MIANGUL HASSAN AURANGZEB, J: Through the instant Regular Second Appeal under Section 100 of the Code of Civil Procedure, 1908, ("C.P .C."), the appellant, M/s Atlas Cables (Pvt.) Limited, assails the judgment dated 04.01.2016, passed by the Court of the learned Additional District Judge, Islamabad, whereby the appellant' s first appeal against the judgment and decree dated 15.04.2015, passed by the Court of the learned Civil Judge, Islamaba d (West), was dismissed. Vide the said judgment and decree dated 15.04.2015, the learned Civil Court dismissed the appellant' s suit for declaration and permanent injunction.
2. The facts essential for the disposa l of the instant appeal are that after a tender bidding process conducted by the Islamabad Electric Supply Company ("respondent"), for the supply of ACSR RABBIT ("Cable"), the following three purchase orders were issued to the appellant:-
1. Purchase order No.1188, dated 07.01.2006, for the supply of 1,300 Km. of Cable for a total contract price of Rs.38,047,750/-.
2. Purchase order No.1255, dated 13.05.2006, for the supply of 1,000 Km. of Cable for a total contract price of Rs.36,800,000 /-.
3. Purchase order No.181 1, dated 20.02.2009, for the supply of 1,800 Km. of Cable for a total contract price of Rs.77,290,200 /-.
3. These three purchase orders shall hereinafter collectively be referred to as "the POs". The terms and conditions of the POs are more or less the same. Under the terms of the POs, the appellant was required to furnish performance bonds for an amount equal to 5% value of the POs in favour of the Chief Executive Officer of the respondent. These performance bonds were required to be issued by a scheduled bank of Pakistan and were to be valid for one year from the date of the completion of the supply of material.
4. The appellant had furnished the following three performance bonds issued by Habib Metropolitan Bank Limited in favour of the respondent:- Performance Bond No. Date Amount Expiry 1 HBZK/LG15818/06 16.01.2006 Rs.1,903,000/- 30.03.2014 2 HBZK/LG16816/08 24.12.2008 Rs.4,444,000/- 30.03.2014 3 HBZK/LG16848/09 13.02.2009 Rs.1,840,000/- 29.03.2014 Total 8,187,000/-
5. The purchase orders stipulated the dates within which the contracted material was to be supplied. Under Purchase Order No.1188, dated 07.01.2006, the appellant was required to deliver 700 KMs of Cable at Rawalpindi, 300 KMs of Cable at Islamabad, and 300 KMs of Cable at Rajjar . 50% of the material was to supplied within three months of the establishment of the letter of credit, and balance 50% within six months. Under Purchase Order 1255, dated 13.05.2006, the appellant was required to deliver 500 KMs of Cable at Rawalpindi, 250 KMs of Cable at Islamabad, and 250 KMs of Cable at Rajjar . 50% of the material was to be supplied within two months of the establishment of the letter of credit, and balance 50% within four months. Purchase Order No.181 1, dated 20.02.2009 required 300 KMs of the Cable to be supplied within 45 days, and the balance in lots of 300 KMs in each subsequent month from the date of the issuance of the letter of credit.
6. As can be seen from the above, the delivery period under Purchase Order No.1188 was six months, and that under Purchase Order No.1255 was four months. The delivery period under Purchase Order No.181 1 extended over a period of six and half months. Under the POs, the delivery period was agreed to be of the essence of the contract. In this regard, Clause 4 of the POs is reproduced herein below:- "Delivery period is the essence of the Contra ct and delivery must be completed not later than the dates specified. "1st day of inspection or 15th day of inspection call whichever , shall be reckoned as date of delivery of Store to IESCO Consignee provided the goods accepted for supply have been delivered within 20-days of issue of inspection certificate subject to the condition that the supplier/manufacturer offers the material for inspection at least 15-days prior to the due date and the offer is not rejected due to being a fake call or material not conforming to the specification".
(Emphasis added)
7. The appellant made partial supplies under the POs. The appellant vide letter dated 31.01.2008 (Ex.D-9), informed the respondent that the delay occasioned in the delivery of the Cable under Purchase Order No.1188 dated 07.01.2006 was on account of the bifurcation of the group of companies to which the appellant belonged; that such bifurcation had resulted in financial and banking disputes for the appellant; and that the resolution of these disputes caused the appellant to go behind schedule in most of its business dealings including the deliveries which it had to make under the said Purchase Order . Furthermore, the appellant stated that its problems had been compounded by an unprecedented fluctuation and rise in the London Metal Exchange ("LME") rates which had rendered the contracts financially unviable. The appellant requested the respondent to waive the imposition of liquidated damages under the said Purchase Order , and to consider their case patiently and favorably to alleviate them from their financial dif ficulties and to bail them out from crises.
8. Vide letter dated 18.08.2008 (Ex.D-1), the appellant proposed a new delivery schedule for the balance quantities of the Cable under Purchase Orders Nos.1 188 and 1255. The appellant asked for a period of 60 days to make the balance supplies of 206 KMs of Cable under Purchase Order No.1188, and 328 KMs of Cable under Purchase Order No.1255. The excuse put up by the appellant for not supplying the material within the period stipulated in the said Purchase Orders was the "rapid increase in prices and other inputs".
9. The respondent acceded to the said request of the appellant. The Board of Directors of the respondent, in its 66th meeting held on 21.07.2008, decided to amend the delivery schedule in the said Purchase Orders. With respect to Purchase Order No.1188, the appellant was required to deliver 100 KMs of Cable within 30 days of the amendment, and 106 KMs within 60 days. Similarly , as regard s Purchase Order No.1255, the appellant was required to deliver 150 KMs of Cable within 30 days, and 178 KMs within 60 days. This was conveyed by the respondent to the appellant, vide letter dated 26.08.2008 (Ex.D-2). Furthermore, the appellant was warned that in case it did not comply with the amended delivery schedule action would be taken under the provisions of the said Purchase Orders.
10. After the expiry of the amended delivery schedule, the appellant vide letter dated 12.12.2008 (Ex.D-3) informed the respondent that the shipment of the basic raw material required for all the conductors had been delayed due to "unavoidable circumstances". The appellant assured the respondent that the balance supplies would be made immediately .
11. As the appellant did not make the supplies within the period stipulated in the amended delivery schedule, the respondent, on 16.12.2008 (Ex.D-12), issued a notice of default in the delivery of goods against Purchase Orders No.1188 and 1255 to the appellant. As per the said notice, the appellant had not supplied 205.6 KM of Cable under Purchase Order No.1188, and 328 KM of Cable under Purchase Order No.1255. The appellant was called upon to explain within ten days as to why the following 'penalties' in terms of the said Purchase Orders may not be imposed on the appellant:-
1. Blacklisting of the appellant;
2. Forfeiture of the Performance Bonds furnished by the appellant and;
3. Cancellation of the Purchase Orders and purchase of material from any other manufacturer/supplier at the appellant' s risk and cost.
