1993 PLP 882 (CLC)

In Karachi Development Authority, Karachi v. Taj Muhammad and 3 others (PLD 1977 Karachi 108) the facts of the case were that the respondent filed a suit for declaration that part of certain survey numbers which he Possessed belonged to him. He also sought permanent injunction. Alongwith the plaint he filed application praying for ad interim injunction restraining the petitioner from dispossessing him. The petitioner did not contest in spite of notice but on 25‑1‑1975 filed an application under section 151 praying that both the parties may be ordered to maintain status quo. The application was rejected by the Civil Judge. On 18‑2‑1975 the petitioner filed an application under Order 39, rule 4, C*P.C. praying to discharge the ad interim injunction. This application was also rejected by the Civil Judge. A Miscellaneous Appeal was filed by the petitioner to challenge this order. The appeal was also dismissed. The petitioner preferred revision before this Court against the dismissal of appeal. Mr. Jamaluddin H. Ahmed, J. (as he then was) held:‑ "In the instant case the applicant admittedly had an opportunity of being heard. He deliberately did not avail of that opportunity and for obvious reasons, for on his own showing, he did not have the material for contesting the interim order. Even after the joint survey made by the applicant no effort was made to oppose the interim injunction. Instead the applicant resorted to the provisions of section 151 and Order XXXIX, rule 4 of the C.P. Code. Obviously at the time of making an application under Order XXXIX, rule 4 there was no new material available with the applicant and relying on the above quoted observation even that application was, therefore, not competent." Section 15 of the Code of Civil Procedure (Amendment) Ordinance, 1980 (Ordinance X of 1980) provides that notwithstanding anything contained in section 3 of the Law Reforms Ordinance, 1972, an appeal shall lie to a Bench of two or more judges of a High Court from an interlocutory order made by a Single Judge of that Court in the exercise of its original jurisdiction. Mr. NA. Farooqui, the learned counsel for the plaintiff contended that appeal under section 15 of the Ordinance of 1980 is competent even as against an unreasoned order of a Single Judge when it says such an order is under the purported exercise of judicial powers under Order 39, Rule 1 or 2, Civil Procedure Code. . Section 2 (14) of the Civil Procedure Code says that an order means the formal expression of any decision of a Civil Court which is not a decree. Section 2 (a) defines "judgment" as meaning a statement by the Judge of the grounds of a decree or order. Section 2 (2) says that a decree means the formal expression of adjudication which, so far as regards the Court expressing it, conclusively determines the rights of the parties with regard to all or any of the matters in controversy in the suit and may be either preliminary or final. These three definitions under the Civil Procedure Code make it manifest that both a decree as well as an order are formal expressions of any decision of a Civil Court. But a decree conclusively determines rights of the parties, which words do not occur in the definition of the word `order'. It is therefore clear to me that any order passed by a judicial authority to which the Civil Procedure Code applies should not ordinarily make it an order, "without basing it on intelligible grounds or reasons. If no such data is given for the passing of such an order, or it does not ex facie apes. in the order itself, then it would cease to be a formal expression of a decision which is the primordial garb to clothe, the mandate of a Court with the badge of an order". With this background, I shall now proceed to analyse Order 39, Rule 1, Civil Procedure Code with which I am concerned in this case. Two eventualities are contemplated in Rule 1 under which Courts could grant a temporary injunction. Order 39, Rule 1 (a) speaks of g subsisting dispute over a property which is in danger of being wasted, damaged or alienated by any party to the suit. Order 39, Rule 1 (b) is preventive in ape and contemplates quiatimat action. In a case where the plaintiff alleges that the defendant threatens or intends to remove or dispose of his property with a view to defraud his creditors, the Court may by order grant a temporary injunction to restrain such act. Order 39, Rule 2 deals with the grant of injunctions to restrain the defendant from committing a breach of contract or other injury of any kind. The language, deployed in Order 39, Rules 1 and 2, gives me the impression that the procedural norms prescribed therein, which would entail the grant of temporary or ad interim injunction, could be broadly pigeon holed in two distinct and separate heads. The first is that ad interim injunction could be granted by the Court until the disposal of suit. The second is that such ad interim injunction could be granted until further orders. The distinction I made in the text of Order 39, Rules 1 and 2 has to be given effect to while the Civil Court exercises jurisdiction either under Order 39, Rule 1 or under the other provisions relatable thereto including the provisions relating to the vacating of such orders and appeals against such orders. The very fact that the Court finally determines that an interim injunction should be issued until the disposal of the suit verily