consistently followed by the Courts in this country. The Supreme Court in EFU, however, concluded that law in respect of performance guarantees has moved on and that law laid down in Shipyard needs to be revisited and updated. In this regard, the following observations were made which the petitioner seeks support from for overturning the orders of the courts below: 10...... In one common law jurisdiction, Singapore, unconscionability is now a well established ground for the Court intervening to restrain payment (see O'Donovan and Philips, op. cit., para 13-049 and the cases gathered at f.n. 153). It may be that this is a ground which comes within the rubric of "special equities". However, whether it does or not and if so should be made subject to any conditions or modifications such as are appropriate for our jurisdiction, remains yet to be seen. This and other developments in the law are to be determined in future cases. While Karachi Shipyard is clearly an important milestone in this area of the law, the High courts should not consider themselves as limited only to what may be regarded as falling strictly within the four corners of the decision. In commercial and corporate matters in particular the development of the law must continue apace and it should be recognized that the real engines of change are the high Courts. While of course always keeping Articles 189 of the Constitution is mind and adhering to the requirements thereof, the decision of this Court should, in these areas of the law, be regarded as being akin (to borrow a famous phrase from elsewhere in the law) to "living tree[s]", "capable" of growth and expansion within [theirs] natural limits". It is noted that the issue of encashment of bank guarantee was not directly involved in EFU rather the dispute between the parties related to the notice of demand under the advance payment guarantee and whether the notice fulfilled the condition laid down in the instrument of the guarantee.
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10. Before proceeding to discuss the authorities from the various jurisdictions, it would be instructive to take note of the provisions of the Arbitration Act which grant the power to the Court to issue interlocutory relief in such like cases as it shall have relevance to the observations made in EFU case. Section 41 of the Arbitration Act deals with the procedure and power of the court and insofar as it is relevant reads as under: 41. Procedure and Powers of Court. Subject to the provisions of this Act and of rules made thereunder_ (a) The provisions of the Code of Civil Procedure, 1908 (V of 1908), shall apply to all proceedings before the Court, to all appeals, under this Act, and (b) the Court shall have, for the purpose of, and in relation to arbitration proceedings, the same power of making orders in respect of any of the matters set out in the Second Schedule as it has for the purpose of, and in relation to, proceedings before the Court. Clause 4 of the Second Schedule of the Arbitration Act grants the power to the Court to issue interim injunctions. It is evident from the reading of the text of section 41 that the grant of injunction by the court in proceedings pending before it shall be governed by the provisions of the Code of Civil Procedure 1908 (the Code) whereas the court retains the power to issue interim injunction on basis of the power contained in the Second Schedule even when the matter has been referred to arbitration and proceedings are pending in that forum. The Three-Pronged Test 11. The grant of interim injunction for the period the proceedings remain pending before the court or the arbitrators is regulated by the provisions of the Code. The three tests applied for grant of interlocutory injunctions are well established in almost all the jurisdictions. These tests require an applicant to demonstrate that (a) there is a prima facie case by which it is meant that the applicant must be able to demonstrate to the satisfaction of the Court that there is a serious question to be tried in the sense that the claim is not frivolous (b) it will suffer irreparable loss and injury in case the relief is denied to it or in other words granting an injunction could cause less harm to the defendant compared to the likely harm the applicant would suffer from the refusal of such injunction, and (c) the balance of inconvenience favours it. 12. The jurisdiction to grant interim injunction is designed to preserve the rights of the parties or to minimize irreparable loss of legal rights pending the trial. The adjudication on an application for grant of interlocutory injunction takes place at a time and on material not tested by cross- examination. Any interference with the position of parties prior to merit adjudication runs the risk of infringement with the due process standards and additionally the Courts are concerned with the likelihood of error that is significantly greater in interlocutory proceeding than on a merit investigation. In order to prevent the probability of mistake and its magnitude and to reconcile the above-mentioned competing considerations, the Courts have devised the three tests to regulate their discretion. 