This is an appeal under section 124 of the Insurance Ordinance, 2000 ("Ordinance, 2000") and challenges the order dated 6.2.2018 passed by the Insurance Tribunal, Lahore. The part of the order which has been called in question and which determines whether a compounding of interest is permissible or not in terms of section 118(2) of the Ordinance, 2000, is as follows: "... Whereas "rests" means a balancing of an account made for the purpose of adding interest to principal for further computation and so far the compounding of interest "as" interest on six percent with half yearly rests. This definition is mentioned in the law Lexicon Encyclopedic Law Dictionary . Rests also means the periods when payments are due when in case on non-payment, the interest accrued is added to the principal and interest is claimed both for the principal and for the interest added. This is defined in law terms and phrases judicially interpreted with legal maxims and a foreign legal words and phrases in ordinary usage."
2. Thus, the entire reliance of the Insurance Tribunal was on the definition of the term 'monthly rests' at a rate specified in subsection (2) of section 118 of the Ordinance, 2000. It may be stated that the parties are not at variance with regard to whether liquidated damages are to be paid or not and it is agreed on all hands that indeed liquidated damages is part of the final order made by the Insurance Tribunal and is payable as such. There is also no dispute regarding the definition of the term 'prevailing base rate' which too has been defined in section 2(viii) of the Ordinance, 2000 and means that: "Base Rate" means the effective annual rate implied by the most recent repurchase rate that is published from time to time in circular issued by the Securi ties Department of the State Bank of Pakistan for 6 months Pakistan Treasury Bills, or, if such rate is not available, the most recent repurchase rate for 6 months Short Term Federal Bonds, Or, if neither of such rate is available, the most recent repurchase rate for any other short term papers issued by Federal Government of an approximately similar tenure, whether in addition to or in substitution for any of the foregoing."
3. Thus, "base rate" means the effective annual rate applied by the most recent repurchase rate that is published from time to time in circular issued by the Securities Department of the State Bank of Pakistan for 6 months Pakistan Treasury Bills. The parties are on common ground that such a 'base rate' is indeed issued by the SBP and which ought to be applied in terms of subsection (2) of section 118 of the Ordinance, 2000. However , the diversions between the parties has occurred on account of the compounding which has been done by the impugned order and by which the liability in terms of the judgment and decree of the Insurance Tribun al has increased manifold. This necessarily depends upon a construction to be put on the term 'monthly rests' at the rate of 5% higher than the provisional base rate. Whether the rate has to be calculated at monthly rests and is to be accumulated against the liability of the appellant or whether the liquidated damages ought to be calculated at monthly rests which will then be added to the next calculation and thereafter the liquidated damages to be calcu lated for the next monthly rests is a question which is engaged in this appeal.
4. Firstly , we may observe that the Insurance Tribunal has relied upon the definition of the term "rests" on the basis of dictionary meanings. Those definitions are inapplicable in the peculiar facts and circumstances of the case as well as the dispensation currently applicable A in the legal paradigm where it is established by now that compounding of interest is an abhorrent and is not part of the law in Pakistan. It has been deprecated by the superior courts which do not countenance the compounding of interest and which results in multiplying the liability on that basis against a person. The impugned order passed by the Insurance Tribunal does exactly that. The provisions of subsection (2) of section 118 of the Ordinance, 2000 do not convey a meaning which has been attributed to that provision in the impugned order . Clearly , the construction that should be legitimately put on subsection (2) of section 118 is to calculate the liquidated damages at monthly rests separately and a mere reading of the provision would clearly give the impression that each calculation at monthly rests is to be added to the next calculation on liquidated damages and will not be added to the said calculation so as to compound the effect. This question arose before a Division Bench of this Court in Messrs State Life Insurance Corporation of Pakistan v. Mst.
Anwar Gulzar (2012 CLD 1014 ) and the following observations which are pertinent in the context of the provenance and are reproduced as under: "6. There is no judgment by a superior court on the point in issue namely , the meaning of the expression "prevailing base rate" used in section 118 ibid. It is therefore one of first impression to which we have given out due consideration. It is clear that LDS are to be calculated at monthly rests for the period that an insurer has failed to make payment due under a policy . Therefore, the entitlement of the decree holder is to be determined with reference to each month that payment is delayed. Some guidance in the matter may be obtained from the definition of the expression "base rate" given in section 2(8) of the Insurance Ordinance, 2000; this is reproduced below:-- "base rate" means the effective annual rate implied by the most recent repurchase rate that is published from time to time in a circular issued by the Securities Department of State Bank of Pakistan for six months Pakistan Treasury Bills, or, if such rate is not available, the most' recent repurchase rate for six months Short Term Federal Bonds, or, if neither of such rates is available, the most recent repurchase rate for any other short term paper issued by the Federal Government of an approximately similar tenor , whether in addition to or in substitution for any of the foregoing".
7. The SBP announces its base rate periodically sometimes on a six monthly basis and at other times on quarterly or monthly basis. Accordingly , for each monthly rest, the most recent base rate announced by the SBP is easily ascertainable. Accordingly , the expression "prevailing base rate" used in section 118(2) of ibid refers to the six monthly SBP repurchase rate that is announced most recently before the monthly rest under consideration for calculating the LDS accruing during such period.
As a result, we hold that the expression "prevailing base rate" is dynamic in mean ing as it varies from time to time depending on the six monthly repurchase rate announced by the SBP that is most recent in relation to the relevant monthly rest that is under consideration . To peg the base rate to a particular event as contended by learned counsel for the respondent/decree holder would burden one party , the insurer or the claimant, with the chance effect of a high or a low base rate as the case may be, without apportioning the benefit and/or burden of the impact of a dynamic rate.
8. The question in issue is answered as stated above. It also follows from the reasoning given above that the resort to a weighted base rate in order to simplify the calculations is not justified. Consequently , a base rate must be calculated for each monthly rest separately and applied accordingly in the calculations in order to determine the accumulated LDS. "
5. Thus, it was held by the Division Bench of this Court that the base rate must be calculated for each monthly rest separately and applied accordingly . The method of calculation by compounding liquidated damages to the next monthly rest was discountenanced. The learned counsel for the respondents argued that the judgment had been set aside by the Supreme Court of Pakistan. However , we have not been referred to any such judgment passed by the Supreme Court of Pakistan which has overridden the holding of the Division Bench of this Court. Therefore, the Insurance Tribunal went wrong in determining the liquidated damages by giving the definition a compounding effect. No such ef fect can be read in the provisions of subsection (2) of section 1 18 of the Ordinance, 2000.
6. In view of the above, this appeal is allowed . The impugned order dated 6.2.2018 passed by the Insurance Tribunal is set aside. Consequently , the Insurance Tribunal shall calculate the mont hly rests separately and thereby calculate the amount on that basis.