indicates its mind to a large extent, and conclusively determines the entitlement of the plaintiffs to such a grant and it 'would thus mean that there has been an application of the mind of the Court to the subject before it, when it made such a grant until the disposal of the suit. Such a more or less conclusive determination of the right of the plaintiffs or the other party in the matter of the grant of an injunction until the disposal of the suit, obviously involves the hearing of both the sides as otherwise the principles of natural justice also would be affected. Therefore in my view if any order under Order 39, Rules 1 and 2 is (sic) by which a temporary injunction is granted until the disposal of the suit that by itself presupposes that there was a hearing on the subject‑matter and both parties were before the Court at or about the time when such an order was made. The second which I have referred to concerns itself with the issuance of such temporary injunctions until further orders. The severity of such injunction is lesser in scope than the one which is granted by the Court while exercising jurisdiction under the first part of Order 39, Rule 1(b). Section 15 of the Civil Procedure Code (Amendment) Ordinance, 1980 is the relative appellate provision. Section 15 dealing with the appeals from interlocutory orders, provides that an appeal shall be from an interlocutory order. The inherent concept in an appeal is to provide to a Bench oho or more judges an opportunity to affirm or reverse the orders of the Single Judge. Such orders should necessarily be formal expressions of a decision which should be based on grounds and reasons. For all the reasons stated above, l am of the view that order passed on 1‑1987 is not based on any grounds and is without the reason can only be subject‑matter of challenging under Order 39, Rule

4. In the result CMA 418/87 is allowed, and the order dated 2‑9‑1987 is recalled. Now I will deal with the application under Order 39,‑Rules 1 and 2, 'CP.C. (CMA 3831/86). On 16th April, 1984 a formal contract between Pakistan Engineering (insultants and the defendant No.1 was executed. Under this agreement Pakistan Engineering Consultants undertook certain obligations to be fulfilled qua defendant No.1. The said firm .has furnished a performance guarantee of the value of Rs.8,78,000 and a bank guarantee for the value of Rs.3,00,968 for mobilisation advance. The bank guarantee and the performance guarantee have been furnished by the defendant No.2 in pursuance of the contract. The defendant No.1 wanted to invoke the said performance bond and the bank guarantee as, according to defendant No.1, the Pakistan Engineering consultants stood dissolved as the said firm was partnership at will because of lath of its Managing Director Kafiluddin Ahmed. The defendant No.1. has hen subjected to serious financial losses on account of default of Pakistan engineering Consultants in its obligation and commitments. There was delay in to completion of the project and supply of substandard equipments and materials. The said firm were under the obligation in terms of the contract to use to advance for the work for due fulfillment of the terms and conditions of the Contract and were allowed to furnish the concerned bank guarantee. The bank guarantee contains in unequivocal term an undertaking to pay without demur merely on demand from the defendant No.1 stating the amount claimed was due. Similarly the plaintiffs were under the obligation in terms of the contract t, duly perform and observe all terms/provisions and conditions and stipulations of the said contract and were allowed, in lieu of that obligation, to furnish performance bond. The performance bond contains in unequivocal terms, an undertaking to pay without any demur merely on demand from the defendant No.1 stating that the amount claimed was due and layable by way of loss or damages caused or to be caused to or suffered by the defendant No.1. The first question is as to the nature of the obligation of the bank under performance bond and as to its legal incident. It is well‑settled that the performance guarantee or performance bond, a comparatively recent species of Banker's Commercial Credit, variously described as a new type commercial credit or `a new business transaction' or `a new creature'. Kerr, J. in R.D. Harbottle v. National Westminster Bank (1972) 2 AIE 862 observed that they are the life blood of the international commerce. Such obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain. Except possibly in clear cases of fraud of which the banks have notice, the Courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in the contracts. The Courts are not concerned with their difficulties to enforce their claims, these are sides which the merchants take. In Edward Owen Engineering Company. Ltd. v. Barclays Bank International Ltd. (1978 OB 159; (1977) 3 WAR 764; 1978 (1) AER 976), the facts were that English suppliers of goods of Libyan purchasers had agreed to give a performance guarantee amounting to 10 per cent of the contract price. A Libyan bank issued a guarantee to the Libyan purchasers. Barclays gave a guarantee to the Libyan bank and the English suppliers gave a counter guarantee to Barclays. The two bank guarantees were payable on demand without proof of conditions and demand had been duly made. The Court had to consider two matters, namely, (a) in what special