Sultan TanvirAhmad, J. This First Appeal has been filed under Section 22 of the Financial Institutions (Recovery of Finances) Ordinance, 2001 (XLVI of 2001) ("FIO, 2001") by ORIX Leasing Pakistan Limited to seek modification of the decree dated 13.1 1.2014 passed by learned Judge, Banking Court-I, Lahore.
2. The basic facts of the case are that Respondent No.1, M/s. Muhammad Noor Dairies applied for Lease Finance which was allowed by the Appellant under Equipment Lease Agreement No.2006/MP/ 25025 dated 26.06.2006, Equipment Lease Agreement No.2007/MP/25448 dated 27.10.2007 and Equipment Lease Agreement No.2008/MP/25869 dated 31.07.2008 ("the Lease Finance Agreements") . The equipment set out in the Lease Finance Agreements were leased to the Respondents-firm. The amount of Lease Finance and monthly rentals have not been disputed between the parties. The total claim in the plaint is Rs.8,9 67,345/- along with the costs of suit and cost of funds in terms of Section 3 of FIO, 2001. The suit of the Appe llant was decreed for a sum of Rs.1,758,090/- along with costs of suit and cost of funds.
The claim in the plaint is divided into three heads:-
(i) Outstanding monthly lease rentals,
(ii) Outstanding additional lease rentals and charges,
(iii) Per month compensation at the rate given in the plaint (the further compensation) .
The learned Trial Court has allowed the outstanding Monthly Lease Rentals after deduction of security and has disallowed Additional Lease Rentals, Charges and the further compensation.
3. The learned counsel for the Appellant has assailed the impugned decree on the ground that the remaining amount of Rs.7,209,255/- should have been allowed by the learned Banking Court and argued that the impugned judgment and decree is based upon erroneous assumptions of law and facts; that additional lease rentals as well as compensation claimed in the suit were as per the law; that learned Banking Court has transgressed its jurisdiction by refusing to grant the amount claimed after dismissal of the Petition for Leave to Appear (PLA) of the Respondent; that security should have not been deducted from the claim.
4. The appeal is pending since 2014 and several notices have been sent to Respondents. The Respondents were served but still could not appear , therefore on 18.02.2020 the Respondents No.1 & 2 were proceeded ex-parte under Order 41 Rule 17(2) of the Code of Civil Procedure, 1908.
5. We have heard the arguments of learned counsel for the Appellant and perused the record.
6. The Additional Lease Rentals provided in Article 18 of the Lease Agreements, which is as follows:- "ARTICLE 18.(Additional Lease-rental on overdue payments).
Without prejudice to the rights of the Lessor against the Lessee under the terms of this Lease Agreement if the Lessee fails to pay any sums or monies whatsoever due under this Lease Agreement (including but not limited to the rent, the Agreed Loss Value and any costs and expenses advanced by the Lessor on behalf of the Lessee), the Lessee shall pay to the Lessor an additio nal Lessee-rental at the rate described in item (11) of the Schedule of the unpaid or defaulted amount from the date due until repayment is made in full to the Lessor ."
7. The aforementioned clearly reflects that claim to the extent of Additional Lease Rentals, is claimed as additional charge on the outstanding or overdue amounts. The statement of account available at Page No.331 of the record (also attached in Annexure-N with the suit) shows that besides receiving monthly rentals, partial additional lease rentals were also deducted and further amount of additional lease rentals are reflected as the outstanding rentals.
Section 3(2) of FIO, 2001 is highly relevant, to the issue, which is as follows:-
3. DUTY OF A CUST OMER. -- (1) It shall be the duty of a customer to fulfil his obligation to the financial institution.
(2) Where the customer defaults in the discharge of his obligation, he shall be liable to pay, for the period from the date of his default till realization of the cost of funds of the financial institution as certified by the State Bank of Pakistan from time to time, apart from such other civil and criminal liabilities that he may incur under the contract or rules or any other law for the time being in force.
(Emphasis Supplied)
8. The aforesaid provision has provided the consequence of failure to fulfill the obligations by the Customers and provides that in case of default in the Finance Agreement, the defaulter is liable to pay cost of funds till realization, as certified by the State Bank of Pakistan, from time to time, besides other contractual liabilities. It is an imperative feature of this case that when costs of suit and cost of funds have already been awarded by the learned Banking Court, in harmony with Section 3(2) of the FIO, 2001 and which adequately protects the interest of the Financial Institutions by reimbursing and compensating for the obstruction of funds, the claimed compensation by the Appellant or Additional Lease Rentals or further compensation would have no justification and amounts to penalizing Customers, for the period involved therein. The default in contract cannot have the consequences of over repayment by the Customers and undue fiscal gain to the Financial Institutions, over and above what they would have fetched/recovered in case of completion of contract. This claim of the Appellant is surely contrary to Section 73 of the Contract Act, 1872 which provides that when a contract is breached, the sufferer of the breach can recover the compensation for the loss or damage which naturally arose in the usual course of things from such breach. Any other approach or interpretat ion would result into windfall for the Financial Institutions at the costs and expense of Customers, which for sure is not the intention of the legislature. Relianc e can be placed on Muhammad Farooq Azam versus Bank Al-Falah Limited and others ( 2015 CLD 1439 )
The jurisprudence developed on the issue by the Superior Courts of the Country is as follows:-
(i) Habib Bank Ltd. versus Karachi Pipe Mills Ltd. ( 2006 CLD 842 )
"As a result of introduction of mark-up based financing in 1984 under BCD Circulars 13 and 32, all financial institution in Pakistan was prohibited from charging any additional sum on account of delay caused by the customer in the repayment of its obligation created under an agreement based on mark-up . Even where the financial institutions have themselves extended the time of repayment with the consent of its customer , it was unlawful to charge additional mark-up for such extended period. The obligation under a mark-up based agreement once fixed cannot be enhanced so as to entitle a financial institution to charge any sum over and above the original contracted amount. Thus mark-up beyond original contractual period or charging of mark-up upon mark-up, both, being in the nature of interest and violative of restrictions contained in BCD Circular Nos.13 and 32 were invariably declared by Courts as unlawful. Only the original contracted marked up price is allowed to be recovered.