12. Furthermore, in the said notice, the appellant was requested to deliver the balance material by 26.12.2008. The appellant, vide letter dated 19.12.2008 (Ex.D-4), informed the respondent that it was facing difficulties due to unprecedented power and gas load-shedding. The respondent was again assured that supplies would be made under the contracts.
13. As no supplies were made by the appellant, the respondent, vide notice 14.03.2009 (Ex.D-5) reiterated its position taken its earlier notice dated 16.12.2008.
14. The appellant vide letter dated 28.07.2010 (Ex.D-6) proposed yet another revised delivery schedule for the supplies to be made under the POs. The appellant requested the respondent to re-sched ule the deliveries without imposing liquidated damages. In response, the respondent, vide letter dated 13.08.2010 (Ex.D-7) extended the delivery period without imposing liquidated damages. The appellant was required to make the balance deliveries between 30.08.2010 to 30.12.2010.
15. As the appellant did not deliver the Cable in accordance with the revised delivery schedule, the respondent vide letter dated 29.07.201 1 (Mark-F) cancelled Purchase Order No.181 1. The respondent is also said to have imposed the 'penalty' of forfeiting the performance bond furnished by the appellant. The other two Purchase Orders were also said to have been cancelled by the respondent. The respondent then took steps to encash the three performance bonds.
16. Vide letter dated 29.08.2012 (Ex.P-1), the appellant inter alia informed the respondent that the "main reason for the stoppage of supplies is due to the unprecedented increase in the cost of input materials in the local and international market." It is pertinent to reproduce the third paragraph of the said letter dated 29.08.2012 herein below:- "Sir, you are well aware that since the start of above P.O. there has been massive increase in the prices of LME and it had become difficult for us to supply the conductor on the rates quoted by us. After losing huge amounts we were able to supply major quantity under their P.O. In this connection we have approached to MD PEPCO, Lahore to allow us for Price Escalation, after that PEPCO, Lahore issued directive No.1657-71/GM/(C&M) P/CE(P&D)/DPE dated 01.07.2008 (copy attached) addressed to all DISCOS regarding provision of Price adjustment/escalation in Contracts for supply of goods due to increase in prices of metal and other input materials. We have immediately requested to your goodself to allow us price escalation as per PEPCO directive."
17. The appellant requested the respondent either to allow price escalation due to the increase in the prices of metals and other input materials, or to cancel the balance quantities in the POs. In its letter dated 19.12.2012 (Ex.P-2), the appellant reiterated its position taken in the above referred letter dated 29.08.2012. The respondent was unmoved by such protestations by the appellant on whose request the deliveries were rescheduled on two occasions.
18. The respondent wrote several letters, including letter dated 24.02.2014 (Mark-G) to Habib Metropolitan Bank for the encashment of the three performance bonds for a cumulative amount of Rs.8,187,000/-.
19. As the respondent had taken steps to encash the performance bonds furnished by the appellant, the appellant vide legal notice dated 20.03.2014 (Ex.P-3) called upon the respondent to desist from taking such steps until a court of competent jurisdiction resolved the disputes between the parties.
20. As the respondent was firm in its resolve to encash the performance bonds, the appellant on 22.03.2014 instituted a suit for permanent injunction against the respondent and Habib Metropolitan Bank Limited before the Court of learned Civil Judge, Islamabad, praying for inter alia a decree for permanent injunction restraining the respondent from encashing the performance bonds. This suit was subsequently amended to make the same for declaration and permanent injunction, and to challenge the letters sent by the responde nt to Habib Metropolitan Bank for the enca shment of the performance bonds.
The respondent contested the suit by filing a written statement. The respondent' s main defence was that as the appellant had committed breach of contract by not supplying the balance material under the POs in the extended delivery period, the respondent had the right to encash the performance bonds.
21. On 27.06.2014, the learned Civil Court framed the following issues:- "1. Whether the plaintif f is entitled for a decree for declaration to the effect that the letters dated 29.07.201 1 and 24.02.2014 issued by defendant No.1 are null and void and of no legal ef fect or consequences whatsoever?OPP
2. Whether the plaintif f is entitled for a decree for permanent injunction restraining the defendants from encashment of the bank guarantees in any manner whatsoever?OPP
3. Whether an unexpected price hike in the world market of Aluminum base metal falls within the ambit of force majeure as defined in the purchase order?OPP
4. Whether the plaintif f has not come to the court with clean hands?OPD
5. Whether the suit of the plaintif f is not maintainable in its present form?OPD
6. Relief."
22. The contesting parties produced one witness each. Vide judgment and decree dated 15.04.2015, the learned Civil Court dismissed the suit. The appellant challenge d the said judgment and decree before the Court of the learned Additional District Judge, Islamabad through Civil Appeal No.62/2014. This appeal was also dism issed, vide judgment and decree dated 04.01.2016. The said concurrent judgments of the learned Courts below have been assailed by the appellant in the instant regular second appeal filed under Section 100 of the C.P .C.
23. Learned counsel for the appellant submitted that the appellant was not able to make the balance supplies under the POs for reasons beyond its control. He tried to take refuge behind the force majeure cause in the POs. Learned counsel further submitted that as the appellant was going to import the Cable from abroad and then supply it to the respondent, and as the international prices of copper during 2008 went very high, the appellant was not able to purchase and import the same. He further submitted that import at such high rates would have rendered the transaction with the respondent financially unviable for the appellant.
24. Learned counsel for the appellant further submitted that even though there was no escalation clause in the POs, the respondent ought to have, on account of the sharp increase in the international prices of copper , given the benefit of price escalation to the appellant. He submitted that the Managing Director of Pakistan Electric Power Company (Pvt.)
Limited ("PEPCO") had constituted a comm ittee to devise a formula for price adjustment in contracts for the supply of goods; that the constitution of this committee was necessitated on account of increase in the prices of some of the input materials; and that reasonable escalation should have been granted to the appellant in the prices of the material to be supplied.
25. Learned counsel for the respondent submitted that as the appellant had clearly breached the provisions of the POs, no restraint could have been placed on the respondent from encashing the performance bonds. He submitted that the performance bonds were furnished to ensure that the appellant faithfully performed its obligations under the POs, and that as the breach of contract on the part of the appellant had been proved, the performance bonds were liable to be encashed to cover the losses suffered by the respondent on account of such breach. In order to combat the contention of the learned counsel for the appellant that on account of force majeure, the appellant was relieved of his obligations under the POs, learned counsel for the respondent submitted that the respondent did not commit any illegality in invoking the performance bonds because Clause 11 of the POs entitled the respondent to recover liquated damages to the extent of 10% of the contract price, and that under the Note to the said Clause 11, force majeure could not be taken into consideration in determining liquidated damages. He further submitted that through the encashmen t of the performance bonds, the respondent would recover the liquidated damages due and payable under Clause 1 1 of the POs.