13. Any discussion on this topic must start from the influential and famous case of American Cyanamid Co. v. Ethicon Ltd. [1975] 2 WLR 316 in which Lord Diplock went on to establish a detailed framework of principles for regulating the discretion of the Courts in granting interim injunction. He cast doubt on the utility of the first test which made it necessary for a plaintiff to establish a prima facie case, that is, that on the balance of probabilities it was more likely than not that the plaintiff would succeed at the trial of the action by holding that Your Lordships should in my view take this opportunity of declaring that there is no such rule. The use of such expressions as "a probability", "a prima facie case", or "a strong prima facie case" in the context of the exercise of a discretionary power to grant an interlocutory injunction leads to confusion as to the object sought to be achieved by this form of temporary relief. The court must no doubt be satisfied that the claim is not frivolous or vexation; in other words, that there is a
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serious question to be tried. It is no part of the court's function at this stage of the litigation to try to resolve conflicts of evidence on affidavit as to facts on which the claims of either party may ultimately depend nor to decide difficult questions of law which call for detailed argument and mature considerations. These are matters to be dealt with at trial. Lord Diplock went on to hold that unless the material available to the court at the hearing of the application for an interlocutory injunction fails to disclose that the plaintiff has any real prospect of succeeding in his claim for a permanent injunction at the trial, "the court should go on to consider whether the balance of convenience lies in favour of granting or refusing the interlocutory relief that is sought." In order to do that, Lord Diplock suggested to balance the outcome by hypothesizing in the following manner: i. If the plaintiff failed in obtaining the interlocutory injunction but succeeded at the trial, can he be adequately compensated by the award of damages for the loss caused to him by the failure to grant the injunction. In addition to that the Court must consider the ability of the defendant to pay damages. If that is so, interlocutory injunction normally should not be granted. ii. If the defendant is restrained by the injunction but ultimately succeeds at the trial, can he be adequately compensated for his loss by award of damages in pursuance of the plaintiff's cross- undertaking and is the plaintiff good for his undertaking? If so, an interlocutory injunction should be granted. iii. Where a doubt exists as to adequacy of damages to either of the parties the court must consider all factors affecting the balance of convenience, which are infinitely variable and depend on the facts of each case. Where the case is evenly balanced, it is a counsel of prudence to maintain the status quo. iv. If the extent of the uncompensatable disadvantage to each party would not differ widely, it may not be improper to take into account in tipping the balance the relative strength of each party's case as revealed by the affidavit evidence adduced on the hearing of the application. This, however, should be done only where it is apparent upon the facts disclosed by evidence as to which there is no credible dispute that the strength of one party's case is disproportionate to that of the other party. 14. The judgment in American Cyanamid was predicated on the notion that a preliminary trial should not be held by the courts on material not tested by cross-examination. After it is established that there is a serious issue to be tried, the court as a matter of principle while considering an application for an interlocutory injunction should not attempt to anticipate the outcome of the case and instead should proceed to assess the balance of convenience test. This approach in American Cyanamid's case has served as valuable guideline for the Courts in deciding the applications for interlocutory injunctions. The reasoning is clear that if the outcome of the case is unknown, a court must ensure that a party is not treated unfairly on account of the length of time it will take for the case to reach a final decision. In American Cyanamid, Diplock correctly observed that save in the simplest cases, the decision to grant or refuse an interlocutory injunction will cause to whichever party is unsuccessful in the application some disadvantages which in ultimate success at a trial may show he ought to have been spared and the disadvantage may be such that the recovery of damages to which he would then be entitled either in the action or under the plaintiff's undertaking would not be sufficient to compensate him fully for any of them. 15. The expression 'irreparable loss' is stated by Lord Wilberforce in Hoffman LaRoche & Co. Ltd. v Secretary of State for Trade and Industry [1975] AC 295 to mean the following; 'The object of [an interim injunction] is to prevent a litigant, who must necessarily suffer the law's delay, from losing by that delay the fruit of his litigation; this is called 'irreparable damage,' meaning that money obtained at trial may not compensate him.'
