' M. SOHAIL IQBAL BHATTI, J.---Through this appeal, the appellant has challenged the order and decree dated 17-12-2009 passed by the learned Judge Banking Court-II, Faisalabad.
2. The facts of the case are that the appellant/plaintiff filed a suit for redemption/clearance of the vehicle Toyota Corolla Saloon bearing Registration No.LZ-9313 on the ground that an auto finance facility, availed by the appellant for purchase of the vehicle in the year 2004, was to be repaid in 48 monthly installments starting from 5-7-2004 and ending on 5-6-2008 which entire amount had been paid by the appellant as provided in the schedule but the plaintiff Bank had refused to issue NOC in respect of the disputed vehicle on the ground that the appellant was under an obligation to pay late payment charges and a prayer was made that a decree may be issued in favour of the appellant to the effect that the respondent Bank was not entitled to charge any penalties, late payment charges and any other charges from the appellant/plaintiff. In pursuance to the summons issued under section 9(5) of the Financial Institutions (Recovery of Finances) Ordinance, 2001 the respondent Bank appeared and filed an application for leave to defend the suit. It was admitted by the respondent Bank that all the installments had been paid by the appellant but the appellant was under the contractual obligation to pay late payment charges amounting to Rs.1,49,700 and legal expenses of Rs.5000 total amounting to Rs.1,54,700. The learned Judge Banking Court, through the impugned order and decree, dismissed the suit filed by the appellant on the ground that the appellant was under the contractual obligation to pay late payment charges.
Hence, this appeal.
3. The learned counsel for the appellant argued that the learned Judge Banking Court, while passing the impugned order and decree, had erred in law by, observing that the appellant was under the contractual obligation to pay late payment charges. In support of his contention, learned counsel has placed reliance upon Zarai Tarqiati Bank Limited through Branch Manager v.
Muhammad Mehmoodul Hassan Khan and another (2007 CLD 488) and Askari Commercial Bank Limited and others v. Pakkind Cement and others (PLD 2000 Karachi 246).
4. On the other hand, learned counsel for the respondent Bank reiterated all the objections which have been raised in the application for leave to defend the suit and argued that since the appellant did not make payment of the installments on their due date, therefore, he was under the contractual obligation to pay late payment charges.
5. We have considered the arguments advanced by learned counsel for the parties and perused the record with their assistance.
6. It is an admitted fact that the appellant had obtained an auto finance facility and according to the terms and conditions of the agreement the appellant was under an obligation to pay monthly installments of Rs.28,487 which was a component of the principal amount of Rs.17,744, mark up of Rs.7,176 and insurance premium of Rs.3,567.
7. The State Bank of Pakistan, through BCD circular No.13 dated 20-6-1984 and BCD Circular No.32 dated 26-11-1984 introduced Islamic system of financing in Pakistan. Both the Circulars are reproduced below:-- "BCD Circular No.13 of 1984 ' STATE BANK OF PAKISTAN ' Banking Control Department ' Central Directorate ' Karachi [Dated: June 20, 1984] ' Elimination of 'RIBA' from the Banking System ' As has been announced by the Finance Minister, it is the intention of Government that the Banking System should shift over to Islamic modes of financing during the course of the next "financial year.
These modes of financing have been described in Annexure I. This shift will take place according to the following programme:
(i) As from the 1st July, 1984, all banking companies will be free to make finance available in any of the modes of financing listed in Annexure I. However, as a transitional arrangement, they will also be free to lend on the basis of interest, provided that no accommodation for working capital will be provided or renewed on interest basis for a period of more than six months.
(ii) As from the 1st January, 1985, all finances provided by a banking company to the Federal Government, Provincial governments, public sector corporations and public or private joint stock companies shall be only in any one of the modes indicated in Annexure I.
(iii) As from the 1st April, 1985, all finances provided by a banking company to all entities, including individuals, shall be on the same basis as mentioned in (ii) above.
(iv) The appropriate mode of financing to be adopted in any particular case will be settled by agreement between the banking company and the client. Some possible modes of financing for various transactions have been shown in Annexure II.
(v) As from the 1st July, 1985, no banking company shall accept any interest-bearing deposits. As from that date, all deposits accepted by a banking company shall be on the basis of participation in profit and loss of the banking company, except deposits received in Current Account on which no interest or profit shall be given by the banking company.
