M. SOHAIL IQBAL BHATTI, J.---Through this single judgment we intend to decide the instant appeal (R.F.A. No.683 of 2002) and R.F.A. No.646 of 2002 as both the appeals have been filed against the judgment and decree dated 25-6-2002 passed by the learned Judge Banking Court-III Lahore.
2. The facts of the case are that respondent No.1/plaintiff bank filed a suit for recovery against the present appellants/defendants Nos.1 and 7 to 9 and the respondents Nos.2 to 6/defendants Nos.2 to 6 (the appellants in R.F.A. No.646 of 2002). According to the averments made in the plaint, upon the request of appellant No.4-Company and respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002 (who were the directors of appellant No.4-Company), the respondent No.1/plaintiff bank allowed IBRD loan of Rs.5.588 million on 13-6-1990 and in consideration of the finance facility, appellant No.4-Company mortgaged its land building and machinery in favour of respondent No.1/plaintiff bank whereas respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002 furnished their personal guarantees in favour of the respondent No.1/plaintiff bank on 20-12-1990. The above mentioned IBRD facility was enhanced on 12-5-1991 from Rs.5.588 million to Rs.6.503 million and new charge documents were executed by appellant No.4-Company as well as by respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002. The loan facility was repayable in nineteen half yearly installments. Appellant No.4-Company and respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002 failed to liquidate the outstanding liability and, upon their request, rescheduling/restructuring was made through sanction advice dated 14-11-1995. According to the new arrangement the rescheduled facility was repayable within eight years including the grace period of one year. Again all the charge documents were executed by appellant No.4-Company and respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002. The appellant No.4-Company and respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002 again failed to liquidate their liability and a request was made for further sanction of finance facilities. This request was again acceded to by respondent No.1/plaintiff bank and a cash finance limit of Rs.3.0 million was extended in favour of appellant No.4-Company and respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002 and all the charge documents were again executed. Again a default was committed. The respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002 requested the respondent No.1/plaintiff bank to allow them to transfer the management of appellant No.4-Company to the appellants Nos.1 to 3/defendants Nos.7 to 9. The request was approved and a tripartite agreement was executed between the appellants and the respondents on 18-5-1999. According to the tripartite agreement the total outstanding liability of appellant No.4-Company and respondents Nos.2 to 6/appellants in R.F.A.
No.646 of 2002 was agreed at Rs.26.697 million which was bifurcated as under:- Facility No. Repaym ent schedule DF-I (Rs.16.162-M) 30 equal quarterly installments within a period of eight years with six month grace period.
Markup to be repaid as per practice.
DF-II (Rs.10.535-M) 48 equal monthly installments within a period of six years with two year grace period.
3. The appellants Nos.1 to 3 executed ail the charge documents in favour of the respondent No.1/plaintiff bank and according to the tripartite agreement it was settled that in case of failure of appellants Nos.1 to 3 to satisfy the repayment as per schedule, the entire outstanding amount of Rs.26.697 million shall become immediately due and payable at once. Since the appellants failed to repay the outstanding amount as per agreed schedule, the respondent No.1/plaintiff bank filed a suit for recovery against the appellants and respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002 on 3-1-2000. The appellants and respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002 filed their separate applications for leave to defend the suit raising different stances. The learned Judge Banking Court-III, Lahore, dismissed the application for leave to defend the suit filed by the appellants and respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002 and passed the impugned judgment and decree dated 25-6-2002 for recovery of Rs.2,74,33,628 along with costs and cost of funds till the final realization of the amount. Hence, the present appeal and R.F.A. No.646 of 2002.
