1988 PLP 418 (CLC)

(1) Ferro Silicon Plant having capacity of 25 tons per day; (ii) 15 MW Turbine and Generator; and (iii) Boiler N‑1800 TAKUMA was entered into between the parties on 18‑5‑1985. The appellant had to set up the said Plant according to this agreement in Pakistan for respondent No.l. The said agreement was varied to some extent through supplemental agreement dated 5‑2‑1986. The agreement was further revised through addendum to agreement and supplemental agreement on 28‑11‑1986. The said agreement, supplemental agreement and the addendum agreement' are not disputed by any party. The main agreement was for about 1320 Million Yen, in the supplemental agreement the amount was raised to about 1360 Million Yen and through the said addendum the amount was reduced to about 1327 Million Yen. Respondent No.l opened a letter of credit for the first shipment which was received in September, 1986 and there is no dispute about the same. For the second shipment a letter of credit was also opened by respondent No.l and the said second shipment valued at about 210 Million Yen reached Pakistan in February/March, 1987 and is still lying at the Karachi Harbour because there has arisen a dispute about the same between the parties. The present litigation relates mainly to the said second shipment. According to clause (28) of the agreement the appellant had to furnish a Performance Guarantee of the value of 20% of the whole agreement. This Guarantee was furnished by Rank of America, Lahore respondent No.2 on 19‑8‑1986. The amount guaraniteed was Yen 265,444,881 and the said guarantee was to hold good till 15‑6‑1989. The case of respondent No.l is that under clause (3.7) of the agreement the appellant had to intimate respondent No.l, the purohase, by cable or tax, 60 days in advance, for inspection at appellant's Factory site (contractor's Factory site) but they did not send any intimation to the purchaser for such inspection. This is why they have not so far got the shipment cleared from Karachi. Respondent No.l invoked clause (28) of the agreement and the Performance Guarantee furnished there under and required respondent No.2 to pay them a sum of Yen 105, 354, 708 out of the whole guarantee money, nearly 50$ of the same, through their bank. The appellant disputed the said payment by respondent No.2 to respondent No.l. The appellant filed an application under section 20 of the Arbitration Act, 1940, for the filing of the agreement and for reference of the dispute/differences/controversies to Arbitration. Alongwith the same the appellant filed an application for the grant of a temporary injunction restraining the respondents from encashment of the Performance Guarantee to the said extent. The application was dismissed by Sh. Liaquat Ali, Civil Judge, 1st Class, Lahore, vide order dated 8‑9‑1987. This appeal has been filed against the said order. I have perused the record and have heard the learned counsel for the parties.

