1. ' NADEEM AZHAR SIDDIQI, J.--- The plaintiff by filing this suit has prayed for referring the matter/dispute to the arbitration.
2. ' The facts necessary for disposal of this suit as pleaded in the plaint are that the plaintiff was awarded the contract of Rehabilitation of M.T. Khan Road from P.I.D.C. Bridge to Jinnah Bridge-II, including Flyover/Bridges Structure for a net price of Rs,206,742,280. The plaintiff has submitted a Performance Bank Guarantee for a sum of Rs,20,674,228 and Mobilization Advance Guarantee in the same amount. The defendant No,1 vide letter, dated 15-12-2006 terminated the contract. The plaintiff, thereafter, vide letter, dated 20-3-2006 referred various disputes under the contract to the Engineer. The defendant No,1 vide letter, dated 18-3-2006 called upon the defendant No,2 to pay a sum of Rs,20,674,228 against the Performance Bank Guarantee.
3. ' The plaintiff along with the plaint has also filed an application bearing C.M.A. No,2066 of 2006 under section 41 of the Arbitration Act praying therein to restrain the defendant No,2 from encashing the Performance Bank guarantee and Mobilization Advance Guarantee.
4. ' The defendant No,1 has filed its counter-affidavit to the C.M.A. No,2066 of 2006 in which it was stated that the application is misconceived and mala fide. It was further stated that there are disputes raised by the plaintiff which are capable of reference to the Engineer under clause 67.1 and indeed have been referred to the Engineer by the plaintiff on 20-3-2006 - as of the date hereof there are no disputes that can be referred to arbitration under clause 67.3 of the conditions of contract. The dispute with regard to termination of contract has already been referred to the Engineer under clause 67.1 of the conditions of contract and is pending and the plaintiff is not entitled to invoke the jurisdiction of this Court.
5. ' The plaintiff has filed affidavit-in-rejoinder in which it has been stated that where it can be shown, that the encashment of guarantee shall be fraudulent and a case of the beneficiary taking advantage of its own defaults, a Court of law can interfere with such encashment of guarantee.
6. ' Mr. Bilal A. Khawaja, the learned counsel for the plaintiff submits that arbitration clause is available in the contract, notices of arbitration were given for illegal termination of the agreement, the conduct of the employee in asking for the encashment of Mobilization Advance Bank guarantee without allowing adjustment is neither fair nor reasonable and is amount to fraud and the Court can intervene. He has relied upon the following reported cases:--
(1) Jamia Industries v. Pakistan Refinery PLD 1976 Kar. 644,
(2) Messrs National Construction Ltd. v. Aiwan-e-Iqbal Authority PLD 1994 SC 311, (3) Pakistan Engineering Consultants v. Pakistan International Airlines Corporation and B.C.C.I.1993 CLC 882, (4)
7. Pakistan Engineering Consultants v. Pakistan International Airlines Corporation 1993 CLC 1926 (D.B.) and (5) Pakistan Engineering Consultants v. Pakistan International Airlines Corporation 1989 SCM R 379.
8. ' Mr. Salman Talibuddin, the learned Counsel for the defendant No,1 submits that the suit is premature as the dispute cannot be referred to the arbitration unless the Engineer decides or fails to decide the dispute. He submits that the plaintiff by filing this suit after referring the matter to the Engineer has not allowed him to decide the dispute. He further submits that the bank guarantees are independent contracts and the defendant No,2 cannot be restrained from encashing the bank guarantees on the pretext of alleged fraud. He has relied upon the following reported cases:--
(1) Shipyard K. Damen International v. Karachi shipyard and Engineering Works Ltd. PLD 2003 SC 191,
(2) Shipyard K. Damen International v. Karachi Shipyard and Engineering Works Ltd. 2003 CLD 309 (D.B.), (3) Board of Intermediate and Secondary Education, Multan v. Fine Star and Company, Engineers and Contractors 1993 SCM R 530 and (4) Pakistan Development Corporation (Pvt.) Ltd. v.
9. Ministry of Defence, Government of Pakistan PLD 1995 Kar. 286.
10. ' In rebuttal, the learned counsel for the plaintiff submits that there is no dispute with regard to the arbitration clause in the contract and during pendency of arbitration proceedings the bank guarantees cannot be encashed. He further submits that since the conduct of the defendant No,1 is fraudulent the Court can, stay encashment of bank guarantees. He further submits that in case of injustice the Court can interfere.
11. ' I have heard the learned counsel for the parties and perused the record of this case very carefully.