26. Learned counsel for the respondent further submitted that the decision of Pakistan Electric Power Company ("PEPCO") Limited to allow escalation to suppliers was not binding on the respondent, which was not a subsidiary of PEPCO; and that the prices mentioned in the POs were fixed and there was no provision for escalation in the POs.
27. I have heard the arguments of the learned counsel for the contesting parties and perused the record with their able assistance.
28. The facts of this case have been set out in sufficient detail in paragraphs 2 to 20 above and need not be recapitulated here.
29. Now, there is no escape for the appellant from the fact that by not supplying 205.6 KMs of Cable under Purchase Order No. 1188; 328 KMs of Cable under Purchase Order No. 1255; and 1800 KMs of Cable under Purchase Order No.181 1, the appellant had committed breach of contract. These supplies were not even made in the extended period, which was granted on the request of the appellant. The respondent had shown enough magnanimity to the appellant by rescheduling, on two occasions, the dates within which the balance supplies were to be made by the appellant.
30. The delivery period in the POs was agreed to be the essence of the contracts. By accepting the terms of the POs, the appellant had committed that the deliveries would be made not later then the dates specified in Clause 4 of the POs. As the appellant did not supply the material even by the rescheduled / extended dates, it can be clearly held to have committed breach of all the three purchase orders.
31. As regards the assertion of the learned counsel for the appellant that the appellant was entitled to escalation, the same is untenable because there is no provision for escalation in the POs, and the respondent has, at no material stage, allowed escalation in the contract price fixed in the POs.
32. The case of the appellant is predicated on the fundamental plea of the force majeure clause in the POs. A force majeure event absolves a party from liability for the nonperformance of a contract due to a supervening impossibility . When a dispute arises, regarding such a force majeure event, the same should be proved in the appropriate forum by a party who wants to be absolved from its contractual obligations. Now, does the force majeure clause in the POs absolve the appellant from all liability for not supplying the balance material under the POs? Clause 10 of the POs reads as follows:- "10) Force Majeure The right of the IESCO to terminate the Contract, or to claim penalty or liquidated damages shall be subject to the follow circumstances, provided as a result of all or any of these events there has been delay in the performance of the contract by the Manufacturer or Supplier , or the contract has become incapable of being performed:- i. Act of God. ii. Act of State, or W ar or any Act of the Enemy . iii. Lock outs, Riots or Civil Commotion. iv. Injunctions granted by a Court of Competent jurisdiction not resulting from any fault of the Manufacturer or Suppliers. v. Restriction imposed by the government on the Import of any material relating to the manufacturer of goods. vi. Non-receipt of raw material from abroad for reasons beyond the control of the manufacturer . vii. Port delays due to bunker age or lighter age. viii. Diversions of supplies by the Carrier without any fault or knowledge of the manufacturer or suppliers.
Provided further that the Manufacturer or supplier has given notice to the IESCO within 14-days of the happening of any such event."
33. If the occurrence of any of the force majeure events listed in Clause 10 of the POs result in a delay in the performance of the contracts or the inability of the appellant to perform the contracts, the respondent cannot terminate the POs or claim liquidated damages. The said Clause 10 of the POs requires the appellant to give a notice to the respondent of the happening of such a force majeure event. The record does not contain any notice from the appellant in terms of Clause 10 of the POs, of the happening of a force majeure event.
34. The Advanced Law Lexicon by P Ramanatha Aiyar , 3rd Edition, explains force majeure as follows:- "Events outside the control of the parties and which prevent one or both of the parties from performing their contractual obligations; A contract provision that stipulates that unforeseen events - wars, acts of God, certain strikes - that will excuse a party from its duty to perform the contract; Standard clause in a contract that absolves either of the parties of blame for non-fulfillme nt of obligations caused by events beyond their control, such as earthquakes, floods or acts of war; A contractual provision allocating the risk if performance becomes impossible or impracticable as a result of an event or effect that the parties could not have anticipated or controlled."
35. In the Halsbury' s Laws of England, 4th Edition, V olume 51, force majeure has been explained as follows:- "2.300: Force majeure. In certain contexts and legal relationships, force majeure may justify derogating from the strict requirements of the law, especially from the legal consequences resulting from the non-fulfilment of an obligation. Force majeure presupposes an external cause which has consequences which are inexorable and inevitable to the point of making it objectively impossible for the person concerned to comply with his legal obligations. Where, in relations between an individual and the public administration, to exceed the material date does not involve the non-fulfilment of an obligation binding the individual but merely renders him subject to a system less favourable than that in force before that date, force majeure may not be relied on."
36. In the case of Dhanrajamal Gobin dram Vs. Shamji Kalidas, reported as AIR 1961 SC 1285, it has been held at paragraph [19 ]of the report as follows:- "19. McCardie J. in Lebeaupin v. Crispin [1920] 2 K.B. 714, has given an account of what is meant by "force majeure" with reference to its history . The expression "force majeure" is not a mere French version of the Latin expression "vis major". It is undoubtedly a term of wider import. Difficulties have arisen in the past as to what could legitimately be included in "force majeure". Judges have agreed that strikes, breakdown of machinery , which, though norm ally not included in "vis major" are included in "force majeure". An analysis of rulings on the subject into which it is not necessary in this case to go, shows that where reference is made to "force majeure", the intention is to save the performing party from the consequences of anything over which he has no control. ..."
37. In so far as the argument of force majeure was concerned, learned counsel for the appellant submitted that the international hike in the rates of metals rende red the appellant unable to perform its part of the contract. That does not mean that this price hike made it impossible for the appellant to perform the contract. 'Inconvenience' was to be distinguished from 'inability' to perform the contract. If the contention of the learned counsel for the appellant is accepted, any party/supplier could get out of a contract, if it turns out to be uneconomical for him after its execution. Thus this was not a case of 'inability' to perform a contract but 'refusal' to perform it on account of contract being no longer profitable. Even if the appellant had to procure the contracted material at rates higher than the ones at which the appellant had agreed to sell such material to the respondent, and in this way incur a loss in the transaction, that would also not constitute force majeure.
38. In the case of M/s. Alopi Parshad Vs. Union of India, reported as AIR 1960 SC 588, it has been held by as follows:- "There it was observed that a contract is not frustrated merely because the circumstances in which the contract was made, altered. The Contract Act does not enable a party to a contract to ignore the express covenants thereof, and to claim payment of consideration for performance of the contract at rates different form the stipul ated rates, on some vague plea of equity . The parties to an executory contract are often faced, in the course of carrying it out, with a turn of event which they did not at all anticipate, a wholly abnormal rise or fall in prices, a sudden depreciation of currency , an unexpected obstacle or execution, or the like. There is no general liberty reserved to the courts to absolve a party from liability to perform his part of the contract merely because on account of an uncontemplated turn of events, the performance of the contract may become onerous."
