2002 PLP 890 (CLD)

8. Issue No.1. The plaintiff awarded the contract for the construction of their District Headquarters buildings at Dadu and Shikarpur to contractor. It is the case of the plaintiff that under clause VI of the agreement EXh. P.1. the contractor was paid mobilization advance in the sum of Rs.5,19,424.40 for each contract being 10 per cent. of the contract price. Clause VI reads as follows: "It is agreed that the contractor shall be paid a sum of Rs.5,19,424.40 (Rupees five lacs nineteen thousand four hundred twenty‑four and paisa forty only) being 10% of the contract price as `Mobilization advance' on production of an insurance guarantee of equivalent amount which shall be adjusted against contractor's first five running bills in equal installments." It was contended that learned counsel for the plaintiff that the amount was disbursed to the said contractor as per Exh.P.2 and Exh.P.3. The defendant executed advance payment bond (Exh.P.4) on 24‑2‑1977, whereby the defendant guaranteed the re‑payment of mobilization advance paid to the contractor. This document is not disputed. The Conditions Nos.2, 3, 6 and 7 are reproduced with advantage for reference: ‑‑ "

2. Whereas the Managing Director, Sui Gas Transmission Co. Ltd., Karachi had agreed to pay a sum of Rs.10,34,325.50 (Rupees ten lac thirty‑four thousand three hundred twenty‑five and paisa fifty only) being 10% of the contract value mentioned job, to Messrs Zafar & Brothers Construction Co., Karachi as Mobilization advance which shall be recovered from the running account bills in accordance with the terms and conditions of the contract.

3. We Messrs the Standard Insurance Company Limited, whose office is at 9th Floor, Muhammadi House I.I. Chundrigar Road, Karachi hereby guarantee to pay you unconditionally on demand any sum up to but no exceeding Rs.10,34,325.50 (Rupees ten lacs thirty‑four thousand three hundred twenty‑five and paisa fifty only) if Messrs Zafar & Brothers Construction Co., Karachi fail to re‑pay this amount to you in accordance with the terms and conditions of the said contract without reference to Messrs Zafar & Brothers Construction Co., Karachi.

6. Our liability will go on reducing by the amount which shall be recovered by the Managing Director. Sui Gas Transmission Co., Karachi from the running bills of Messrs Zafar & Brothers Construction Co., Karachi unless a claim in writing is presented to us and if unpaid, a suit for action to enforce such claims is filed against us within 3 months (three months) from the date, all your rights under the said Bond shall be forfeited and we shall by released and discharged for all liability thereunder.