12. 'It is not disputed that the contract contained an arbitration clause and in terms of contract the plaintiff has referred the matter to Engineer for his decision. The plaintiff has filed this suit without waiting for the decision of the Engineer. Mr. Salman Talibuddin has referred to clause 67.1 of the contract and submits that unless the Engineer gives his decision or fails to give his decision the matter/dispute cannot be referred to the arbitration. Clause 67.1 of the contract provides that the dispute of any kind between the employer and the contractor in connection or arising out of the contract, whether during the execution of works or after their completion and whether before or after repudiation or termination of the contract, in the first place, be referred in writing to the Engineer. The said clause further provides that either the employer or contractor be dissatisfied with any decision of the Engineer, or if the Engineer fails to give notice of his decision than either of the party give notice to other party of his intention to commence arbitration.
13. 'From the perusal of clause 67.1 the contention of Mr. Salman Talibuddin appears to be correct that the arbitration proceedings provided in terms of the contract cannot be commenced unless the Engineer gives his decision or fails to give his decision. In the instant case, the plaintiff has referred the dispute to Engineer on 20-3-2006 and without providing him any opportunity to decide the dispute has filed this suit on 24-3-2006 and has obtained an order of maintaining status quo by the parties. The order of status quo is not operating against the Engineer, but since the matter is subjudice before the Court the Engineer deems fit not to initiate any proceedings. Clause 67.1 also provides period within which the Engineer has to take decision. Mr. Bilal A. Khawaja submits that since the time provided in the clause 67.1 is expired the Engineer cannot take decision. The contention of Mr. Bilal A. Khawaja has no force for the simple reason that the parties have agreed to a mechanism of resolution of their dispute and they cannot bypass the same by initiating legal proceedings. Furthermore, the plaintiff after referring the matter to the Engineer has not waited for his decision and has filed this suit, due to which the Engineer cannot take decision. The plaintiff cannot take advantage of its own deeds and cannot avoid proceedings in terms of the contract.
14. 'The suit filed by the plaintiff under section 20 of the Arbitration Act appears to be premature. The defendant No,1 has at no stage disputes the arbitration clause in the contract and has also not disputed the authority of the Engineer to take decision and has agreed to join the proceedings pending before the Engineer, therefore, the suit at this stage is not maintainable. The plaintiff may avail remedy available to him under the contract after the decision of the Engineer.
15. ' By filing C.M.A. The plaintiff has prayed for stay of encashment of bank guarantees executed by the defendant No,2. Section 41 of the Arbitration Act provides that the Court shall have, for the purpose of, and in relation to, arbitration proceedings has same power of making orders in respect of any matter set out in the second schedule as it has for the purpose of, and in relation to, any proceedings before the. Court.
16. ' The learned counsel for the plaintiff submits that the defendant No,1 acted fraudulently by claiming the encashment of bank guarantees during pendency of proceedings before the Engineer and has asked for the encashment of entire amount under the Mobilization Advance Guarantee without adjusting the amount, which was already deducted from the bills of the plaintiff.
17. The learned counsel for the plaintiff. Submits that the payment of bills amounting to Rs,28 million is pending with the defendant No,
1. He further submits that in case the encashment is stayed no prejudice will be caused to the defendant No,1 as further guarantee to take care the financial charges has been furnished to safeguard the interest of the defendant No, 1.
18. ' The learned counsel for the defendant No,1 submits that mere :alleging fraud is not sufficient and the plaintiff has to prove the same. He submits that the bank guaraMees are independent contract and under the garb of pendency of proceedings the encashment cannot be stayed.
19. ' The plaintiff in the affidavit in support of its application under section 41 of the Arbitration Act has submitted that the encashment of Performance Bank Guarantee under the circumstances can only be a case of blackmailing which is impermissible under the law.
20. ' The dispute between the parties is termination of the contract. Whether the contract was terminated rightly or wrongly is to be determined as per the mechanism provided in the contract.
21. ' The Mobilization Advance Bank Guarantee was furnished against the payment made by the defendant No,1 to the plaintiff to safeguard the interest of the defendant No,
1. The Performance Bank Guarantee was furnished in order to ensure the completion of work.
22. ' Before proceeding further it will be appropriate to reproduce the terms of guarantees. The Mobilization Advance Guarantee reads as under:-- "Now, therefore, the Guarantor hereby guarantees that the contractor shall use the advance for the purpose of above mentioned contract and if he fails and commits default in fulfillment of any of his obligations for which the advance payment is made, the Guarantor shall be liable to the Employer for payment not exceeding the aforementioned amount.
23. ' Notice in writing of any default, of which the Employer shall be the sole and final judge, on the part of the contractor, shall be given by the Employer to the Guarantor, and on such first written demand, payment shall be made by the Guarantor of all sums then due under this guarantee without any reference to the contractor and without any objection.