39. In the case of Brauer & Co. (Great Britain), LTD. Vs. James Clark (Brush Materials), LTD. [1952] 2 All ER 497, a contract for the shipping of goods from Brazil provided that the contract should be void for any quantity which was not shipped one month after the expiration of the contract period where the shipment was prevented by force majeure. The contract was subject to a Brazilian export licence. The sellers gave the buyers a notice that they could not ship the goods on the basis of the contract price because the Bank of Brazil required that the goods could only be shipped at a certain minimum F.O.B. price, which price was higher than the contract price. If the sellers had paid the minimum higher price to their suppliers, they could have obtained a licence to export the contract goods and shipped them within the contract period.
The Court of Appeal held that as there was no embargo or physical or legal preventi on of export, the sellers were not relieved from liability by the 'force majeure' clause. It was also held that merely because the sellers were required to pay more for the goods then the agreed selling price, did not show that the sellers were unable to obtain an export licence. The sellers were not relieved from their liability because they had not taken reasonable steps to obtain a licence. Denning L.J. in his separate note held, at page 501 of the report, as follows:- "After all, any person who sells goods forward must be ready himself to bear any increase in the market price. It would be a strange thing if the seller could insist on the contract if the prices fell, and could escape his own obligations if it rose. ... Just as the buyer takes the risk of a fall in the price, the seller takes the risk of a rise."
40. In the case of Thames Valley Power Ltd. Vs. Total Gas & Power Ltd. [2006] 1 Lloyd's Rep. 441, the notion that economic circumstances can generally form a claim for force majeure was disapproved. In the report, it was held as follows:- "... It does not at all follow that the supplier is entitled to rely upon an increase in the market price in comparison to the contract price as a force majeure circumstance. ...This conclusion is consistent with a line of cases, both on force majeure clauses and on frustration, ..., to the effect that the fact that a contract has become expensive to perform, even dramatically more expensive, is not a ground to relieve a party on the grounds of force majeure or frustration. I take as an example Tennants (Lancashire) Ltd v CS Wilson & Co Ltd [1917] AC 495, a force majeure case where Lord Loreburn observed at page 510:- "The argument that a man can be excused from performance of his contract when it becomes "commercially impossible" seems to me to be a dangerous contention which ought not to be admitted unless the parties plainly contracted to that effect."
41. In view of the foregoing, I am of the opinion that even if the international prices of metals escalated abnormally after the issuance of the POs, this by itself would not constitute a force majeure event. A change in economic / market circumstances, affecting the profitability of a contract or the ease with which the parties' obligations can be performed, is not regarded as being a force majeure event. Therefore, the appellant's attempt to get out of its contractual obligations by invoking Clause 10 of the POs is not tenable.
42. The appellant' s sole witness, Gohar Ali Khan (PW-1) in his examination-in-chief deposed that the reason why the appellant could not make the balance supplies of Cable to the respondent was the sharp increase in the international prices of aluminum. In his cross-examination, the said witness deposed that the supplies under the Purchase Order were to be made after the international crisis in the prices of aluminum had ended. Even if it is assumed that force majeure would apply on account of the sharp increase in the international price of aluminum during 2008, this would not come to the appellant' s aid, because under the extended schedule, the balance supplies under the POs were to be made much after 2008, when the prices had stabilized.
43. The term "Non-receipt of raw material from abroad for reasons beyond the control of the manufacturer" in Clause 10 (vi) of the POs was not connected or relatable to any economic downturn. A rise in price owing to unforeseen circumstances did not excuse the appellant from delivery , and therefore the respondent was entitled to damages for the losses it suffered due to non-delivery of the balance contracted material. Force majeure refers to legal or physical prevention, and not economic un-profitableness. A change in economic or market circums tances, affecting the profitability of a contract or the ease with which the parties' obligations can be performed, is not regarded as being a force majeure event.
44. The record shows that the appella nt was running out of excuses for not supplying the balance material under the POs.
The appellant, in its letter dated 31.01.2008, took the position that balance supplies of the material could not be made due to the bifurcation of the group of companies to which the appellant belonged; in its letter dated 12.12.2008, the appellant asserted that the balance supplies could not be made due to "unavoidable circumstances"; in its letter dated 19.12.2008, the appellant stated that it was facing difficulties due to unprecedented power and gas load-shedding; in its letter dated 29.08.2012, the appellant asserted that the balance supplies could not be made "due to the unprecedented increase in the cost of input materials in the local and international market." All these, I believe, were lame excuses. The appellant simply wanted to get out of the bargain which had become unprofitable for it. The appellant was not even able to make the balance supplies within the schedule that it had itself proposed in its letter dated 18.08.2008. Hence, there is a clear default/ breach of contract on the part of the appellant.
45. Now the vital question that needs to be answered is whether , on account of the said breach of contract on the part of the appellant, the respondent was ipso facto entitled to encash the performance bonds by way of a penalty , or whether it was incumbent on the respondent to plead its loss on account of the said breach in its written statement and substantiate / prove the same through cogent evidence, and encash the bonds only to the extent of such loss. The Learned counsel for the respondent did, in his arguments, submit that the respondent has sustained a loss in the re-procurement process but no evidence to this ef fect was produced during the trial.
46. A performance bond, just like a bank guarantee, is usually issued by a bank. It is essentially a contract of guarantee as contemplated under Section 126 of the Contract Act, 1972, which is reproduced herein below:- "126. Contract of guarantee, surety , principal debtor and `creditor'-. A `contract of guarantee' is a contract to perform the promise, or discharge the liability , of a third person in case of his default. The person who gives the guarantee is called the `surety'; the person in respect of whose default the guarantee is given is called the `principal debtor', and the person to whom the guarantee is given is called the `creditor'. A guarantee may be either oral or written'."
47. The contract of guarantee, as is clear from the above definition, involves three parties - a principal debtor , whose liability may be actual or prospective; a creditor , and a third party called surety who promises to discharge the debtor's liability if the debtor fails to do so. The guarantee, thus envisages two contracts, one between the principal debtor and the creditor and the second between the creditor and the surety . The guarantee has its genesis in the underlying contract between the principal debtor and the creditor .
48. Irrevocable and unconditional bank guarantees are normally couched in a language whereby the bank undertakes to give money to the beneficiary on demand, without demur or protest. If a bank guarantee is unconditional stipulating that the bank should pay, on demand, without demur and that the beneficiary shall be the sole judge not only on the question of breach of contract but with respect to the amount of loss or damage, the obligation of the bank has to be discharged in the manner provided in the bank guarantee. When such a demand is made, the bank is not permitted to probe into the disputes between the parties. The courts will not interfere directly or indirectly to withhold payment, otherwise trust in commerce, internal and international, would be irreparably damaged.