2. The case of the appellant is that as a dispute has arisen between the appellant and respondent No.l and because a definite arbitration clause for solution of disputes is contained in the agreement, the Performance Guarantee cannot be got encashed to any extent till an Arbitrator or the Arbitrators or the Umpire have given their award and the same is made a Rule of the Court. On the other hand respondent No. l contends that the Performance Guarantee is encashable without reference to the Opener i.e., the appellant and the encashment is not subject to any decision in Arbitration or of a Court of law. Clause (25) of the agreement relates to Arbitration and provides that all disputes, controversies, or differences which may arise in connection with the contract shall be settled amicably and if this cannot be done the same shall be referred to Arbitration as provided for in the said clause. Respondent No.l contends that this Arbitration clause is not applicable to encashment of Performance Guarantee as the same is in itself independent and autonomous. The operative part of the Performance Guarantee is as follows:‑ "As per request of M/s. Toyo Menka Kaisha, Ltd. we hereby issue our Letter of Guarantee No.LU6214/3812 in your favour on account of M/s. Toyo Menka Kaisha Ltd. for a sum not exceeding Y.265,444,881 (Japanese Yen two hundred sixty‑five million four hundred forty‑four thousand eight hundred eighty‑one only) being 20 per cent of the total shipping value (C&F) related to the contract No.QBA‑0‑224‑R dated 18th May, 1985 and supplemental agreement No.QBA‑0‑342 dated 5th February, 1986 as a performance guarantee as per requirements mentioned in the contract and supplemental agreement under the following terms and conditions (1) this guarantee is available for payment, without recourse to the opener against beneficiary's first written call to do so accompanied by a written statement certifying that the opener failed to comply with the terms and conditions of the contract and supplemental agreement. (2) the guarantee shall terminate on 15th June, 1989." 3.Although definitions of many terms, used in the agreement, have been given in its clause (1) yet no definition of Performance Guarantee has been given therein. Therefore, it is to be found out as to what is Performance Guarantee in the eyes of law. Plainly speaking it is a guarantee for the due performance of the contract by the parties. Per se the guarantee appears to safeguard the interests of only one party, namely, respondent No.l. He can get the guarantee encashed in case of any default by the appellant. But, on the other hand, if the breach is on the part of respondent No.l there is no such easy remedy available to the appellant. The reason for this differenciation between the parties to the contract is clear that respondent No.l has paid whole of the money amounting to about Rs.14,00,00,000 to the appellant. Therefore, the said Performance Guarantee is to hold good for the benefit of respondent No.l and he as such is the beneficiary thereof. The said guarantee, as quoted above, provides that the guarantee is available for payment to respondent No.l:‑ (a) without recourse to the Opener; (b) against beneficiary's first written call; and (c) which is accompanied by a written statement certifying that the Opener has failed to comply with the terms and conditions of the contract. Ordinarily a guarantee is bilateral between the contracting parties and can be enforced either by mutual agreement or consent or through a Court of law. Part 'a' above shows the guarantee amount in this case is payable to the beneficiary without recourse to the Opener and only subject to his first written call under part 'b' which is accompanied by a certificate mentioned at 'c' above. The learned counsel for respondent No.1 agrues that the wording of Performance Guarantee will show that it is an agreement between respondent No.l and the Bank of America, respondent No.2, to which the Opener, the appellant, no longer remains a party. He means to say that once the Opener had got the guarantee issued from respondent No.2 he had no say in the matter and respondent No.l could get the Guarantee encashed only by complying with the requirements at 'a' to 'c' above. He states that they have made the first call and that the same is accompanied by the requisite certificate and, therefore, respondent No.2 should have, without the intervention or without any reference to the appellant, paid the amount claimed by respondent No.l.

4. According to the learned counsel for respondent No.l such a guarantee, as already said, is a document which is independent in itself and which is not subject to the terms and conditions contained in the agreement between the appellant and respondent No.l. He has referred to some oases from England, from India and from Pakistan. The cases referred to by him are R.D. Harbottle Mercantile v. International Westminster Bank Ltd. (1977)2 AER,862; Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. (1978) I AER 1976; Penan Homes Ltd. v. Coleman Contractors (Overseas) Ltd.(Before Lord Justice Eveleigh and Lord Justice May; Judgment reported in Times, London, February 24, 1984); M/s. Banwari Lal Radha Mohan v. Punjab State Cooperative Suppply & Marketing Federation Ltd. Chandigarh and another AIR 1982 Delhi 357; Bawari Lal Radha Mohan v. The Punjab State Cooperative Supply and Marketing Federation Ltd., A I R 1983 Delhi 86; Pesticides India, Props Mewar Oil & Gen. Mills Ltd. v. State Chemicals and Pharmaceuticals Corporation of India Ltd. and others A I Ii 1982 Delhi 78; Road Machines (India) Pvt. Ltd. v. The Projects and Equipment Corporation of India Ltd. and another A I R 1983 Calcutta 91; Jamia Industries Ltd. v. Pakistan Refinery Ltd. PLD 1976 Kar. 644 (mainly relied upon by the appellant also) and Sirafi Trading Establishment v. Trading Corporation of Pakistan Ltd. 1984 C L C