24. ' This guarantee shall remain in force until the advance is fully adjusted against payments from interim payment certificates of the contractor or until 30-9-2005 which ever is earlier.
25. ' The Guarantor's liability under this guarantee shall not in any case exceed the sum of Pak.
26. Rs,20,674,228 (Pakistani Rupees twenty million six hundred seventy-four thousand two hundred twenty-eight only).
27. ' The guarantee shall remain valid up to the aforesaid date and shall be null and void after the aforesaid date or earlier if the advance made to the contractor is fully adjusted against payments from Interim Payment Certificates of the contractor provided that the Guarantor agrees that the aforesaid period of validity shall be deemed to be extended it on the above mentioned date the advance payment is not fully adjusted."
28. ' The Performance Bank Guarantee is read as under:-- ' Now therefore, we hereby affirm that we are the Guarantor and responsible to you, on behalf of the contractor, up to a total of Pak. Rs,20,674,228 (Pakistan Rupees twenty million six hundred seventy-four thousand two hundred twenty-eight only), and we undertake to pay you upon your first written demand and without cavil or argument, any sum or sums within the limits of Pak.
29. Rs,20,674,228 (Pakistan Rupees twenty million six hundred seventy-four thousand two hundred twenty-eight only) as aforesaid without needing to prove or to show grounds or reasons for your demand of the sum specified therein.
30. ' We hereby waive the necessity of your demanding the said debt from the contractor before presenting us with the demand.
31. ' We further agree that no change or addition to or other modification of the terms of the contract or of the works to be performed thereunder or of any of the contract documents which may be made between you and the contractor shall in any way release us from any liability under this guarantee and we hereby waive notice of any such change, addition or modification."
32. ' From reading the terms of guarantees it appears that the same are unconditional and did not stipulate that its encashability would be dependent or linked with the main contract. The plaintiff has already received the amount under the Mobilization Advance Guarantee which was not fully adjusted and that the encashment of Mobilization Advance Guarantee is not dependent on performance of main contract. The plaintiff cannot object to the encashment of Mobilization Advance Guarantee to the extent the advance amount, which was not adjusted. The learned counsel for the defendant No 1 . Submits that an amount of Rs,8,269,691 was recovered and the balance remains Rs,12,404,537, which was not disputed by the learned counsel for the plaintiff.
33. ' Similarly, the Performance Bond Guarantee was provided for the due performance of the contract.
34. It is an admitted position that the contract was terminated by the defendant No,1 and the matter was referred to the Engineer for decision. The encashment of Performance Bank Guarantee is not linked with the main contract and according to the terms of guarantee the Bank is liable to pay on the first demand without any cavil or argument without needing to prove or to show grounds or reasons for demand. In the reported case of Pakistan Engineering Consultants v. Pakistan International Airlines Corporation 1993 CLC 1926 a Division Bench of this Court has held as under:- "As regards the performance bond, in our view, the same stands entirely on different footing than the bank guarantee and unless and until the Court prima facie finds that the default was on the part of the consultants, it would not be just and proper to allow its encashment as the encashment depends on the commission of default. We have already observed hereinabove that on the basis of material available on record, it cannot be said who has committed the default."
35. ' The above judgment was challenged before the Honourable Supreme Court of Pakistan in the reported case of Pakistan Engineering Consultants v. Pakistan International Airlines Corporation 1989 SCM R 379 while refusing the leave the Honourable Supreme Court of Pakistan has held as under:-- "In the circumstances the High Court has already granted an interim relief to the petitioner so far as the performance bond is concerned and allowed a partial relief with regard to the guarantee given in aspect of the mobilization advance. This Court does not ordinarily interfere with the interim orders made during the pendency of a suit."
36. ' The encashment of bank guarantee was also considered by a learned Divisional Bench of this Court in the reported case of Shipyard K. Damen International v. Karachi Shipyard and Engineering Works Limited 2003 CLD 309 and has held as under:-- "Admittedly the bank guarantee furnished are unconditional, there are no pre-requisite 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."
37. ' The above said judgment was challenged before the Honourable Supreme Court of Pakistan in the case of Shipyard K. Damen International v. Karachi Shipyard and Engineering Works Limited 2003 PLD SC 191 in which it has been held that guarantee once given cannot be avoided, except on the ground of fraud and misrepresentation. In the above reported case it has been further held as under:-- ' In the light of what has been discussed hereinabove it can be inferred safely that encashment of bank guarantee has no nexus with the spirit of the contract executed between the parties being an independent contract containing its own terms and conditions to be performed by the concerned parties. The encashment of the bank guarantee had nothing to do with the alleged dispute between the petitioners and the respondent, which must be decided independently on the basis of terms of that contract without involving the contract of bank guarantee. It must be noted that bank guarantee is an autonomous contract and imposes an absolute obligation on the bank to fulfil the terms and the payment on the bank guarantee becomes due on the happening of a contingency on the occurrence of which the guarantee becomes enforceable. If any authority is needed reference can be made to case titled National Construction Company Limited v. Aiwan-e-Iqbal PLD 1994 SC 311."
