2003 PLP 309 (CLD)

The performance guarantees furnished under clause 2.7 of the aforesaid contracts are similar to each other and, amongst others, it has been specifically stipulated as under:‑‑ "This guarantee is unconditional and it is expressly understood that the sole judge for deciding whether seller has performed the purchase contract and fulfilled the terms and conditions of the purchase contract shall be buyer." Mr. Arif Khan, learned counsel for the appellant, in support of his contention has argued that the contract has been substantially performed by the appellants and on the basis of satisfactory execution of contract the respondent even agreed to enter into further contracts for similar work. He has further argued that any question pertaining to defective work, under the circumstances, is a question to be determined by the Arbitrators in pursuance of the terms of the contract and encashment of the said guarantees under such circumstances was uncalled for and opposed to the spirit of the contract. In support of his contentions he had placed reliance on the cases of Messrs Jamia Industries Ltd. v. Messrs Pakistan Refinery Ltd., Karachi (PLD 1976 Karachi 644) and Pakistan Engineering Consultants v. Pakistan International Airlines Corporation and others (1993 CLC 1926). Mr. Aziz A. Shaikh, Advocate for the respondents, has supported the impugned orders. He, in rebuttal, contended that the injunction application was not maintainable as no arbitration proceedings were pending and in the absence of pending proceedings the appellant was not entitled to seek injunctions as the powers under section 41 of the Arbitration Act could be invoked only with respect to proceedings pending before the Court or the Arbitrator. In support of his contention learned counsel bas placed reliance on the case of Messrs Asadullah Khan & Co. Ltd. v. Karachi Shipyard and Engineering Works Ltd. And another (1979 CLC 625). His second contention was that when the material equipments were put to use then only their working and performance could be determined. The performance of the equipments did not conform to the specifications and standards as laid down. It was only after unsatisfactory performance of the equipments when subjected to physical application and use that the substandard quality was revealed. Under these circumstances the work did not amount to due performance of contract and the respondents were entitled to enforce the encashment of Bank Guarantees as provided for under the terms of the contracts. In support of this contention he placed reliance on the cases of Toyota Menka Kaisha Ltd., Tokyo, Japan v. Ferro Alloys Pakistan Ltd. and another (1988 CLC 418) and Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P.) Ltd. and another (AIR 1997 SC 2477). His third contention was that the intention of the parties under contract, as evident from the terms incorporated therein, was that' the will of the parties should be enforced and the case did not call for any intervention by any third party by restraining the encashment of the said Bank Guarantees as the same would be violative of the terms of the contract and the stipulations of the Bank Guarantees. He placed reliance on the case of Commissioner of Income‑tax, Peshawar Zone, Peshawar v. Messrs Siemen A.G. (1991 PTD 488). Mr. Liaquat Merchant, Advocate appearing for ABN Amro Bank, contended that in lieu of Bank Guarantees pay orders were issued by Messrs ABN Amro Bank. The said pay orders were also presented for encashment but payment was not made in view of ad interim orders passed in the present case. After placing these facts before the Court Mr. Liaquat Merchant prayed for further orders in this regard. With regard to first contention of learned counsel for the respondent regarding maintainability of the application seeking interim orders, the provision of section 41 of the Arbitration Act are attracted and orders pertaining to matters enumerated under the Second Schedule of the said Act are subject to the existence of conditions provided under the said section which reads as follows:‑‑ "

41. Subject to the provisions of this Act and of rules made thereunder.‑(a) The provisions of the Code of Civil Procedure, 1908, shall apply to all proceedings before the Court, and to all appeals, under this Act, and (b) the Court shall have, for the purposes 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, any proceedings, before the Court: Provided that nothing in clause (b) shall be taken to prejudice any power which may be vested in an arbitrator or umpire for making orders with respect to any of such matters." The question of maintainability of performance guarantee also came for consideration before the Hon'ble Supreme Court in the case of Messrs National Construction Ltd. v. Aiwan‑e‑Iqbal Authority (PLD 1994 SC 311). In the case of Asadullah Khan & Co. Ltd. (supra) cited by learned counsel for the respondent the application for interim injunction was moved prior to