49. In the case of Haral Textiles Milited Vs. Banque Indosuez Belgium, S. A., (1999 SCMR 591), the Hon'ble Supreme Court applied the principles relating the encashment of a letter of credit to a bank guarantee, by holding as follows:- "A contract of Bank Guarantee is a trilateral contract under which the bank has undertaken to unconditionally and irrevocably abide by the terms of the contract. It is founded on an act of trust with full faith to facilitate free growth of trade and commerce in internal or international trade or business. It, like a Letter of Credit, creates an irrevocable obligation to perform the contract in terms thereof. A Bank must honour a Bank Guarantee free from interference by the Courts otherwise trust of any commerce, internal and international, would be irreparably damaged. If a Bank Guarantee is unconditional and irrevocable, the Bank concerned must pay when demand is made unless the Bank has pledged its own credit involving its reputation. Generally , it has no defence except in case of fraud."
50. It is essential for a Court to examine whether the bank guarantee is uncondition al or whether it can be invoked on the happening of a particular contingency as stated in the bank guarantee. In certain instances a bank guarantee can be invoked by the beneficiary only if there is loss or damage caused or suffered by the beneficiary by reason of nonfulfillment of the contractual terms. In such circumstances, the contention of the party at whose instance the bank guarantee is given is normally that unless loss or damage caused or suffered is proved, the bank guarantee cannot be invoked. As mentioned above, this would depend upon language of the bank guarantee. The terms of a bank guarantee are, therefore, extremely material. The invocation, therefore, will have to be in accordance with the terms of the bank guarantee, or else, the invocation would be bad.
51. In the case of Shipyard K. Damen International Vs. Karachi Shipyard and Engineering Works Ltd, (PLD 2003 SC 191), it has been held that the rights and liabilities of the parties are to be determined with reference to terms and conditions of the guarantees. Furthermore, it was held that "[t]he guarantee as provided could be scanned to ascertain whether it is conditional, unconditional or an autonomous contract by itself or otherwise."
52. The text of the three performance bonds issued under the POs is more or less the same. It is, however , pertinent to reproduce the 3rd and 4th paragraphs of the said Bond:- "NOW THEREFORE, if the Principal shall [well], truly and faithfully perform and fulfill all the undertakings, covenants, terms and conditions of the Contract in the manner and within the time provided in the Contract and any extension thereof that may be granted by the Employer with or without notice to the Surety , which notice is hereby waived, and shall also well, truly and faithfully perform and fulfill all the unde rtakings, covenants, terms and conditions of any and all modifications to the Contract that may hereafter be made, notice to which modifications of the Surety being hereby waived, then this obligation to be null and void otherwise to remain in full force and effect till 22.12.2009. Our total liability under this Bond is limited to the penal sum stated above.
We, the undersigned Bank (Surety), do hereby irrevocably and independently guarantee to pay to the Employer without delay upon the Employer first written demand the penal sum stated above, against the Employer written declaration that the Principal has refused or failed to perform his obligation under the Contract which payment will be effected by the Surety to the Employer ." (Emphasis added)
53. A scan of the terms of the perform ance bonds show that the term, "if the Principal shall well, truly and faithfully perform and fulfill all the undertakings, covenants, terms and conditions of the Contract" is obviously a reference to the underlying POs, which constitute the genesi s of the performance bonds. In other words, but for the POs, the performance bonds would not have come into existence. On account of the employment of the words as mentioned above, the obligations of the guarantor bank under the performance bonds cannot be held to be independent of the POs. Rather such obligations are interdependent and contingent and conditional upon the breach of contract committed by the appellant (the principal debtor).
54. If it had been the intention of the parties that on the appellant' s simple demand for the encashment of the performance bonds, the bank was under the obligation to encash the same without demur or reservation or reference to the underlying contract, the performance bonds would have contained no stipulation to the effect that they would be rendered null and void upon the fulfillment of the contractual obligations by the appellant; they would also not have required a "written declaration from the respondent that the appellant Principal had refused or failed to perform its obligations under the contracts. Therefore, it is my view that the performance bonds furnished by the appellant were conditional in nature."
55. A read of the performance bonds makes it clear that if the appellant performed its contractual obligations under the POs, the respondent could not seek the encashment thereof. Rather upon the faithful performance of such contractual obligations by the appellant, the obligations of the guarantor bank under the performance bonds were to be rendered null and void. Clause 15 of the POs explicitly provides that the respondent would have the right to forfeit the "security bond/bank guarantee (performance bond)" in the event the appellant fails to supply the goods within the time specified or commits any breach of contract. The appellant had furnished the performance bonds as security for compliance of obligations under the POs. Therefore, it is my view that the performance bonds were conditional in nature and could be invoked only if the appellant failed to fulfill its contractual terms.
56. In the case of Standard Construction Company (Pvt.) Limited Vs. Pakistan, through Secretary M/o Communications and others (2010 SCMR 524), the Hon'ble Supreme Court observed that there were certain guarantees, which in their contents, prescribe certain eventualities on the happening whereof the beneficiary is entitled to the demand of the encashment of the guarantee. The employment of the words, "...in the event that obligations expressed in the said clause of the above mentioned agreement have not been fulfilled by the company giving the right of claim to the NHA for recovery of the whole or part (of the Toll Money from the Company under Agreement" in the guarantee were held by the Hon'ble Supreme Court to make the encashment of the bank guarantee conditional on the fulfillment of certain conditions in the main agreement. The Hon'ble Suprem e Court restrained the encashment of such a guarantee, whereas bank guarantees which contained no stipulation to the ef fect mentioned above, were allowed to be encashed.
57. It must be appreciated that the performance bonds issued under the terms of the POs are not in the nature of advance payment guarantees or mobilization advance guarantees to secure the repayment of an amount advanced by the creditor to the principal debtor . The POs do not contemplate any advance payment to the appellant. Payments under these POs were to be made through an irrevocable letter of credit in favour of the appellant. No payment could be made to the appellant without inter-alia submission of a delivery challan duly stamped and signed by the consignee, and an inspection certificate with respect to the goods supplied issued by the Chief Engineer of the National Transmission and Dispatch Company or his authorized representative. Under this mechanism, the appellant would be entitled to receive payment only for the goods supplied and no more. The performance bonds in question were furnished to ensure that the appellant complies with its contractual obligations under the POs. The fulfillment of the contractual obligations on the part of the appellant renders the performance bonds void.
58. A bank guarantee has to be treated differently from a performance bond. The distinction between an unconditional/irrevocable bank guarantee and a performance bond/guarantee has been drawn by the Superior Courts in Pakistan. Reference in this regard may be made to the following case law:- i. In the case of Jamia Industries Ltd., Vs. Pakistan Refinery Ltd. (PLD 1976 K 644), the Hon'ble High Court granted an injunction restraining the encashment of a performance guarantee, which was unconditional in nature. It was, inter alia, held that as the dispute between the parties was yet to be adjudicated upon by the Arbitrator , the performance guarantee should be utilized in terms of the award when the liability of the Plaintif fs will have been determined. ii. In the case of Pakistan Engineering Consultants Vs. P.I.A. Corporation, (1993 CLC 1926 ) a distinction was drawn between a bank guarantee and a performance bond in the following terms:- "10. As regards the performance bond, in our view, the same stands entirely on differen t 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."