381. I need not discuss all these cases in detail at this stage when the application for temporary injunction only needs disposal because that may not effect the case on merits. However, it may be pointed out that in the cases of England the Performance Guarantee has been held to be an independent and autonomous agreement between the benecifiary and the Bank issuing the Guarantee and that the Opener has no say in the matter unless element of fraud etc. comes into the same. The Indian cases cited above have gone both ways and their consensus seems to be that if there is a dispute between the main contracting parties the Performance Guarantee may not be allowed to be encashed till the resolution of the dispute. The case of M/s. Banwari Lal Radha Mohan related to six applications for temporary injunction and although it was held therein that a Performance Guarantee was an autonomous and independent contract and the Banker had to honour the same according to its terms yet it was also found that where a dispute arises in particular about the determination of loss suffered by a party the encashment should not be allowed without determination of the same. Accordingly injunction was allowed in some cases and was refused in the others. The overall gist and effect of the English cases and the Indian cases is that a Performance Guarantee is a different type of Guarantee as compared to the Guarantee as known and prevalent commonly and unless there are specific reasons to withhold the encashment or to stop the encashment the Banker should be allowed and called upon to discharge his liability as a Guarantor and to pay the guarantee money to the beneficiary without reference to the Opener or without the order of a Court of law. The case of Jamia Industries Ltd. also related to a Performance Guarantee and had arisen out of an application filed under section 20 of the Arbitration Act, 1940 and out of the miscellaneous application filed for issuance of a temporary injunction. In that case it was found that when the agreement between the contracting parties contained an Arbitration clause, even the dispute relating to encashment of Performance Guarantee should be left to be determined through Arbitration. It was found therein that prima facie the matter relating to the assessment of damage and loss was not free from doubt and would require adjudication in the light of all the provisions of the contract. It was, therefore, held that even such a question was within the jurisdiction of the Arbitrator. The encashment of Bank Guarantee or Performance Guarantee was not allowed. The learned counsel for respondent No.l has tried to differentiate this case op the basis of the case of Sirafi Trading Establishment. In that case it was found that the beneficiary was the sole Judge to determine the breach and to determine the resulting loss and he was, therefore, entitled to encash the Bank Guarantee without reference to the Opener. The said case is different from the case in hand. The operative part of the Bank Guarantee furnished therein has been reproduced in para‑1 of the judgment and is reproduced below for facility of reference:‑ "We understand that this guarantee is unconditional and that the sole Judge for decision whether the sellers have performed the contract and fulfilled the terms and conditions of the contract will be buyers (the defendants)." It will be seen that it has been provided therein that the buyer, i.e. , the beneficiary will be the sole Judge for decision as to whether the seller, i.e. the Opener had performed the contract and fulfilled the terms or not. There is no such clause in the Performance Guarantee in our case the operative part of which has been reproduced above. So far as the definition and import of the Performance Guarantee is concerned it is sufficient to say that it is a new type of Guarantee introduced for large and mostly international contracts. It is independent and autonomous in nature generally but its import and scope can differ from case to case according to the facts of each case and according to the wording of Performance Guarantee furnished L therein. It will be absolutely independent if the encashment is left to the exclusive option of the beneficiary as a sole Judge of the breach and loss but if the wording is different and admits of the determination of the point as to who breached the contract and as to what was the resultant loss on account of the said breach then the Performance Guarantee will not be available for encashment solely on the option of the beneficiary.

