1999 PLP 1876 (MLD)

4. At this juncture, respondent sought indulgence of civil Court by filing a petition under section 20 read with section 8 of Arbitration Act, 1940 wherein it was claimed that a dispute had arisen in terms of the contract which required settlement and adjudication through arbitration in terms of Article 23 of the agreement. An application under section 41 of Arbitration Act read with para. 4 of Second Schedule to the Arbitration Act and Order XXXIX, rules 1 and 2 of C.P.C. was also moved to restrain the petitioner from encashment of bank guarantee and performance bonds.

5. The learned Civil Judge granted ad interim injunctive order to restrain encashment of bank guarantee/bonds and later, after hearing the two sides, disposed of the application vide order, dated 16-4-1997 after observing that bank guarantees were to be construed independent of primary contract and that the respondent was not entitled to- injunction, the application was dismissed, yet the petitioner was allowed to encash bank guarantees upto Rs.50,00,

000. The petitioner, feeling aggrieved by this restriction, has filed Civil Revision No. 171 of 1997 while respondent has filed Civil Revision No. 175 of 1997 for the annulment of the order in toto and for acceptance of the application for the grant of temporary injunction.

6. Supporting his revision and attacking the order of the learned trial Court, placing restriction, encashment of the bank guarantees upto a certain limit, learned counsel for the petitioner contended that the order was not only self-contradictory, violative of the settled law but also the rule laid by the superior Courts, in respect of encashment of bank guarantees. It was added that after having accepted the right of the petitioner to encashment bank guarantee and observing that the bank guarantee was to be construed independent of the primary contract, the learned Civil Judge could not place any restriction against the free exercise of right of the petitioner in terms of the bank guarantee. Reference was also made to letter of termination of contract, dated 19-2-1997 issued by the petitioner and the reply dated 6-3-1997 of the respondent, to support the ground that default of the part of respondent was admitted and that the action of termination of contract was warranted in law.

7. Learned counsel for the respondent, making reference to various articles of the primary contract, attempted to build an argument that the primary contract would govern the enforcement of bank guarantee and that the bank guarantee could not be considered independent of the main contract. It was added that till such time the respondent is held to be guilty of breach of primary contract, the corresponding guarantee furnished by the respondent cannot be encashed and for this reason it will be appropriate that the decision of the Arbitrate- is awaited before the petitioner is allowed to enforce its unilateral and arbitrary decision. Learned counsel also contended that the circumstances, of the case warrant that to secure the interest of justice a status quo in all respect be maintained till the decision of the case as encashment of bank guarantee can invite multiple litigation leading to unnecessary complication:

8. With the assistance of learned counsel for the parties the terms of bank guarantees as also the various articles of primary contract were reviewed. The arguments raised on the basis thereof have also been taken care of and it is observed that for the reasons hereafter the restriction placed by the learned civil Judge against the total encashment of the Bank Guarantees cannot prevail.

9. The parties are not at issue as to the execution of the primary contract, grant of mobilization advances and periodical payments, furnishing of bank guarantees, the issuance of notice of termination of the contract and the raising of demand by petitioner with the banks for encashment of the bank guarantees. They are however, attributing defaults against each other in respect of the circumstances causing breach of contract and are attempting to place responsibility against each other. The respondent claimed that the petitioner defaulted in fulfilling its obligations under the contract whereas the petitioner claims that there was no breach on its part and that the default rests with the respondent. Relying on the reply issued respondent to the notice of termination of contract, it is maintained that the respondent had virtually accepted its fault and the defence raised, prima facie, justifies the action taken by the petitioner

10. The question need to be resolved at this stage is as to whether the bank guarantees furnished by the respondent to secure the mobilization. advance received in terms of the contract and also to cover the risk of the petitioner can be made subject to the primary contract or shall be construed dependent thereof The terms of the guarantees as incorporated in the documents make it obvious that the bank guarantees are independent and are encashable without reference, to the respondent. The banks guarantees, against mobilization advance, clearly stipulate, that the petitioner (Attock Industrial Products Limited) shall not be obliged before making any demand therein, to give any Notice to respondent (Heavy Mechanical Complex (Pvt) Limited) or to take proceedings or obtain judgment against the respondent from the Court or Tribunal to make claim. The operative part of the bank guarantee reads as follows (a) Our obligation to pay in accordance with the terms of this Mobilization Advance Guarantee Bond shall remain in full force and effect notwithstanding the winding up or dissolution of HMC or any chain, in its status, function, control or ownership. (b) This Mobilization Advance Guarantee Bond constitutes a prima; obligation on our part to pay in ,accordance with its terms and accordingly AIPL shall not be obliged before making any demand, obtain judgment against HMC in any Court or tribunal or arbitrator or to make or file any claim for the winding up or dissolution or insolvency of HMC. (c) We shall not be released from any liability under this Mobilization Act Dance Guarantee Bond and our obligation hereunder shall not in any way be discharged or impaired by any alternation in the terms of the contract or in the extent or nature of the works to be carried out completed and maintained under the contract or by any allowance of time by or on behalf of AIPL for the performance of any act under the contract or by any forbearance or forgiveness on the part of AIPL or on AIPL's behalf in or in respect of any matter or thing concerning the contract. "