The Honourable Supreme Court of Pakistan in the case of Pakistan Engineering Consultants Vs. P.I.A. Corporation (1989 SCMR 379 ) dismissed the petition against the said judgment. iii. In the case of Zeenat Brother (Pvt.) Ltd. Vs. Aiwan-e-Iqbal Authority (PLD 1997 K 183), at Page 188 of the report a performance bond was held to be in the nature of a penalty in view of Section 74 of the Contract Act. Further , it was held that unless evidence was led from both the sides and are analyzed of will be very difficult to say who was responsible for the delay in the performance of the Contract. In this case the Hon'ble High Court distinguished a Performance Bond/Guarantee from a Mobilization Advance Guarantee, and passed an injunction restraining the encashment of the performance guarantee. iv. In the case of China International Water and Electric Corporation Vs. WAPDA (2001 YLR 2191 ), the Hon'ble High Court, after making reference to the case of (Zeenat Brother (Pvt.) Ltd. Vs. Aiwan-e-Iqbal Authority) held on Page 2201 of the report as follows:- "It is further observed in the said judgmen t that encashment of Performance Guarantee amounts to penalty since it is otherwise encashable in the event of default in due performance of all or any of the obligations under the contract between the parties; and imposition of such penalty , even if they or such was committed by the Plaintif fs, could not be permitted until the same was established through evidence. In view of reference of disputes between the parties to arbitration, the matter has yet to be adjudicated upon on the basis of evidence as may be produced before the Arbitrator . Encashment of the Performance Guarantee, in the circumstances at this stage, is likely to put the defendant No.1 in a position of advantage and on other hand expose the Plaintif f to serious financial strain. The Application is granted to such extent." v. In the case of Mehboob Enterprises Vs. Karachi Development Authority (1997 UC 150), it has been inter alia held, at Page 153 of the report, as follows:- "I am also of the view that in the case of encashment of a bank guarantee which in its nature is a performance bond, the owner / creditor is required to establish that the principal debtor / contractor has committ ed default and secondly he is also required to show that as a result of such default he has suf fered damages."
In this case interim injunction was granted and the creditor was restrained from encashing the bank guarantee. vi. In the case of (Mercury Corporation Versus Pakistan Steel Mills Corporation (Private) Ltd. - 2000 YLR 734), it has been held, at Page 736 as follows:- "In have gone through all the facts which have been given in detail above and relying on the decision of the Honourable Supreme Court where it has been repeatedly held that even if an arguable case is made out then stay has to be granted. I am also aware of the fact that decisions have also been given about the sanctity and validity of bank guarantees simplicitor .
In this case a cursory glance at the bank guarantees clearly show that indeed a demand can be made but that demand is pursuant to a commission of default under the contract. From the wording of the bank guarantee and the different terms used in the contract as mentioned above, it is clear that it is a guarantee based on performance and hence that can only be encashed if through evidence it is proved that a default had indeed occurred which was the fault of the person on whose behalf such guarantee was issued. (Emphasis added)
59. In view of the above case-law , the encashment of a performance bond/guarantee is inherently preconditioned on established default on the part of the principal debtor . Having said that, another question that must be answered is whether a breach of contract on the part of the appellant established through an adjudicatory process would, by itself, entitle the respondent to encash the performance bonds or whether respondent was required to plead and prove the losses and damages suffered by it and encash the perfo rmance bonds only to the extent of such losses and damages. To answer this question, the purpose behind furnishing the performance bonds has to be discovered. In this regard, a read of Clause 15 of the POs is essential:- "(15) FORFEITURE OF SECURITY BOND / BANK GUARANTEE (Performance Bond)
The Contracting Of ficer will have the right to forfeit the Security Bond / Bank Guarantee (Performance Bond):-
(A) If the Contractor:- i) Fails to supply the goods within the time specified. ii) Commits any breach of contract. iii) Fails to account for the Import License issued on account of the purchaser . iv) Fails to account for the raw material secured by the contractor against any License or permit issued on account of the Contracting Of ficer. v) Fails to return drawings, design or any material belonging to the Contracting Officer which was to be returned in good condition to the Contracting Of ficer after the successful termination of the contract.
(B) For the other reasons specified in the Purchase Order by the contracting of ficer for forfeiting the security deposit.
If the forfeiture of the security deposit does not compensate the contracting officer for losses suffered due to non-delivery or breach of contract or for any other reasons, the Contracting Officer will have a right to forfeit other security deposits or to recover the same from any other security deposit made in favour of any other unit of WAPDA/IESCO or from any moneys due to the Contractor from any unit of W APDA / IESCO." (Emphasis added)
60. The first rule of the construction of a contract or a document is to ascertain the intention of the parties to it. For the purpose of ascertaining the intention of the parties behind the requirement to furnish the performance bonds, reference again is warranted to the provisions of the POs. The term, "[I]f the forfeiture of the security deposit does not compensate the contracting officer for losses suffered due to non-delivery or breach of contract..." in Clause 15 (B) of the POs makes it clear the raison detre behind furnishing the performance bonds was to compensate the respondent for the losses suffered by it due to non-delivery of the contracted material or breach of contract on the part of the appellant. Other than the requirement to furnish performance bonds, the POs contain no provision for a security deposit.
61. The argument of the learned counsel for the respondent that through the encashment of the performance bonds, the respondent would recover the liquidated damages due and payable under Clause 11 of the POs, does not appeal to me.
It is my view that it was necessary for the respondent to show that, on account of the appellant' s breach of contract and the losses suffered by the respondent as a cons equence thereof, it had become entitled to recover its losses by encashing the performance bonds. In the case of Messrs A.Z. Company , Karach Vs. Government of Pakistan and another (PLD 1973 SC 311), it has been held that where there is a breach of contract by the purchaser and the goods had to be imported from a foreign country , the supplier was at least entitled to be placed in the same situation with respect to damages as if the contract has been performed. Now, by analogy , if the supplier commits a breach of contract and does not supply the contracted material, and the purchaser has to procure the material from other sources in the market, the supplier has to pay to the purchaser the losses it may have suffered in the re-procurement process. Howeve r, where there was no evidence at all as to the specific nature of the loss suffered in the re-procurement process, except general assertions of vague nature, such assertions were by no means sufficient to establish that the loss flowed directly as a consequence of the breach.
Damages for breach of contract were to be calculated in terms of actual loss. When a person claims special damages, it is incumbent upon him to show as to under which head of account and how such damages were sustained.
62. The respondent made no attempt to plead in its written statement that it had suffered losses in the re-procurement process. The respondent also did not adduce any evidence to prove the losses, if any, sustained by it. The record is silent as to the losses suffered by the respondent on account of the breach of contract on the part of the appellant. As there was no way for the Court to know whether the respondent had suffered any losses on account of the appellant' s breach of contract, it is my view that the respondent could not have invoked the performance bonds.