circumstances the giver of a performance guarantee is entitled to refuse payment, notwithstanding that the contractual conditions precedent to payment have been met, and (b) had the plaintiff established that such circumstances existed. Lord Denning MR. at page 981 said: " ....Sztejn v. J Henry Schroder Banking Corporation which has heard in the New York Supreme Court in 1941. After citing many cases Shientag, J. said this: "It is well‑established that a letter of credit is independent of the primary contract of sale between the buyer and the seller. The issuing bank agrees to pay upon presentation of documents, not goods. This rule is necessary to preserve the efficiency of the letter of credit as an instrument for the financing of trade." He said that in that particular case it was different because‑‑ on the present motion, it must be assumed that the seller has intentionally failed to ship any goods ordered by the buyer. In such a situation, where the seller's fraud has been called to the bank's attention before the drafts and documents have been presented for payment, the principle of the independence of the bank's obligation under the letter of credit should not be extended to protect the unscrupulous seller." That case shows that there is this exception to the strict rule; the bank ought not to pay under credit if it knows that the documents are forged or that the request for payment is made fraudulently in circumstances when there is no right to payment." and at page 983: "The only exception is when there is a clear fraud of which the bank has notice." Lord Justice Browne IJ. at page 984 held: "That exception is that where the documents under the credit are presented by the beneficiary himself and the bank knows when the documents are presented that they are forged or fraudulent, the bank is entitled to refuse payment." Lord Justice Geoffrey Lane at page 986 held: "The only circumstances which would justify the bank not complying with a demand made under that agreement would be those which would exonerate them under similar circumstances if they had entered into a letter of credit, and that is this, if it had been clear and obvious to the bank that the buyers had been guilty of fraud." In United City Merchants (Investment) Ltd. and Glass Fibres and Equipments Ltd. v. Royal Bank of Canada, (1982) 2 Lloyd's Law Reports 1, Lord Diplock at page 6 held: 'The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods that does not permit of any dispute with the buyer as to the performance of the contract of sale being used as a ground for non‑payment or reduction or deferment of payment. To this general statement of principle as to the contractual obligations of the confirming bank to the seller, there is one established exception: that is, where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application of the maxim ex turpi causa non oritur actio or, if plain English is to be preferred, "fraud unravels all". The Courts will not allow their process to be used by a dishonest person to carry out a fraud." In the case of Bolivinter Oil SA. v. Chase Manhattan Bank, Commercial Bank of Syria and General Company of Homs Refinery ((1984) 1 Lloyd's Law Reports 251), the facts were that by a contract the plaintiff agreed with the third defendants that they would procure the carriage of Iranian Crude Oil from Iran to Syria in the summer of 1982. The contract provided for a daily penalty of U.S. $ 25,000 in the event of delay in performance. By clause 16 the plaintiff also agreed to furnish Horns with a performance guarantee for U.S. S 1 million. On 16‑10‑1983 CBS informed Chase that Homs had demanded s 1 million under the CBS guarantee due to the plaintiffs' breaches of the June, 1982 agreement. On 31‑10‑1983 the plaintiffs obtained injunctions restraining Homs from claiming on the CBS guarantee and restraining CBS from paying under that letter of credit. Pursuant to a summons the injunctions were further considered by the Court on 29‑11‑1983. Straughtour, J. discharged the injunctions. The Court of Appeal held that the learned Judge was right to discharge the injunctions affecting Chase and CBS. In Discount Records Ltd. v. Barclays Bank Ltd. and another (1975) 1 WLR 315 the purchasers of goods instructed bankers to provide irrevocable confirmed letters of credit for vendors. The goods supplied were defective. There were allegations that vendors were guilty of fraud. Megarry, J. held that the present case falls short of establishing any ground upon which it would be right for the Court to intervene by granting the interlocutory injunctions claimed, even in its revised form In Sztejn v. J. Henry Schrodu Banking Corporation ((1941) 31 N.Y.S. 2nd Edition page 631) the facts of the case were that the seller had shipped rubbish and then passed his draft for collection. At page 633 Shuntag, J. observed that letter of credit is independent of the primary contract of sale between the buyer and seller, so that unless the letter of credit otherwise provides, the banker is neither obliged nor allowed to enter into controversies between the buyer and seller regarding the quality of the merchandise shipped. However, the learned Judge distinguished mere breaches of warrant of quality from cases where the seller has intentionally failed to ship any of the goods ordered by the buyer. In relation to the latter case at page 634 held: "In such a situation, where the seller's fraud