11. It is, thus, discernible that the petitioner is entitled to encash the bank guarantee without reference to the respondent or without waiting any, decision or judgment against the respondent and also that the banks are legally obliged to encash the same on raising of demand by the petitioner, without reference to the respondent. It nowhere gives an impression that the terms of the bank guarantee would be governed or regulated by the primary contract or that its encashment will be dependent on the decision in affirmative the respondent has breached and committed default in the performance of the contract. The hank guarantees furnished by the respondent contained definite undertaking creating obligation against the bank to pay the amount irrespective of any dispute which might arise between the parties regarding breach of contract. Such like guarantees being independent contract have to be kept apart from the main contract and have to be enforced as such without reference to the person furnishing the bank guarantee and irrespective of the dispute regarding breach of the contract. There is no provision in the bank guarantee permitting the respondent to withhold payment or stop encashment thereof on the ground of dispute having arisen in performance of contract of sale.

12. In "Manzoor Textile Mills Ltd. v. Special Judge Banking, Lahore and others" (1996 CLC 422 LHR), it was observed that the retraining order against payment of Bank guarantee should not ordinarily be granted on count of its repercussions on the trade and that refusal of injunction in inch like situation would not cause irreparable loss to the parties claiming injunctive relief.

13. In "Messrs National Construction Ltd. v. Aiwan-e-Iqbal Authority" (PLD 1994 SC 311), it was ruled by the Hon'ble Supreme Court that the bank guarantees furnished contain categorical undertaking and impose absolute obligations on the bank to pay the amount irrespective of any dispute which might arise between the parties regarding breach of contract. It was observed that covenants in the bank guarantees, or performance guarantees are meant for smooth performance of the contract and such guarantees being independent contracts, bank authorities must construe them independent of the primary contract and should encash the same notwithstanding any dispute arising out of original contract between the parties. It was further ruled that encashment of bank guarantees cannot be postponed pending decision of any litigation regarding primary contract.

13. Deeper consideration of the facts of the present case reveals, that the respondent was allowed mobilization advance and periodical payments. Bank guarantees have been furnished by the respondent in toto which contained undertaking in unambiguous terms that on the placement of demand by the petitioner the banks would be legally obliged to encash the bank guarantees and make payment of the amount covered by the guarantees. There is no substance in the submission of learned counsel for the respondent that the terms of bank guarantee should be subservient to the primary contract. The terms contained in the bank guarantee, do not give any impression of being subject to the provision of the primary contract but instead, the documents reflect intentions of the parties that the same can be encashed without reference to the respondent and that the banks will make payment without waiting for final decision and irrespective of any dispute arising from the primary contract between the parties. The respondent having received the benefit of mobilization advance and periodical payments, the letter of rescision of contract having already been issued, the petitioner having already placed demand upon the banks for the encashment of bank guarantees, there was hardly any justification to place restriction against total encashment thereof.

14. The learned Civil Judge after observing that the respondent was not' entitled to the injunction prayed for, placed restriction against total encashment i of the bank guarantee and proceeded to pass a contradictory order by, directing encashment upto the extent of Rs.50 lacs. There was neither any reason for restricting the exercise of right of encashment of bank guarantee nor any justification was made out for restraining encashment after particular limit. Even otherwise, the claim of the petitioner exceeded the amount covered by the guarantees and, therefore, the propriety demanded that the encashment of the guarantee should not have been stopped, ever fractionally.

15. Even otherwise, the respondents were unable to satisfy the mandatory ingredients for the grant of injunctive relief, inasmuch as the third important ingredient viz. irreparable loss was missing in this case. The dispute pertaining to the money claim, the refusal to grant injunctive relief could not cause irreparable loss. In this view of the matter, the petitioner had failed to make of any prima facie case for the grant of injunction nor could claim sufferance irreparable loss in case of refusal thereof.

16. Another reason for which injunction could not be granted was that parties having made solemn commitment in their agreement and undertaking, should not be allowed to frustrate the same by raising any frivolous objections. Having agreed to allow encashment notwithstanding the pendency of any dispute from the principal contract, the respondent could not be allowed to seek discretionary relief in equitable jurisdiction, for the purposes of frustrating the enforcement of solemn contractual commitments. Grant of such like injunctive order and obstruction in the due performance of bank guarantee also adversely effects the good-will and credibility of the Bank and shakes the confidence and trust of the parties who agree to execute agreement, on bona fide assumption that the documents of the bank would be given due effect in ordinary course of business.

17. For the reasons above, Civil Revision No. 171 of 1997 is allowed and Civil Revision No. 175 of 1997 is dismissed. The impugned Judgment, dated 16-4-1997 is modified, the restriction imposed in the order against encashment of bank guarantee exceeding Rs.50 lacs is set aside and the application under section 41 of the Arbitration Act read with 2 clause (4) of Second Schedule of the Arbitration Act and Order XXXIX, Rules l and 2 of C.P.C. filed by respondent (Heavy Mechanical Complex (Pvt.) (Ltd in the trial Court is dismissed. H.B.T./A-283/L Order accordingly.