7. The liability of the Standard Insurance Company Limited., Karachi shall be reduced in proportion to the deductions made periodically from Bills/Claims of the contractor and the indemnity shall be limited to that amount which shall be due from the contractor at the time any default as noticed and the total amount of Rs.10,34,325.50 (Rupees ten lacs thirty‑four thousand three hundred twenty‑five and paisa fifty only) advanced to the contractor at or before the commencement of the contracted work." It has been pleaded that the .defendant failed to make the payment in spite of notice. 9: Mr. Muhammad Aslam Butt contended that the plaintiff has succeeded in proving the payment of mobilization advance in the sum of Rs.10,34,325.50 which has not been re‑paid by the said contractor. He referred the decree against the contract in Suit No.285 of 1982. The defendant under the mobilization advance bond are liable to make payment and their liability is co‑extensive with that of the contractor. Mr. Aslam Butt, learned counsel for the plaintiff has referred the cases of Messrs Platinum Insurance Company Limited, Karachi through Managing Director v. Daewoo Corporation, Sheikhupura through Director, Administration and Finance (PLD 1999 SC 1), wherein the liability of the guarantor in terms of mobilization guarantee was examined in appeal against the order of liquidation. In support of the above appeal, inter alia, the following contentions were raised, which are material for the issue involved in the instant case:‑‑ "(i) That the Mobilization Advance Guarantee cannot be read in isolation, but is to be read in conjunction with the other documents which were executed as a part of the above transaction of sub‑contract agreement, performance bond and the bank guarantees executed by Messrs Emirates Bank International Limited. (ii) That there was bona fide dispute as to the liability of the appellant‑Company under the above Mobilization Advance Guarantee, inasmuch as the respondent had not shown the adjustment of the Mobilization Advance in terms of Article 4 of the sub‑contract agreement, which provided re‑payment of the Mobilization Advance on pro rata basis in accordance with progress rate commencing from second interim payment certificate up to the last payment certificate, as admittedly the sub contractor had executed about 28% work." While repelling the contentions the following observations were made by apex Court: "Adverting to the above first submission of Mr. Fazal‑e‑Ghani Khan, Advocate Supreme Court that the Mobilization Advance Guarantee cannot be read in isolation but is to be read in conjunction with the other documents which were executed as a part of the above transaction of sub‑contract agreement, it may be observed that in support of his above submission he had referred to the wording of the performance Bond Guarantee and the various terms of the sub‑contract agreement in order to demonstrate that factually in the Mobilization Advance Guarantee was dependent on the terms and conditions contained in the sub‑contract and the Performance Bond. The above contention is not tenable. It may be observed that in building/ construction contracts it is common practice that an employer pays amount as Mobilization Advance to the contractor upon the execution of the contract document against an unconditional bank guarantee or an Insurance Company Guarantee, in order to enable the contractor to commence execution of the work by bringing at the site the equipment and material. Whereas a performance bond is executed on behalf of a contractor in order to ensure that the contract work is completed and in case of failure, the surety who executed the performance bond has to indemnify the employer. If we were to compare the language used in the Mobilization Advance Guarantee and the language employed in the performance bond, it becomes evident that the former is unconditional, whereas the latter is conditional. At this juncture, we may reproduce the relevant portion of the Mobilization Advance Guarantee, which reads as under:‑‑ 'In consideration of the premises, we, Messrs Platinum Insurance Company Limited, having registered Office at 8th Floor, UNI Centre, I.I. Chundrigar Road, Karachi (hereinafter called the surety) hereby Guarantee irrevocably and unconditionally to pay forthwith to the Contractor without any reference to the sub‑contractor on the contractor's first demand in writing that the said Mobilization Advance or any part thereof, is due and has not been paid by the sub‑contractor notwithstanding any contestation by the sub contractor such sum not exceeding to Rs.1,26,00,000 (Rupees twelve millions, six hundred thousands only)'. The perusal of the above‑quoted portion of the Mobilization Advance Guarantee indicates that the appellant undertook irrevocably and unconditionally to pay forthwith to the contractor without reference to the sub‑contractor, on the contractor's first demand in writing the Mobilization Advance or any part thereof which is due. The unconditionality of the above Mobilization Advance Guarantee is reinforced by the subsequent portion of the same, which reads as under:‑‑ .. and we, Messrs Platinum Insurance Company Limited, do hereby further declare that no alteration in the terms of the contract or of the conditions of which the Mobilization Advance is paid by agreement between the contractor and the sub contractor under the contract nor any forbearance of forgiveness in or in respect of any matter or thing concerning the contract or the Mobilization Advance on the part of contractor or the said sub‑contractor shall in any way release this Insurance Guarantee, from any liability under his Mobilization Advance. In view of the language employed in the above Mobilization Advance Guarantee, it is not open to the appellant‑Company to urge that the same was contingent on the terms and conditions of the sub contract agreement in question or the performance bond guarantee or the bank guarantees which were executed in respect of the other sub‑contract agreement referred to hereinabove. As regards the second submission of Mr. Fazal‑e‑Ghani, learned counsel for the appellant, that there was bona fide dispute as to the liability of the appellant‑Company under the above Mobilization Advance Guarantee, inasmuch as the respondent had not shown the adjustment of the Mobilization Advance in terms of Article 4 of the sub‑contract agreement, which provided re‑payment of the Mobilization Advance on pro rata basis in accordance with progress rate commencing from second interim payment certificate up to the Last Payment Certificate as admittedly the sub contractor had executed about 28% work, it may be observed that there is no doubt that under Article 4 of the sub‑contract agreement the mode of re payment of the Mobilization Advance has been provided for, inasmuch as it has been stated that the re‑payment of the Mobilization Advance shall be made on `pro rata' basis in accordance with progress rate commencing from the second Interim Payment Certificate up to the last Payment Certificate and that the balance will be adjusted in the Last Payment Certificate. It is also true that a portion of the work under the sub‑contract agreement in question was executed and, therefore, the respondent should have adjusted portion of Mobilization Advance on pro rata basis in the running bills. However, from the documents. on record, it is evident at no point of time the sub contractor raised the plea to the effect that factually any portion of the Mobilization Advance was adjusted in its running bills. On the contrary, from the contents of the plaint of Suit No. 852 of 1994 filed by the appellant against the sub‑contractor for recovery of Rs. 3,15,98,483 in the High Court of Sindh at Karachi, it is clear that the sub‑contractor admitted the factum that he was liable to pay the full amount under Mobilization Advance Guarantee to the appellant. Factually the appellant got a decree for the amount of Mobilization Advance Guarantee as well as performance bond guarantee on 5‑3‑1997. from the above High Court (pages 10 to 17 of the paper books. Part III). It may also be pointed out that sub‑contractor in his correspondence addressed to the appellant or to the respondent never raised the plea that any of the above Mobilization Advance was adjusted in any of the running bills. The omission, if any, on the part of the respondent does not absolve the appellant from its liability under the above Mobilization Advance Guarantee in view of the second quoted portion of the above guarantee, which inter alia clearly provides that not any forbearance for forgiveness in or in respect of any matter or thing concerning the contract or the Mobilization Advance on the part of the contractor or the said sub contractor shall in any way release the Insurance Guarantee, from any liability under this Mobilization Advance."