has been called to the banker's action before the drafts and documents have been presented for payments, the principle of the independence of the bank's obligation under the letter of credit should not be extended to protect the unscrupulous seller." In Sirafi Trading Establishment v. Trading Corporation of Pakistan Ltd. (1984 CLC 381) Mr. KA. Ghani, J. (as he then was) inter alia observed as follows:‑‑ "From the discussion as above, I find that the bank guarantee furnished would be governed by the same principles of law, which are applicable to payments by the banks against confirmed letters of credit. Thus an absolute obligation is imposed upon the bank which executes the guarantee to honour the same according to its terms. There may be exceptions to the general rule in special cases or in cases of fraud to the knowledge of the bank, where the Court may preclude banks from fulfilling their obligation to third parties. Prima facie no case falling under any of the exceptions having been made out, interim injunction granted in the case was discharged by short order passed on 21st March, 1983 with the direction to the Nazir to encash the bank guarantees and invest the amounts received for the benefit of the party who ultimately succeeds." In Koh‑i‑Noor Trading (Pvt.) Ltd. v. Mangrani Trading Company (1987 CLC 1533) a Division Bench of this Court held as follows:‑‑ 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 Tarapore and Company, Madras v. Tracto‑export, Moscow (AIR 1970 SC 891) Tracto‑export supplied machinery to Tarapore & Company. After the machinery was used for sometime, Indian firm complained to Russian firm that the performance of the machinery supplied by it was not efficient as represented at the time of entering into the contact and consequently it had incurred and continued to incur loss. The firm filed a suit for injunction and the plea urged was that if the Russian firm was allowed to take away the money secured to it by letter of credit, the Indian firm would not be able to effectively enforce its claims arising from the breach of the contract it complained of as Russian firm had no assets in India and therefore any decree that the Indian firm may be able to obtain could not be executed. It was on the basis of these allegations the Supreme Court of India observed that the letter of credit is independent of any unqualified by the contract of sale or underlying transaction and that except under very exceptional circumstances the Court would not interfere in the mechanism of the letter of credit as any interference in that mechanism is bound to have serious repercussions on the international trade of the country. It was further observed that the letter of credit has a definite implication in that a vendor of goods selling against a confirmed letter of credit sells under the assurance that nothing will prevent him from receiving the price. In the case of United Commercial Bank (AIR 1981 SC 1426) the Supreme Court of India affirmed that "a letter of credit sometimes resembles and is analogous to a contract of guarantee". It also affirmed its earlier decision in the case of Tarapore & Company (AIR 1970 SC 891) that the opening of a confirmed letter of credit constituted a bargain between the banker and the seller of the goods which imposed on the banker "an absolute obligation to pay" in its terms. The observations of Kerr, J. in (1978) QB 146 were approved by Lord Denning MR in (1978) QB

159. Browne L.J. who concurred with the Masters of Rolls in the case of Edward Owen Engineering Ltd. went a step further and held that on the language of the guarantee with which the Court was concerned in that case, such guarantees had "much more of the characteristics of a promissory note than the characteristics of a guarantee". On these performance bonds or performance guarantees there have been some recent cases in U.K., India and Pakistan. These Courts have come to the conclusion that the performance guarantees, letters of credit and bank guarantees are autonomous and independent contracts and that they are irrevocable in character and the obligations arising under these bank guarantees, performance guarantees, performance banks letters of credit are independent of the obligations arising out of the contracts betwen the parties. The performance guarantees. Performance bonds, bank guarantees and letters of credit impose an absolute obligations on the banks to pay irrespective of any dispute which may arise between the parties on the question whether the parties have fulfilled their part of the contract or not. They are independent of the primary contracts of sale/supply of goods between the buyer/suppliers and seller/contractor. These Courts have looked at the nature of the bank's obligations under the bank guarantees, performance guarantees/letters of credit and inferred an absolute obligation of the bank to pay in accordance with their terms and conditions against any judicial interference in such obligations except in rare cases of fraud. In the result, CMA 3831/1986 fails and is hereby dismissed, leaving the defendant No.1 in this case free to invoke the bank guarantee and performance bond/guarantee in accordance with their terms, if so advised. The defendant No.2 is free to make the payment in accordance with the terms of the bank guarantee and performance guarantee. Ex parte interim order made earlier in this application is hereby vacated.