5. Applying the said test to our case it will be found that the Performance Guarantee furnished by respondent No.2, at the request of the appellant, on 19‑8‑1986, is not absolutely independent. The said Guarantee had been furnished "as per requirements mentioned in the contract and supplemental agreement" under the terms and conditions reproduced above from 'a' to 'c'. Therefore, the said Performance Guarantee cannot be encashed without reference to the agreement including supplemental agreement. The agreement provides that the parties will abide by the terms of the agreement and will be responsible for any breach thereof. The Performance Guarantee, therefore, cannot be encashed without establishing that there was any breach by the appellant. According to clause (3.7) of the agreement "Before Factory test of every consignment, contractor shall intimate the purchaser by cable or telex, 60 days in advance for inspection" at Contractor's Factory Site and "Contractor will obtain a written consent of purchaser to ship" . It is admitted before me by the learned counsel for the appellant that no such intimation whatsoever, for inspection, was given by the appellant to respondent No.l and, therefore, neither the latter could inspect the goods nor did he resultantly give any written consent for shipment. It is for this reason that the said second and disputed shipment has not been cleared by respondent No.l from Karachi. The learned counsel for respondent No.l states that the machinery/equipment is so sensitive and technical that it is not possible to test the same in Pakistan and he states that in clause (3.7) the provision for test at Factory Site of the Contractor (appellant) was consciously made only because the testing facilities existed there. In these circumstances there is no doubt that the condition provided in clause (3.7) of the agreement has been breached by the appellant. However, the question of assessment of the loss if any, will remain undetermined till the case is decided on merits. If respondent No.l had taken delivery of the goods and got the same inspected somehow and had reached the conclusion as to what was the real damage or loss it would have been possible to release the Guarantee in his favour at least to the extent of such damage and loss. He demands about 50$ of the total value of the second shipment obviously because the Guarantee does not cover the second shipment only but because it covers whole of the contract and its complete performance. Therefore, even if the damage or loss had to be determined solely by respondent No.l that will not help respondent No.l unconditionally because he himself is not sure about the extent of damage or loss. He is acting only on a presumptive loss and damage. Therefore, when he is allowed to encash the Guarantee to the extent claimed by him he has to furnish suitable security for the same.

6. It may be added that the ingredients of irreparable loss and balance of convenience in this case are almost equal for both the parties. The appellant has breached the contract may be to some extent while respondent No.l has not assessed the damage and loss resulting there from. However, as already said, respondent No.l has made payment of whole of the huge money in advance and he cannot now make use of the same while it is fully available to the appellant for use. In return the appellant had to provide machinery and equipment etc. to respondent No.l and if the same were available to respondent No.l for utilization then he would be having the compensation for the money paid by him. In the present circumstances the machinery etc. of the second shipment has not becomes available to respondent No.l because of want of inspection. This would mean that he has been denied the use of the consideration for his money paid in advance. Till the machinery etc. in good and acceptable condition become available to respondent No.l he is entitled either to get back the money paid by him for the second shipment or to encash the Performance Guarantee to the extent demanded by him. The return of money is of course impossible and the ingredients of irreparable loss and balance of convenience lean towards respondent No.l and, therefore, the Guarantee should be allowed to be encashed so that in the meantime respondent No.l can utilize the money for 1 his purposes. The appellant will *not suffer any irreparable loss or even loss if the Guarantee is allowed to be encashed because I propose to obtain a sufficient and solid security from respondent No.l before he can encash the Performance Guarantee to the disputed extent. In case the appellant wins the case he will get back the guarantee money through enforcement and encashment of the said security through the learned trial Court without separate litigation. However, if nothing is allowed to be paid to respondent No.l he will be suffering an irreparable loss because neither he has been supplied the machinery and equipment according to the terms of the agreement nor has he any facility to use money which has been paid in advance to the appellant.

7. In the circumstances it is ordered that the Performance Guarantee may be encashed by respondent No.2 in favour of respondent No.l to the extent of Yen.105, 354, 708 and no more on the condition that either respondent No.l furnishes irrevocable bank guarantee for the said amount guaranteeing to pay back the said amount either in Court or to the Bank of America, respondent No.2, if the case is decided against him or he may pledge the machinery and equipment etc. received by him through the said first shipment and their Factory including the site thereof as a security for paying back the amount of guarantee money to the Court or to respondent No.2 in case of his failure in the case. This Bank Guarantee or the pledge will hold good till the same are released by the Court after final disposal of the case. The encashment of the Performance Guarantee will be allowed to the extent mentioned above and this order will not authorise respondent No.l to encash the remaining amount of Performance Guarantee without due course of law. If the said Bank Guarantee is not furnished or such a pledge is not made to the satisfaction of the learned trial Court, respondent No.l shall not be entitled to encash the Performance Guarantee to any extent. The appeal is disposed of accordingly. A . A . /T‑25/ A Order accordingly.