10. Mr. Aslam Butt also referred the following cases: (i) Subhankhan Ramijankhan v. Lalkhan Haji Umarkhan (AIR (35) 1948 Nagpur 123); (ii) Radha Kanta Pal v. United Bank of India Ltd. (AIR 1955 Calcutta 217): (iii) National Construction Ltd. v. Standard Insurance Co. Ltd. (1984 CLC 286). In above cases, the rule laid down was that under the provision of sections 125 and 128 of Contract Act, the liability of surety is co‑extensive with that of the principal debtor. The learned counsel for the plaintiff on the above premises has argued that the plaintiff has proved its case of non‑payment by the defendant under the performance bond Exh.P.4.

11. Mr. Abdul Rauf, learned counsel for the defendant has argued that the suit is based on advance/ mobilization bond which is not disputed. He also conceded to the proposition of law that the liability of the surety is co extensive with that of the principal debtors. But Mr. Abdul Rauf has placed much emphasis on the term of the bond for deduction of the mobilization advance, on pro rata basis, from the running account bills of the contract in terms of P.1 (Contract Agreement), and pointed out that the mobilization advance was to be adjusted against the contractors first five running bills in equal installments in terms of clause VI of the agreement (P.1) which has to be read in conjuncture with terms of the Bond. He contended that the specific amount has been claimed, whereas under the contract, the mobilization advance amount was to be deducted from the first five running bills and he points out that the witness examined by the plaintiff, Sardar Ikramullah has admitted that contractor had submitted three bills in respect of Dadu Work and four bills for Shikarpur, but he was not in a position to give the detail amount claimed by the contract in their said bills. The witness also admitted that no deduction was made from the bills towards the adjustment of mobilization on the request of the contractor due to their financial difficulties. On the basis of above admission, it has been argued by Mr. Abdul Rauf that the plaintiffs themselves have not deducted the amount of mobilization advance from the running bill as agreed and what amount is due has not been proved by the plaintiff, as such the defendant cannot be asked to make payment. I have considered the contention of Mr. Abdul Rauf, the defendant's liability is co‑extensive with contractor, the decree dated 8‑2‑1998 passed by this Court in Suit No.285 of 1982 (Exh.P.11), the unpaid amount of mobilization advance has been determined i.e. Rs.1,07,030, thus the liability cannot be disputed on account of amounts being undetermined.

12. Mr. Abdul Rauf also contended that case of Platinum Insurance Co. Ltd. (supra) has no application as the same was under the Company Law and the point was about the inability of the company to pay its debt, warranting the order of liquidation. No doubt the case was under Companies Law but the question raised and examined was the liability of the guarantor under the mobilization guarantee. The second contention of Mr. Abdul Rauf was that the claim of the plaintiff stands forfeited by virtue of clause VI of the Bond as the plaintiff was required to file the suit within three months from the date of claim, if it remains unpaid. In order to appreciate this contention, the relevant clause may be reproduced as under:‑‑ "Our liability will go on reducing by the amount which shall be recovered by the Managing Director, Sui Gas Transmission Co. Ltd., Karachi from running bills of Messrs Zafar & Brothers Construction Co., Karachi unless a claim in writing is presented to us and if unpaid, a suit for action to enforce such claims is filed against us within 3 months (three months) from the date, all your rights under the said Bond shall be forfeited and we shall be released and discharged for all liability thereunder."

13. Mr. Abdul Rauf, learned counsel for the plaintiff contended that the defendant rejected the claim of the plaintiff by their' letter dated 17‑11‑1977 addressed to the plaintiff (Exh. P.15) and the suit should have been filed within three months i.e. on or before 7‑2‑1978 and he pointed out that the suit was filed on 7‑3‑1978 and contended that the plaintiff's suit would be barred by time. He contended that such agreement between the parties is not void under section 23 of the Contract Act, and the plaintiff has forfeited their right under the bond, he referred the Full Bench judgment of Messrs Ali Pipe Industries, Faisalabad v. The Universal Insurance Company Ltd. and 2 others (PLD 1989 Lahore 390), wherein it was held that the clauses in fire or lightning Insurance Policies which provide for forfeiture of benefits or non‑liability under the policies after specified period are not void under section 28 of the Contract Act.