the filing of an application under section 20 of the Arbitration Act. Taking this fact into consideration, the learned Single Judge of this Court was of the view that in the absence of any proceedings before the Arbitrators or the Court on the date of filing of the injunction application, the powers available to the Court under section 41 of the Arbitration Act, as specified under the Second Schedule, were not available. The present case is distinguishable as the application under section 20 of the Arbitration Act was also filed by the appellants alongwith injunction application. With the institution of the application under section 20 of the Arbitration Act, registered as suit in pursuance of rule 278(1) of the Sindh Chief Court Rules, (O.S.) the Court has powers to make the orders in respect of any of the matters set out in the Second Schedule which reads as follows:‑‑ "278. (1)‑‑‑Every application under section 20(1) of the Arbitration Act, 1940 (hereinafter in this rule and rules 279 to 292 called the Act) shall be verified, numbered and registered as a suit. All subsequent applications shall be entitled in such suit." In pursuance of the above rule the application under section 20 of the Arbitration Act was registered as Suits Nos. 1435 and 1436 of 2001 and the application for seeking interim orders is a subsequent application in the proceedings required to be entitled in the suit. In view of the above we are of the view that the applications to restrain the respondent from encashment of performance bank guarantees are maintainable and the objection has no force. The next question of encashment of Bank Guarantee for performance of the contract during the pendency of the arbitration proceedings came for examination before the Hon'ble Supreme Court earlier in the case of National Construction Limited (supra) wherein the case of Jamia Industries Limited (supra) was also considered and a performance guarantee furnished under the terms of the contract was held to be an independent contract. It has been laid down that the Courts must give effect to the covenants of the Bank guarantees, the performance guarantees for the smooth performance of the contract. The relevant para. of the said judgment is reproduced as under:‑‑ "We have considered the contentions raised by the learned counsel for the parties and have also perused the record. The contents of para. 3 of mobilization advance guarantee, clearly visualized that the respondent can get encashed guarantee without any question or without any reference of any nature, whatsoever to the contractor (appellants) and irrespective of any dispute between the parties or before any arbitrator or any Court of law. The precedents cited by learned counsel for the appellants are distinguishable. The case reported as Messrs Jamia Industries Limited v. Messrs Pakistan Refinery Limited (PLD 1976 Kar. 644) does not deal with bank guarantee given against, the mobilization advance. Similarly in MacDonald Layton & Co. Ltd. v. Pakistan Service Limited and others (1983 CLC 2252), the employer terminated the contract in contravention of the clauses of the agreement, when the plaintiffs did not abandon the work, consequently injunction was issued. The contention of the learned counsel for the appellants that in the event, the appellants succeeded in the arbitration proceedings they will not be able to recover the amount is beyond the point in issue. In the instant case, therefore, the bank guarantees furnished by the appellants contain categorical undertaking and impose absolute obligations on the banks to pay the amount, irrespective of any dispute which may arise between the parties regarding the breach of contract. In our view the Courts must give effect to the covenants of the bank guarantees, the performance guarantees, for the smooth performance of the contracts. Those guarantees are independent contracts and the Bank Authorities must construe them, independent of the primary contracts. They should encash them notwithstanding any dispute arising out of the original contract between the parties. In the instant case, therefore, the encashment of the bank guarantees cannot be postponed pending decision of the arbitration proceedings, which may take years to conclude." Admittedly the Bank Guarantees furnished are unconditional, there are no prerequisite conditions or impediments for encashment in the said Guarantees for which the respondent has been made the sole judge. It is also not disputed that respondent is statutory organization of the Government of Pakistan and possess sufficient assets to ensure payment of such amount under the decree determined as due and payable in pursuance of the arbitration proceedings, the award and decree. In view of the above this matter does not call for any interference with the orders passed by the learned Single Judge. These appeals have no merit and are accordingly dismissed alongwith listed applications. Q.M.H./M.A.K./S‑230/K Appeals dismissed.