4. The learned counsel for the appellants has argued that the suit filed by the respondent No.1/plaintiff bank against the appellants was premature. It has been further argued that the tripartite agreement dated 18-5-1999 was executed to revive the project (appellant No.4). It has been further argued that no decree could have been passed against the appellants as respondent No. 1/plaintiff bank had also agreed to provide fresh finance facilities and since the respondent No. 1/plaintiff bank had failed to provide the fresh proposed facilities, the present appellants were not bound to perform the terms and conditions of the tripartite agreement dated 18-5-1999. To substantiate this argument the learned counsel has referred to sections 51 to 54 of the Contract Act, 1872. It has been further argued by the learned counsel for the appellants that the suit filed on 3-1-2000 was premature as no cause of action had otherwise accrued in favour of respondent No.1/plaintiff bank on 3-1-2000 as according to the repayment schedule of DF-I six months grace period had been allowed to the appellants and thereafter the first quarterly installment became due.
5. The learned counsel for respondent Nos.2 to 6/appellants in R.F.A. No. 646 of 2002 has drawn the attention of the Court towards different recitals and clauses of the tripartite agreement to argue that the impugned judgment and decree could not have been passed against respondents Nos. 2 to 6/appellants in R.F.A. No.646 of 2002.
6. On the other hand, learned counsel for respondent No.1/plaintiff bank has vehemently supported the judgment and decree dated 25-6-2002 passed by the learned Judge Banking Court-III, Lahore.
It has been argued that the suit had been filed on account of default committed by the appellants.
It has been further argued that the fresh finance facilities were to be provided to the appellants against the fresh collateral securities but despite issuance of the letters the appellants failed to provide fresh securities and, therefore, no fresh facility could have been provided. The learned counsel also argued that although the grace period of six months was allowed but the appellants were required to pay the mark up as per practice of the bank and since mark up had not been paid by the appellants the suit had been filed. The learned counsel for the respondent No. 1/plaintiff bank further argued that respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002 were liable to pay mark up under clause 8 of the agreement dated 18-5-1999.
7. We have considered the arguments advanced by learned counsel for the parties and have also perused the record with their able assistance.
8. It is an admitted fact that the appellants Nos.1 to 3 had undertaken the liability of Rs.26.697 million which was bifurcated in DF-I and DF-II amounting to Rs.16.162 million and Rs.10.535 million and executed all the documents in favour of respondent No. 1/plaintiff bank. There is also no denial to the fact that appellants Nos.1 to 3 became the Directors in appellant No.4-Company and all the shareholdings of respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002 were also transferred to appellants Nos. 1 to 3 in the instant RFA. As far the argument advanced by learned counsel for the appellants that no cause of action had accrued and the suit was premature, we have observed that suit was filed on 3-1-2000 and application for leave to defend the suit was filed by the appellants on 4-2-2000 and the amended application for leave to defend under section 10 of the Financial Institutions (Recovery of Finances) Ordinance, 2001 was filed on 8-10-2001. In reply to paragraphs 10, 11 and 12 of the plaint, the appellants have made an evasive denial and have only mentioned that the agreement dated 18-5-1999 had been breached by respondent No. 1/plaintiff bank. The appellants, to show their bona fides, could have immediately filed an application before the learned Banking Court when they filed an application for leave to defend the suit for the first time on 4-2-2000 that according to the agreement dated 18-5-1999 certain installments are due and could have paid those installments. As far the argument that the suit was premature, it is established from the agreement that the appellants were required to pay mark up on DF-I regularly and the grace period had only been granted to the appellants for repayment of the principal outstanding liability as it is mentioned in the repayment schedule of DF-I that the mark up shall be paid as per practice which leads to only one conclusion that the appellants were under an obligation to pay the mark up regularly and this fact has been admitted by the learned counsel for the appellants that nothing was paid on account of mark up till the time of filing of suit i.e. 3-1- 2000. As far the argument advanced by learned counsel for the appellants that the agreement dated 18-5-1999 had been breached by respondent No. 1/plaintiff bank, the appellants were not obliged to repay any amount mentioned in the agreement dated 18-5-1999. We are constrained to observe that all the assets and management of appellant No.4-Company had been transferred to appellants Nos.1 to 3. Thus, the appellants cannot take the defence that the appellants were not liable under the agreement dated 18-5-1999.