(2) The instructions contained in item (i), (ii) and (iii) above shall, however, not apply to on-lending of foreign loans which will continue to be governed by the terms of the loans. Likewise, the instructions contained in item (v) above shall not apply to foreign currency deposits.
(3) The above instructions are being issued under the Banking Companies Ordinance, 1962. Further instructions, where necessary, will follow.
' Please acknowledge receipt.
' Yours faithfully (SIBGHATULLAH) Director"
"BCD Circular No.32 of 1984 ' STATE BANK OF PAKISTAN ' Banking Control Department ' Central Directorate ' Karachi ' BCD Circular No.13 [Dated: November 26, 1984] ' All Banks and Development Finance Institutions. Dear Sirs ' Elimination of 'RIBA' from the ' Banking System Bank Charges ' Please refer to BCD Circular No.13, dated the 20th June, 1984.
(2) Vide BCD Circular No.7, dated the 28th March, 1984 bank charges except charges for home remittances, have been deregulated. The schedules of bank charges received from the banks show that the following items of bank charges are based on interest:-
(i) Mark-up in the case of import bills under important letters of credit.
(ii) Mark-down in the case of documentary bills drawn against inland letters of credit.
(3) The schedules also provide for levy of overdue/penal interest in case of non-retirement/non- payment of inland cheques, bills etc., purchased.
(4) In exercise of the powers vested in it under the Banking Companies Ordinance, 1962, the State Bank of Pakistan is pleased to direct that as from the 1st January, 1985, interest, wherever charged by a banking company/development finance institution in any of the items of bank charges, shall be replaced by a non-interest mode considered appropriate by it. Moreover, 'overdue/penal interest or mark-up on mark-up shall not be charged by a banking company/DFI as from that date. Instead, it may take legal steps for recovery of the overdue finance.
(5) Please acknowledge receipt.
' Yours faithfully (SIBGHATULLAH) Director"
' It is not out of place to observe here that the Circulars, issued by the State Bank of Pakistan, are in the nature of instructions/directions to the financial institutions. The commercial Banks, whether private or government owned, are bound by these instructions and all the banking companies are under obligation to follow the instructions given by State Bank of Pakistan in contemplation of sections 3-A, 25 and 41 of the Banking Companies Ordinance, 1962.
8. With the introduction of Islamic system of financing through BCD Circulars Nos.13 and 32, issued by State Bank of Pakistan, all financial institutions in Pakistan have been prohibited from charging any additional sum on account of delay caused by the customer in repayment of its obligation created under an agreement based on mark up. Obligation under mark up based agreement once fixed could not be enhanced so as to entitle a financial institution to charge any sum over and above the original contractual amount. Thus, mark up beyond the original contractual period or any late payment charges, claimed by the financial institution, is violative of restrictions contained in BCD Circulars Nos.13 and 32. Any clause, incorporated in the finance agreement for charging of any additional mark up or penalty, would be violative of State Bank's Circulars Nos.13 and 32 and thus is void ab initio.
9. Even otherwise the imposition of penalty or damages at a fixed rate is opposed to the provisions contained in section 73 of the Contract Act. In a judgment reported as Messrs Hitoc Metal Plast (Pvt.) Ltd., etc. v. Habib Bank Limited (PLD 1997 Quetta 87) it has been held by the learned Division Bench that the general principles for granting compensation, when beneficiary alleges breach of contract, are regulated by sections 73 and 74 of the Contract Act. Thus, without proving the actual loan even fixed amount, stipulated as for liquidated damages, does not become automatically payable unless actual loan, suffered by the beneficiary, is established.