14. Abdul Rauf also referred the Divisional Bench judgment of this Court in Sargodha Central Cooperative Bank Ltd. and another v. New Hampshire Insurance Co. (PLD 1982 Karachi 627), wherein it was urged that clause 19 of the insurance policy in fact curtail the period of limitation for filing of a suit and, therefore, was hit by sections 23 and 28 of the Contract Act. The learned Divisional Bench after reappraisal of the case‑law dealing with the issue, deemed it appropriate to follow the principle of stare decisis and did not disturb the validity of clause 19 of the insurance contract. In reaching the conclusion it made the following observations:‑‑ "Since the High Courts in India have for about 70 years consistently taken the view that a clause in the insurance policy limiting liability of the insurance company for a certain period does not hit section 23 of the Contract Act, in our view it will not be just and proper to upset the above view after the expiry of such a long period .Since for the last 70 years the clauses identical with the clause of insurance Policy had been construed as having not violated section 23 or 28 of the Contract Act and, therefore, are enforceable, in our view the parties to the insurance contracts are presumed to have the above legal position. It will, therefore, not be just and proper to hold now that the clause in question violates section 23 or 28 of the Contract Act. The appellants/ plaintiffs while entering into the contract of insurance are presumed to have understood that the respondent/ defendant would be liable for a period of 12 months."

15. The question touching the validity of the clause providing for forfeiture of all benefits under the bond, if no action or suit is commenced within three months, if the claim remains unpaid and curtailing the period during which the liability of the company is sustainable is concerned, same has not impressed me on two reasons, firstly that the cases cited by Mr. Abdul Rauf are in respect of forfeiture clauses in insurance policies, which has no general application to such clause in other contract or to contract of guarantee, as such the same have no application to instant case. The discharge from liability clauses contained in other contract have invariably been held to be, ineffective in law being in conflict with provisions of sections 23 and 28 of the Contract Act. In Islamic Republic of Pakistan v. Nazar Din Khatak & Sons (PLD 1969 Pesh. 313) and Federation of Pakistan v. Messrs Muhammad Shafi & Sons (PLD 1971 Peshawar 93), wherein clause containing the words "Governor General shall stand discharged from liability unless arbitration or suit commenced within three month" were held to be void. Cases of Nathu Mal Ram Das v. D.B. Stamp & Co. and others (AIR 1932 Lahore 169), Gobandhan Das v. Dan Dayal (AIR 1932 Allahabad 273) and Pherai v. Pudai Ram (AIR 1925 Oudh 502), can also be referred.

16. It may be observed that in building/ construction contract, it is common practice that a principal pays amount as mobilization advance to the contractor upon the execution of the contract document against an unconditional bank guarantee or an insurance company guarantee, in order to enable the contractor to commence execution of the work by bringing at the site the equipment and materials at this juncture, the relevant portion of the Mobilization Guarantee may be reproduced, which reads as follow:‑‑ "We Messrs the Standard Insurance Company Limited, whose office is at 9th Floor, Muhammadi House, I.I. Chundrigar Road, Karachi hereby guarantee to pay you unconditionally on demand any sum up to but not exceeding Rs.10,34,325.50 (Rupees ten lacs thirty‑four thousand three hundred twenty‑five and paisa fifty only) if Messrs Zafar & Brothers Construction Co,, Karachi, fail to re‑pay this amount to you in accordance with the terns and conditions of the said contract without reference to Messrs Zafar & Brothers Construction Co., Karachi." The perusal of the above quoted clause of the mobilization advance guarantee indicates that the defendant undertook irrevocably and unconditionally to pay forthwith to the employers without reference to the contractor on demand. If remains unpaid.

17. The plea taken by the defendant was that the contractor has filed Suit No.667 of 1977. under section 20 of the Arbitration Act, the dispute has been referred to arbitration by order, dated 1‑12‑1977, until the dispute is finally decided and default if any of the contractor and also the amount, if any, due from the contractor is ascertained the defendant cannot be liable for any amount. The plaintiff was successful in proving that the contractor has not paid the amount of mobilization advance by producing the award, dated 14th February, 1982 (Exh.P.10) the same has been made rule of the Court judgment, dated 4‑2‑1998 (Exh. P.11) .

18. It is true that contractor submitted three running bills for Dadu Work and four running bills for Shikarpur work, and therefore, the plaintiff should have adjusted portion of mobilization advance on pro rata basis from the running bills. However, from the documents on record, it is evident that at no point of time the defendant raised the +plea to the effect that factually any portion of the mobilization advance was adjusted in running bills. On the contrary from the judgment dated 4‑2‑1998, it is established without any doubt that contractor has not repaid the mobilization advance.

19. For the reasons stated above, I am of the view that the plaintiff has proved his case that the defendants are liable to pay the unpaid amount of mobilization advance given to the contractor under the mobilization guarantee. The issue is decided in affirmative.

20. In view of the findings do Issue No. 1, the plaintiff is entitled for a sum of Rs.10,70,030.98 with mark‑up at prevailing rate of State Bank of Pakistan from the date of suit till its realization, however, with no order as to costs. M.A.K./Q.M.H./S‑182/K Suit decreed.