9. At this stage it would be useful to reproduce sections 51 to 54 of the Contract Act, 1872 as under:- "(51) Promisor not bound to perform, unless reciprocal promisee ready and willing to perform.-- -When contract consists of reciprocal promises to be simultaneously performed, no promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise.
(52) Order of performance of reciprocal promises.--Where the order in which reciprocal promises are to be performed is expressly fixed by the contract, they shall be performed in, that order; and, where the order is not expressly fixed by the contract, they shall be performed in that order which the nature of the transaction requires.
(53) Liability of party preventing event on which the contract is to take effect.---When a contract contains reciprocal promises, and one party to the contract prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented; and he is entitled to compensation from the other party for any loss which he may sustain in consequence of the non-performance of the contract.
(54) Effect of default as to that promise which should be first performed in contract consisting of reciprocal promises.--- When a contract consists of reciprocal promises, such that one of them cannot be performed, or that its performance cannot be claimed till the other has been performed, and the promisor of the promise last mentioned fails to perform it, such promisor cannot claim the performance of the reciprocal promise, and must make compensation to the other party to the contract for any loss which such other party may sustain by the nonperformance of the contract."
10. It is correct that respondent No. 1/plaintiff bank had agreed to provide fresh finance facilities to the appellants but in consideration of those facilities the appellants were required to provide additional collateral securities which, according to learned counsel for the appellants, were never provided. We would like to reproduce the contents of letter dated 26-7-1999 addressed to the appellants as under:- The Chief Executive, Nenser Ampoules (Pvt.) Ltd., 23-Civic Centre, New Garden Town, LAHORE.
Dear Sir, RESCHEDULING/RESTRUCTURING OF OUTSTANDING LIABILITY.
We refer Rescheduling/Restructuring of your outstanding liabilities approved by the competent authority of our bank and request that payment of the following charges may please be made to enable us to implement the above package in our books.
1. Markup on Rescheduled amount for the Period 1-5- 1999 to 30-6-1999. Rs.383,399
2. Legal Documentation Fee Rs. 31,592
3. Rescheduling/Restructuring ChargesRs. 53,394 Total: Rs. 468, 385 Apart from the above, you are also requested to undertake that you will complete all necessary formalities upto the satisfaction of the bank with respect to additional collateral within a period one year from the date of sanction of the case i.e. Latest by 22 January, 2000 and you will not avail working capital facilities from our branch until and unless these formalities are completed by you.
We may inform you that as a matter of policy, every facility is available for a period of 90-days from the date of its sanction, after which date it terminates automatically. In your case the revised proposal was approved on 12th May, 1999, therefore the availment period is going to be expired on 12-8-1999.
You are, therefore requested to expedite the things to enable us to do the needful.
Thanking you, Yours faithfully, VP/CHIEF MANAGER.
11. The contents of the letter make it abundantly clear that the appellants were required to provide additional collateral to the respondent No.1/plaintiff bank for availing of fresh/proposed finance facilities which had never been provided to respondent No.1/plaintiff bank. The contents of the letter also show that the appellants were required to make payment of mark up from 1-5-1999 to 30-6-1999 amounting to Rs.3,83,399 which amount had never been paid by the appellants. We are afraid that reference to sections 51 to 54 of the Contract Act, 1872 in itself shatters the case of the appellants as the appellants were under an obligation to perform their part of the promise i.e. To provide additional securities for availing of finance facilities. The fresh finance facility could only have been provided to the appellants after the provision of additional collateral securities. We are of the view that where order in which the reciprocal promises are to be performed is fixed; these promises shall be performed in that order but where the order is not expressly fixed; these promises are to be performed in that order which the nature of transaction requires. In the present case the nature of transaction for providing the fresh finance facility was that the appellants were to provide additional securities for availing the fresh finance facilities and since the appellants failed to provide the additional collateral securities, no default could have been attributed to the respondent No. 1/plaintiff bank as the agreement dated 18-5-1999 did not fix the order of performance of reciprocal promises meaning thereby the order of performance had to be in accordance with the nature of transaction. Thus, we are not in agreement with the learned counsel for the appellants. We are afraid that the appellants had failed to raise a substantial question of law and fact which could have entitled the appellants the right to grant of leave to appear and defend the suit. The concept of grant of leave to defend the suit requires that the defendant should come forward with the positive defence of a particular fact which has to be supported by certain documentary evidence to convince the Court that there was sufficient ground for granting leave to defend the suit. The term "substantial" means of real worth and importance as opposed to the imaginary and illusory. For grant of leave by the Banking Court the defendant has to raise a serious question which needs to be important, grave and entails consequences giving cause of concern and must be worth of consideration.