63. In all the three performance bonds, the guaranteed amount is referred to as "penal sum". The wording of the performance bonds makes it clear that invocation of the said bonds by the respondent is an imposition of a penalty on the appellant for breach of contract. In the notices dated 16.12.2008, 14.03.2009 and 29.07.201 1, the respondent expressly referred to the forfeiture of the performance bonds as a "penalty". Reference to the said correspondence was necessary in order to eliminate any element of doubt as to intention of the parties behind the requirem ent to furnish performance bonds.
In the case of Sandoz Limited Vs. Federation of Pakistan (1995 SCMR 1431 ), it has been held that the Court, in order to ascertain the real intention of the parties, can have resort to the correspondence preceding or subsequent to the execution of the contract.
64. Penalty clauses in contacts are something that our Courts frown upon and do not enforce. In the case of Muhammad Farooq Azam Vs. Bank Al-Fala h Limited (2015 CLD 1439 ), the Division Bench of the Hon'ble Lahore High Court held that if there was a clause in an agreement regarding late payment charges and penalty , the same would be disregarded by the Courts being unconscionable, against the law , and against the Islamic system of finance.
65. Under Clause 15 of the POs, the forfeiture/ encashment of the performance bonds is conditioned on the breach of contract / failure on the part of the appellant to supply the material under the POs. If the encashment of the performance bonds is to be treated as a penalty , it would certainly not be enforceable. If, on the other hand, it is treated as recovery of liquidated damages, then it has to be determined whether in the light of the law laid down by the superior Courts in Pakistan, such encashment was permissible.
66. English law differentiates betwee n liquidated damages and penalties. Liquida ted damages are recognized as a genuine pre-estimate of losses suffered due to another party' s breach of contract, whereas a penalty is a sum of money so stipulated in terrorem (in order to frighten) so as to drive a party to fulfill a contract. Sectio n 74 of the Contract Act, 1872, has diluted the difference between liquidated damages and penalties. For ease of reference Section 74 (ibid.), without its two Explanations and the Exception, which are not material here, is in the following terms:- "74. When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulatio n by way of penalty , the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby , to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or , as the case may be, the penalty stipulated for".
67. The distinction between a 'penalty' and 'liquidated damages' has been well-explained by the Hon'ble Mr. Justice Saeeduzzaman Siddiqui (as he then was) in the case of Muhammad Karimuddin Vs. Kanza Food Industries Ltd., (1989 MLD 3900) in the following terms:- "8. In so far as the recovery of damages for breach of a contract by a party is concerned , it is not disputed that the position will be governed either under section 73 or under section 74 of the Contract Act. It is agreed that in the present case section 73 of the Contract Act will have no application as the damages are claimed on the basis of a stipulation in the contract which provided for payment of a named sum in the event of breach. The damages accordingly will be payable as provided in section 74 of the Contract Act. There is however , disagreement between the plaintif fs and the defendants with regard to the nature of stipulation in the agreement which provides for forfeiture of the balance of sale consideration by defendants in case of breach by the plaintif fs. While it is contended by the plaintif fs that is a penalty and a s such not enforceable under the law, the defendants treat it as liquidation damages legally recoverable in the event of breach. In view of the pronouncement of the Supreme Court in the case of the Province of West Pakistan Vs. Messrs Mistry Patel & Company (now reported (1989) 3 WLR 175 and West Pakistan Industrial Development Corporation V. Aziz Kureshi (1989) 3 WLR 189 LR) I venture to say that difference which exists under the English law between liquida ted damages and a penalty is not recognized by section 74 of the Contract Act and therefore irrespective of the fact whether the amount as mentioned in the agreement is a penalty , or liquidated damages, a party complaining of the breach is entitled to recover damages whether or not actual damages have been suffered by it subject to the maximum limit of such damages which will be the amount so mentioned in the agreement. Therefore, merely because a specific sum by way of liquidated damages is mentioned as payable in the event of a reach in the agreement, is not a sufficient ground for the Court to grant the same to the party complaining of the breach of this amount only represents the maximum limit of damages which may be recovered by such party in the event of a breach. In spite of mention of a specific sum in an agreement to be paid as damages to a party in the event of a breach by the other , the Court still has to hold that such amount would normally arise as damages to such a party in the case of a breach by the other . There fore, in cases, here the party complaining of the breach in fact, suffered no damages at all and on the contrary gained some advantage in spite of the breach or where the Court finds that the sum mentioned as damages in the agreement in case of breach, is such that it could not reasonably arise from such breach, the Court may refuse to grant the same."
68. Damages have to be first pleaded and thereafter proved by leading reliable trustworthy and cogent evidence. Damages require evidence regarding details of losses actually suffered. Liquidated damages, as a rule, require the positive evidence to show the actual loss was suffered by the party claiming the damages. Even a fixed amount stipulated in a contract as liquidated damages cannot be recovered if the quantum of actual loss suffered is not proved through sufficient evidence. At this stage reference to the following case-law would be apposite:- i. Lord Atkin in the case of Bhai Panna Singh and others Vs. Bhai Arjun Singh and others, (AIR 1929 Privy Council 179), observed that the effect of Section 74 is to disentitle the plaintif f to recover simpliciter the penal sum named in the agreement as due and payable on a breach of contract, whether as penalty or liquidated damages, unless he proves the damages he has suf fered. ii. In the case of Saudi-Pakistan Industrial and Agricultural Investment Company (Pvt.) Ltd., Islamabad Vs. Messrs Allied Bank of Pakistan (PLD 2003 SC 215), the bank guarantee also contained a sum payable by the surety/guarantor to the creditor/beneficiary as liquidated damages. As the creditor had brought no evidence on record to show that it has sustained damages on account of the default on the part of the principal debtor , the creditor was held not entitled to any amount as liquated damages. In paragraph 1 1 of the report, it is held as follows:- "Liquidated damages, as a rule, require the positive evidence to show the actual loss was suffered by the party claiming the damages. Even fixed amount stipulated for liquidated damages cannot be recovered if the quantum of actual loss is not proved." iii. In the case of Messrs Khanzad a Muhammad Abdul Haq Khan Khattak & Co. v. WAPDA through Chairman WAPDA and another (1991 SCMR 1436 ), after making reference to Section 74 of the Contract Act, 1972, the following observations were made:- "... section 74 of the Contract Act undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract, whether , or not actual damages or loss is proved to have been caused by the breach.
Thereby , merely dispenses with proof of actual loss or damages. It does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good the loss or damage which naturally arose in the usual course of things, or which the party knew they made the contract to be likely to result from the breach." iv. In the case of Industrial Development Bank of Pakistan Vs. Messrs Baloch Engineering Industry (Pvt.) Ltd., (2010 CLD 591), it was held by the Hon'ble High Court of Sindh, as follows:- "It is, by now, well-settled proposition of law that claiming of fine, liquidated damages or penalty solely based upon the terms of finance agreement between the parties itself will not be sufficient to grant the fine, liquidated damages or the penalty amount inasmuch as the party claiming such fine, liquidated damages or penalty has to in the first place plead such fact in its plaint or petition and thereafter to prove the same through cogent and reliable evidence and that too, the Court, if satisfied with the evidence, will not necessarily grant the specific amount of fine liquidated damages or penalty as stipulated in the finance agreement but only a reasonable compensation to be ascertained from the evidence adduced by the parties." v. In the case of Messrs United Bank Limited Vs. Messrs M. Esmail and Company (Pvt.) Limited (2006 CLD 394), a suit for recovery of loan amount and liquidated damages was filed by the plaintif f/Bank against the defendant/borrower .