' The similar view has been expressed in a judgment reported as Habib Bank Ltd. v. Messrs Farooq Compost Fertilizer Corporation Ltd., and 4 others (1993 MLD 1571). Relevant portion is reproduced as under:- "Word 'finance', within the meanings of section 2(e) of the Banking Tribunals Ordinance, 1984, does not involve any equivalent of interest and by its own force does not carry returns beyond the stipulate period unless emanating in due course of law or expressly covenanted, again within the framework of law. In the relevant agreement, envisaging sale and purchase of goods, no such term (finance) nor perhaps a term to that effect could be improvised, the reason being that such an improvisation may have exposed itself as a degenerative, relegating the transaction to one, carrying interest. Patently, a provision for sale/and repurchase of the goods within periods specified (Bai Muajjal), culminating on repurchase, was calculated to advance the concept of trade and to forestall the extension of interest. Such agreements were to be construed in the, light of Islamic Fiqh. The enforcement of Shariah Act, 1991, lends support to such observations because that legislation declares the Qur'an and Sunnah as the Supreme Law of the land and, if more than one interpretations be possible, enjoins upon all Courts to interpret statute-law in a manner consistent with Islamic principles and jurisprudence."
' This Court in a judgment reported as Zarai Tarqiati Bank Limited through Branch Manager v.
Mohammad Mehmoodul Hassan Khan and another (2007 CLD 488) has held as under:- "We have heard the learned counsel for the appellant and also perused the statement of account.
The agreement is not denied. The facility was for the purchase of tractor and was liable to be liquidated in the agreed instalments. Statement of account clearly reflects that agreed amount was duly paid by the plaintiffs/respondents. Therefore, the claim of the appellant is restricted to the imposition of penalty on account of delayed payment of instalments. The provisions of BCD Circular No.32 dated 26-11-1984 disallow this the position has already been interpreted in Askari Commercial Bank Limited and others v. Pakland Cement and others PLD 2000 Karachi 246.
Therefore, the appellant-Bank could only initiate steps for recovery of outstanding instalments. The respondents/plaintiffs had diligently discharged their liability by depositing the instalments and liquidated the liability. Leave to defend has been correctly refused by the. Banking Court. There is no illegality in the impugned order and decree, resultantly, this appeal is dismissed leaving the parties to bear their own costs."
10. In a similar judgment reported as Messrs Nigah-e-Karimee Enterprises through Proprietor and another v. Trust Investment Bank Limited (2005 CLC 912), while discussing the scope of the late payment charges, this Court has discussed as under:- "We have heard the learned counsel for the parties. So far as the first contention of the learned counsel for the appellants is concerned, obviously, late payment charges have been claimed by virtue of agreement but in the nature of penalty. And in the facts and circumstances of the case, without proving loss, the respondent cannot recover such amount, therefore, to this extent, decree has been erroneously passed by the Court below."
11. The respondent Bank had provided a schedule of payment which included the amount of mark up to be repaid by the appellant over and above the principal amount and the respondent Bank was not entitled to recover any amount beyond the agreed amount to be repaid. Reliance in this regard is placed on Messrs Bukhari Agritek (Pvt.) Limited through Director and 3 others v.
Agricultural Bank of Pakistan (2005 CLD 619).
' Although we have observed that there is no agreement on record allowing the respondent Bank to charge any penalty whatsoever in any form but it would be useful to discuss this issue as to even if there is an agreement regarding imposition of penalties and burdening borrower with late payment charges what would be its effect.
' We are of the considered opinion that the Courts have the power to look into the question as to whether the outcome of the contract is fair. It has been held in Abdul Rahim and 2 others v. Messrs United Bank Ltd. Of Pakistan (PLD 1997 Karachi 62) as under:- "The classical theory in the law of contract is only aimed at procedural fairness. In other words, such theory propagates the idea of freedom of bargaining power, while only laying down rules of procedure which would ensure that the process of negotiations and conclusion of the bargain are fair. The classical theory is not concerned with the Court authoritative fairness or justice in the outcome of the contract. In modern times, however, the classical theory has been subject to debate, criticism and erosion and the Courts have been seen to even strike down or amend contractual terms on grounds that they lead to consequences which are extremely unfair, unjust and unreasonable."
' Meaning thereby that even if there is a clause in the agreement regarding late payment charges and penalty; the same would be disregarded by the Courts being against the Islamic system of finance; same being unconscionable and against the law.
12. For what has been discussed above, the impugned order and decree dated 17-12-2009 is set aside. Resultantly, the suit filed by the appellant is decreed with the observation that the respondent Bank is not entitled to claim any penalty or late payment charges in any form whatsoever. The respondent Bank is, therefore, directed not to withhold the issuance of Clearance Certificate in favour of the appellant on the basis of outstanding late payment charges or penalties.