12. As regards the argument advanced by learned counsel for respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002, we would like to reproduce recitals (c), (d) and (e) and clauses (1), (2) and (4) of the agreement dated 18-5-1999 as under:-
(c) At the request of the parties of the Second, Third and Fourth part, the Bank in order to revive the project of the Company has decided to reschedule/restructure the above finances/loans and to change the management as under:-
(d) The Outgoing Directors have agreed to sell their shareholding in the Company to Incoming Directors and the Incoming Directors have agreed to take over all the assets and liabilities as mentioned above of the Company by absolving the Outgoing Directors of any liability in respect of an(sic.) in connection with the Company towards the Bank.
(e) The Bank has given the consent vide their approval memorandum No. SSB/JS/1574 Dated 14- 11-1998 and SSB/JS/ARM/04 dated 20-4-1999 which is integral part of this agreement for the sale of shares and the change of management of the Company provided the Incoming Directors will execute their personal Guarantees in favour of the Bank and fulfill all the other conditions.
NOW THEREFORE THIS AGREEMENT WITNESSES AS UNDER.-
(1) That all the parties to the Agreement hereby confirm and undertake that total liability of the Company payable to the Bank on the day of signing/execution of this Agreement i.e. Rs.26.697 Million as mentioned in the Repayment Schedule Part I of Clause (c) above and it is hereby agreed between the parties that the Company and the Incoming Directors/Management will be liable to pay this amount and this amount is hereinafter referred to as Due Amount.
(2) the outgoing directors/management also admit and acknowledge that they were personally liable for the Due Amount mentioned in clause 1 on the basis personal guarantees signed/executed by them in favour of the Bank. The incoming directors/management hereby undertake that upon signing/execution of this agreement, personal guarantees and having fulfilled all the terms and conditions required in terms of approval memorandum No.SSB/JS/1574 Dated 14-11-1998 and SSB/JS/ARM/04 dated 20-4-1999 the outgoing directors will be released from any liability towards the Bank and the incoming directors/management will now be personally liable for the repayment of all amount/sum due by the outgoing directors/management or the company to the Bank.
(3) .............
(4) The incoming directors/management further accepts and acknowledge that in case of default in making payments of any instalment/instalments due to the Bank as per terms of repayment arrangements more specifically mentioned in the repayment schedule mentioned above, the Due amount under the clause 1 shall become immediately due and payable by them at once.
(Emphasis provided by us)
13. The perusal of these recitals and clauses makes it explicit that the respondent No. 1/plaintiff bank allowed the change of management of appellant No.4-Company and respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002 being the outgoing Directors who had agreed to sell their shareholdings in appellant No.4-Company to the incoming Directors and the incoming Directors agreed to take over all the assets and liabilities mentioned in the agreement dated 18-5-1999. The bank gave its consent to the change of management and it was mutually agreed in Clause (2) of the agreement that, upon signing of the agreement by the incoming Directors i.e. Appellants Nos.1 to 3, the outgoing Directors i.e. Respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002 will be released from any liability towards the bank. Clause (4) of the agreement dated 18-5-1999 provides that in case of default in making payment of any installment, the incoming Directors shall be liable to pay the entire liability. It is evident from the terms of agreement dated 18-5-1999 that respondent No. 1/plaintiff bank had allowed for the change of management of appellant No.4- Company. The appellants Nos.1 to 3 were inducted into the management of appellant No.4- Company with the blessings of the respondent No.1/plaintiff bank and they have, as such, being referred to as incoming Directors of respondent No.4-Company. The respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002, who were the former Directors, have clearly been mentioned as the outgoing Directors and this change of management has been duly sanctioned and approved by respondent No.1/plaintiff bank. The incoming Directors/appellants Nos.1 to 3 have executed their personal guarantees in pursuance to the agreement dated 18-5-1999. The respondent No.1 bank never required respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002 to execute any guarantee to secure the liability of appellant No.4-Company. Thus, it is apparent that respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002 cannot be he'd liable for the liabilities which had been undertaken by the new management with the approval of the bank. The passing of decree against respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002 is incomprehensible.