38. ' Mr. Bilal A. Khawaja, the learned counsel for the plaintiff submits that there is conflict of opinion between the two judgments of Honourable Supreme Court and submits that earlier judgment reported as Pakistan Engineering Consultants v. Pakistan International Airlines Corporation PLD 1989 SC 379 was not considered in the subsequent judgment of Shipyard K. Damen International v.
39. Karachi Shipyard and Engineering Works Limited PLD 2003 SC 191 and submits that the subsequent learned Bench cannot take the different view. In the reported case of Ardeshir Cowasjee v. Karachi Building Control Authority 1999 SCM R 2883 a learned Larger Bench of the Honourable Supreme Court of Pakistan relying upon the case of Multilines reported as PLD 1995 SC 423 held that a Bench of the same number of Judges of the same High Courts, or of the Supreme Court cannot deviate from the view of an earlier Bench.
40. ' From the perusal of two judgments it appears that in the earlier reported case of Pakistan Engineering Consultants the relief with regard to encashment of Mobilization Advance Guarantee to the extent of unadjusted amount under the Mobilization Advance Guarantee was refused, whereas the encashment of performance bond was stayed on the ground that the encashment of performance bond depends upon the commission of default. Whereas, in the subsequent judgment of Shipyard K. Damen International the Honourable Supreme Court declined to grant stay of encashment of Performance Bank Guarantee on the ground that the bank guarantee being an autonomous contract, imposed an absolute obligation on bank to fulfil its terms and payment whereunder became due on happening of a contingency on which guarantee became enforceable.
41. ' There appears to be no conflict between the two judgments of Honourable Supreme Court. In the case of Pakistan Engineering Consultants (supra) the encashment of Performance Bond was linked with the commission of default, whereas in the case of Shipyard K. Damen International (supra) the encashment of bank guarantees was refused as the same were unconditional and no embargo whatsoever has been imposed for its encashment.
42. ' In the above judgment of Shipyard K. Damen International (supra) the Honourable Supreme Court after considering the relevant case-laws has held that there should be prima facie a case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Mere irretrievable injustice without a prima facie case of established fraud is of no consequence in restraining the encashment of bank guarantee.
43. ' The law on the question of granting interim injunction to restrain the encashment of Mobilization Advance Guarantee is now well-settled. The Courts are reluctant to grant an interim injunction restraining the bank from honouring its contractual obligations under the unconditional guarantees. In the case of encashment of Performance Bank Guarantees the consensus of the superior Courts are that in exceptional cases, where refusal to grant interim injunction, will perpetuate fraud, which should be apparent from the material available on record, the Court may grant interim injunction. Other reason for stay of bank guarantee in exceptional cases is "injustice".
44. Admittedly, the defendant No,1 has not paid the bills of the plaintiff amounting to Rs,28 million. The encashment of Performance Bond at this stage without payment of pending bills will amount to double jeopardy and the defendant No,1 cannot be allowed to cause injustice to the plaintiff by encashing the Performance Bank Guarantee for the entire amount without adjusting the pending bills. The defendant No,1 can claim encashment of bank guarantee after adjusting the pending bills.
45. ' The plaintiff has failed to prove any fraud or misrepresentation on the part of the defendant No,1 and mere allegations of fraud and blackmailing are not sufficient to stay the encashment of bank guarantees. Similarly, mere claiming the encashment of entire amount under the Mobilization Advance Guarantee is not amounted to fraud. However, on the ground of injustice the plaintiff has a good case and encashment of Performance Bank Guarantee can be stayed.
46. ' In view of what has been discussed hereinabove the suit filed by the plaintiff under section 20 and application under section 41 of the Arbitration Act are disposed of as under:--
(A) The plaintiff and defendant No,1 will approach the Engineer who will deliver his decision in terms of the conditions of contract.
(B) The defendant No,1 may claim encashment of the Mobilization Advance Bank Guarantee from the defendant No,2 for the remaining unadjusted advance amount.
(C) The defendant No,1 may claim the enactment of Performance Bank Guarantee from the defendant No,2 for the remaining amount after adjusting the pending bills of the plaintiff.
47. ' In view of the circumstances of the case the parties are left to bear their own costs.