Thus after introduction of Islamic system of financing, whenever there was any attempt on the part of a financial institution to charge additional mark-up in violation of restricti ons contained in the above mentioned BCD Circulars of the State Bank of Pakistan, the same was declared by Courts as unlawful.
It was on account of such restrictions that BCD Circular No.32 contained an advice to all financial institutions to initiate recovery proceedings of their stuck up finances without loss of time as any delay would not bring any financial benefit to the financial institutions. As a result of this new system of financing, financial institutions were prevented from charging any additional sum which they were earlier entitled under the interest based financing.
Any delay in repayments did not bring any monetary gain for the financial institutions."
(ii) Messrs United Bank Ltd. through Authorized attorneys versus M. Mubeen Khan ( 2012 CLD 1995 )
"12. Another important aspect of this case is that cost of funds was claimed by the appellant from the date of filing of suit, whereas the same has been awarded by the Banking Court from the date of default, which is in consonance with section 3(2) of the Ordinance. It is our considered view that entitlement of cost of funds from the date of default was introduced through the Ordinance in order to safeguard the interest of tile plaintiff, whether a financial institution or customer by reimbursing him with an amount (cost of funds) as compensation for blockade of his funds. It would not be out of place to mention here that justification or cause of action for claiming cost of funds and service fee, or any other type of penalty , is the same, that is, default by the customer in fulfillment of his obligation.
It does not appeal to our mind that a customer should be penalized twice for the same wrong/default and for the same period, that is default in fulfillment of his obligation, by charging service fee or any other type of penalty from him from the date of default on the one hand, and on the other hand by claiming cost of funds from him with ef fect from the same date of default."
(iii) Emirates Global Islamic Bank Ltd. versus Muhammad Abdul Salam Khan ( 2013 CLD 1291 )
"....In such an event, no doubt the plaintiff becomes entitled to a decree, but only to the extent of such amount which is permissible in law. It has now been well settled that markup more than the agreed rate and/or beyond the agreed period cannot be granted to the financial institution. Similarly , no other charges or amounts can be allowed to the financial institution to which the customer had not agreed."
(iv) Dr. Faiz Rasool and others versus The Askari Bank Limited through Branch Manager/authorized Authority (2015 CLD 1710).
"...It is now a settled law that penalty or penal charges in any form cannot be claimed by the financial institution . The charity amount charged/claimed on the contract price is nothing but mark up under the guise of charity ."
(Emphasis Supplied)
9. In F.A.O No.35 of 2017, titled Khurram Farooq versus Bank Al-Falah Limited and another reported as (2018 CLD 1417 ) question similar to issue in the present case was decided by one of us (Jawad Hassan, J.) that no other charges or amounts can be allowed to the financial institution to which the customer had not agreed and the Court must examine the claim of the financial institution before passing the decree.
10. After cautiously considering the facts of the case and the terms of the Lease Finance Agreements, we have reached to the conclusion that the discussed stipulation was inserted in the Lease Finance Agreement not by way of a reasonable compensation to the Appellant Financial Institution but in order that by reason of its vexatious or oppressive character it may operate in terrorem over the Customers to coerce them to fulfill the Lease Finance Agreement. The stipulation is certainly a penalty and onerous, particularly when the learned Banking Court has already not just reasonably but ef fectively compensated the default of the Respondent by allowing cost of funds.
The principal and interest or markup are inbuilt in Monthly Lease Installments and any further allowance(s), as claimed in the attire of Additional Lease Rental or further compensation, are highly unjustified and not permissible under Section 74 of the Contract Act, 1872 as well as the aforementioned judgments.
11. As far as the argument that the Appellant was entitled to refund of security deposit is concerned, the same has already been settled by this Court in case titled ORIX Leasing Pakistan Limited versus Judge Banking Court No.II Lahore and another , R.F.A No.233/2014 in the following terms:- "5. After hearing the learned counsel for the Appellant and going through the record, we find that as per clause 23 of the Agreement Respondent No.2 was not entitled for the refund of security deposit after expiry of the Agreement.
The learned Banking Court was bound by the judgment of this Court in 2003 CLD 1779 (supra) in a similar matter which stands decided."
12. Now we would like to address the ground raised in the appeal that the learned Banking Court had no jurisdiction to disallow partial claim withou t granting petition for Leave to Appear and Defend is terms of Section 10 of FIO, 2001. The same has no force in view of law laid down by the august Supreme Court of Pakistan in case titled Apollo Textile Mills Ltd. and others versus Soneri Bank Ltd. (2012 CLD 337) and this Court in case titled Passco versus Omer Bilal T raders (Pvt.) Limited ( 2007 CLD 492 ).
13. For what has been discussed above, we find no merit in this appeal, which is, therefore, dismissed .