14. Clause (8) of the agreement dated 18-5-1999 can only be termed as a result of inequality of bargaining power as has been observed by Lord Denning as under:- "English law gives relief to one who, without independent advice, enters into a contract upon terms which are very unfair, or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influence or pressure brought to bear on him by or for the benefit of the other."
15. The perusal of the recitals and clauses (1), (2) and (4) of the agreement dated 18-5-1999 leads us to an irresistible conclusion that Clause (8) of the agreement is extremely unfair and can only be termed as a clause which is a result of economic duress and undue influence. In the present case it would be useful to reproduce section 16 of the Contract Act, 1872 as under:-
16. Undue influence.---(1) A contract is said to be induced by "undue influence" where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other, and uses that position to obtain an unfair advantage over the other.
(2) In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another-
(a) Where he holds, a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or
(b) Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.
(3) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other.
Nothing in this subsection shall affect the provisions of section 111 of the Evidence Act, 1872.
16. The respondent No.1/plaintiff bank, in the circumstances of this case, was holding an apparent economic authority over respondents Nos.2 to 6/appellants in R.F.A. No.646 of 2002. In the modern times it is the duty of the Court not only to look into the procedural fairness obtaining before the finalization of the contract but courts have the power to look into the question as to whether the outcome of the contract by itself is fair. The equitable doctrines of un-conscionability, inequality of bargaining power, economic duress can be invoked by the Court to ensure substantive fairness in the outcome of the contract. The Courts, in the modern times, have been more willing to question the fairness of contractual consequences than they had been in the past and in doing so the Courts have resorted to doctrines of "unconscionable bargain", "inequality" or "un- conscionability of bargaining power" or "economic duress" where one of the parties to a contract is in a position to dominate the will of the other and a contract is apparently unconscionable i.e. Unfair the law presumes that the consent must have been obtained by undue influence.
17. We are mindful of the fact that the classical theory in the law of contract is only aimed as procedural fairness, meaning thereby, the classic theory propagates the idea of freedom of bargaining power while only lying down rules of procedure but this theory is not concerned with the substantive fairness or justice in the outcome of the contract. In modern times, however, the classic theory has been subject to debate, criticism and erosion and the Courts have been seen to even strike down or amend the contractual terms on the ground that they lead to consequences which are extremely unfair and unjust. We are of the considered view that clause (8) of the agreement dated 18-5-1999 cannot be read as a sore thumb but has to be read in its totality and when this clause is read with the other clauses, as discussed above, it leads this Court to the conclusion that clause (8) of the agreement is riot only extremely unfair but is a result of unconscionability of bargaining power, economic duress and undue influence. This clause is in clear contradiction with the other clauses of the agreement dated 18-5-1999.
18. For what has been discussed above, this appeal (R.F.A. No.683 of 2002) is dismissed and R.F.A.
No.646 of 2002 is allowed. Resultantly, the impugned judgment and decree dated 25-6-2002 is modified, the suit is decreed and the decree is passed against appellants/defendants Nos.1 and 7 to 9 for recovery of Rs.2,74,33,628 along with costs and cost of funds, the suit filed against respondents/defendants Nos. 2 to 6/previous management of appellant No.4-Company is dismissed to their extent, while decree against the appellants/defendants Nos. 1 and 7 to 9 is.
Upheld.