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The Australian jurisdiction looks at this proposition by asking whether, in all the circumstances, it is just that the plaintiff should be confined to his remedy in damages (see State Transport Authority v. Apex Quarries Ltd., [1988] V.R. 187, 193 and City of Melbourne v. Hamas Pty Ltd., (1987) 62 L.G.R.A. 250, 261-262). 16. Lord Diplock in American Cyanamid's case explicitly undermined the immutable rule of establishing prima facie case before an interlocutory injunction could be granted. Not surprisingly, many judgments subsequently rendered criticized the abandonment of the prima facie test. Geoffrey Lane LJ in Lewis v Heffer [1978] 1W.L.R. 1061 went on to claim that 'the rules in American Cyanamid were designed to cover a commercial situation where loss, hardship or misfortune could be compensated by payment of money.' Laddie J in Series 5 Software Ltd v. Clark [1996] 1 All ER 853 concluded that the intent of Lord Diplock in American Cyanamid was to exclude consideration of the relative merits of the case only where there were intractable issues of fact or law involved. He remarked that "If, on the other hand, the court is able to come to a view as to the strength of the parties' cases on the credible evidence, then it can do so." In NWL Ltd v Woods [1979] 1 WLR 1294 Lord Diplock himself interpreted his decision in American Cyanamid by stating that: [T]here is in my view nothing in the decision of this House in American Cyanamid ... to suggest that in considering whether or not to grant an interlocutory injunction the judge ought not to give full weight to all the practical realities of the situation to which the injunction will apply. 17. In Merck Sharp & Dohme Corporation v. Clonmel Healthcare Limited [2019] IESC 65, which involved a dispute between the parties over a patent, O'Donnell J. observed that the governing principle of balance of convenience test was adequacy of damages. He went on to hold that: 35. In my view, the preferable approach is to consider adequacy of damages as part of the balance of convenience, or the balance of justice, as it is sometimes called. That approach tends to reinforce the essential flexibility of the remedy. It is not simply a question of asking whether damages are an adequate remedy. As observed by Lord Diplock, in other than the simplest cases, it may always be the case that there is some element of unquantifiable damage. It is not an absolute matter: it is relative. There may be cases where both parties can be said to be likely to suffer some irreparable harm, but in one case it may be much more significant than the other. On the other hand, it is conceivable that while it can be said that one party may suffer some irreparable harm if an injunction is granted or refused, as the case may be, there are nevertheless a number of other factors to apply that may tip the balance in favour of the opposing party. This, in my view, reflects the reality of the approach taken by most judges when weighing up all the factors involved. In conclusion, O'Donnell J. laid down, amongst others, the following tests for grant of interim injunctions. (a) If there is a fair issue to be tried (and it probably will be tried), the court should consider how best the matter should be arranged pending the trial, which involves a consideration of the balance of convenience and the balance of justice; (b) The most important element in that balance is, in most cases, the question of adequacy of damages; (c) In commercial cases where breach of contract is claimed, courts should be robustly sceptical of a claim that damages are not an adequate remedy; (d) Nevertheless, difficulty in assessing damages may be a factor which can be taken account of and lead to the grant of an interlocutory injunction, particularly where the difficulty in calculation and assessm ent makes it more likely that any damages awarded will not be a precise and perfect remedy. In such cases, it may be just and convenient to grant an interlocutory injunction, even though damages are an available remedy at trial. While the adequacy of damages is the most
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important component of any assessment of the balance of convenience or balance of justice, a number of other factors may come into play and may properly be considered and weighed in the balance in considering how matters are to be held most fairly pending a trial, and recognising the possibility that there may be no trial; (e) While the adequacy of damages is the most important component of any assessment of the balance of convenience or balance of justice, a number of other factors may come intoplay and may properly be considered and weighed in the balance in considering how matters are to be held most fairly pending a trial, and recognising the possibility that there may be no trial; (f) While a structured approach facilitates analysis and, if necessary, review, any application should be approached with a recognition of the essential flexibility of the remedy and the fundamental objective in seeking to minimise injustice, in circumstances where the legal rights of the parties have yet to be determined. 18. Laddie J. in Series 5 Software Ltd v. Clark [1996] 1 All ER 853 and Nicolas J. in Uber Builders and Developers Pty Ltd v MIFA Pty Ltd [2020] VSC 596 summarised the governing principles applicable in cases where interlocutory relief is sought to restrain the calling of a bond as follows. (1) The grant of an interlocutory injunction is a matter of discretion and depends on all the facts of the case. The relief must be kept flexible; (2) The applicant for interlocutory relief must show there is a serious question to be tried if the matter were to progress to a final hearing; (3) The court must consider the extent to which damages are likely to be an adequate remedy for each party and the ability of the other party to pay; (4) The applicant must show that the 'balance of convenience' favours the granting of the injunction. This means…
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