The bank had not made any assertion in the plaint about the nature of losses or actual damages suffered by the bank due to nonfullfilment of obligation by the borrower or violation of the terms of the loan agreement executed by the borrower in favour of the bank. It was held that non-awarding of claim of liquidated damages, which was solely based on the breach of terms of loan agreement was fully justified in circumstances. vi. In the case of Allied Bank of Pakistan Limited, Faislaabad Vs. Messrs Asisha Garme nts (2001 MLD 1955 ), it has been held at paragraph 12 of the report as follows:- "Under section 74 of the Contract Act, when liquidated damages are entered in a contract itself, then in case of breach of such contract, the damages are to be assessed in the ordinary way, subject to that fixed amount as a maximum. In that case the plaintif f is under a legal obligation to prove the exact amount of damages, which he has allegedly suffered, irrespective of the specific amount mentioned in the contract, which is not at all a concrete proof and in such-like cases the plaintif f, who is complaining the breach of contract and also demanding the damages, shall have to first plead and then to prove the damages, suffered by him. We are of the considered view that liquidated damages under section 74 of the Contract Act, 1872, call for the proof and the person claiming such damages is under obligation to bring'suf ficient material on record in order to prove that he had suffered so much of losses. Without proving the actual loss, even fixed amount stipulated as liquidated damages does not automatically become payable." vii. In the case of National Development Finance Corporation Vs. Moona Liza Fruit Juices Limited (1999 YLR 500), the Hon'ble High Court of Sindh, after referring to Section 74 of the Contract Act, 1872, held as follows:- "From a bare reading of the section, it is apparent that if a contract contains any stipulation by virtue of which any specified amount or a penalty becomes payable when a breach of contract is committed, then the party complaining of the breach is entitled to receive from the party who has committed the breach of contract not the amount or penalty specified therein but reasonable compensation not exceeding the amount mentioned in the contract. What is reasonable compensation is a question of fact and the party who claims compensation must prove the fact. This can only be done by producing evidence or by placing on record documents to prove reasonable compensation in the circumstances of the case if the law permits or requesting the Court for permission to adduce evidence."
In the said case despite a liquidated damages clause in the contract, the party complaining of the breach of contract did not adduce any evidence to show as to what would be reasonable compensation for the breach of contract. The Hon'ble High Court held that in the absence of any evidence adduced by the claimant, it was not possible to award reasonable compensation. However , a token compensation of Rs.1,000/- was awarded. viii. In the case of Messrs HITEC Metal Plast (Pvt.) Ltd. V. Habib Bank Limited (PLD 1997 Quetta 87), it has been held as follows:- "General principle for granting compensation when beneficiary alleges breach of contract; are obviously regulated by sections 73 and 74 of contract Act. Evide ntly without proving actual loss, even fixed amount stipulated for liquidated damages does not become automatically payable. Record manifestly displays that respondent-Bank has not adduced an iota of evidence suggesting quantum of actual losses suffered by reasons of default on the part of appellants. We, therefore, feel that demand for specified liquidated damages by creating liability through forced finance account against the appellant was not justified."
69. The whole claim of the respondent in imposing a penalty or encashing the performance bonds or recovering liquidated damages against the appellant was based on the breach of the terms of the POs. In the case at hand, the respondent had made no assertion in the written statement about the nature of losses or actual damages suffered by it due to non-fulfillment of the contractual obligations or the violation of the terms of the POs by the appellant. Had the respondent pleaded such loss or damages in the written statement and substantiated them through cogent evidence, it would have been able to encash the performance bonds to the extent of the loss so pleaded and proved. Absent such proof of loss, the respondent had no right to take steps to encash the performance bonds.
70. In the case of Province of West Pakistan Vs. Mistri Patel & Company (PLD 1969 SC 80), a bank guarantee was furnished in lieu of earnest money/ security , in a transaction for the purchase of rice. The purchaser had breached the contract by not taking the goods. This caused the supplier to take steps to encash the bank guarantee. As the supplier had not suffered any damages due to the purchaser 's breach of contract, it was held that he was not entitled to encash the bank guarantee. In the said report, it was held as follows:- "In the present case we are, therefore, to see whether the Province of West Pakistan can claim the whole or any part of the amount which the firm was to deposit by way of earnest money . It will be wrong to argue that since the firm had agreed to deposit a sum as earnest money and in lieu thereof furnished Bank Guarantee for the said amount the Government would be entitled to claim the whole of this amount simply because there was a breach of the contract by the firm. Such a contention does not even receive support from the cases where the view taken was that the forfeiture clause of a deposit in a contract does not come within the purview of section 74 of the Contract Act. In these cases also forfeiture was held to be justified if the amounts were found to be reasonable."
71. Applying the principles derived from the above-mentioned judgment, as the respondent did not plead or prove any loss caused by the appellant' s breach of contract, it could not encash the performance bond which was furnished to compensate the respondent for the losses it would suf fer on account of such breach.
72. In view of the above, I am of the opinion that the respondent was not entitled to invoke the provisions of the performance bond or encash the same unless (1) it was established through an adjudica tory process that the appellant had committed default of the provisions of the POs, AND (2) as a result of the default the respondent had suffered damages.
Once such default on the part of the appellant and the loss suffered by the respondent as a result of such default is proved, the performance bonds could have been encashed to the extent of such loss.
73. The burden to prove actual loss lies on the party who claimed the damages or compensation, even in cases of the liquidated damages. The respondent had an opportunity , during the trial, to adduce evidence to prove the losses and damages suffered due to the appellant' s breach of contract. But they chose not to do so and this opportunity go by. This appeal is being allowed essentially on the ground that the respondent has failed to prove the amount of damages suffered by him, and that the learned lower Courts did not take account of this essential requirement of the law. The appellant has been successful in showing that the learned lower courts had failed to determine a material issue of law. The performance bonds have also been erroneously interpreted. I find the concurrent judgments of the learned lower courts to be contrary to law as stated above. This case, therefore, warrants interference under Section 100 C.P .C.
74. In view of the above, this second appeal is allowed, the impugned judgments dated 15.04.2015 and 04.01.2016, passed by the learned trial court and the learned appellate court, respectively , are set aside and the appellant' s suit is decreed to the extent of declaration that the call on the encashment of the performance bonds is not lawful; and permanent injunction restraining the respondent from encashing the performance bonds. In the circumstances of the case, there shall be no order as to costs.