' This is an application under Order XXXIX, rules 1 and 2, C.P.C. Made by the plaintiffs praying therein for injunction restraining the defendants from encashing the bank guarantees/performance bonds dated 4th December, 1982 and 19th December, 1982 given by Bank of Credit and Commerce International (Overseas) Ltd., for U S $ 127,571.40 and U S $ 216,995 respectively.
1. The facts briefly stated are that the plaintiffs entered into agreements made on 24th November, 1982 and 15th December, 1982 with the defendants for the supply of edible oil of the description given in the contracts to be shipped from Malaysia and Indonesia, shipment periods were agreed to be '16th to 31st January, 1983 and January, 1983'. As per terms of the contracts which required that the sellers shall arrange performance bonds/bank guarantees for the due performance of the contracts, the plaintiffs furnished the above-mentioned two bank guarantees/performance bonds, whereby the said bank bound itself unconditionally and absolutely to make payment of the aforementioned amounts to the defendants on the date of the request of payment from the buyers/ defendants in writing, without any question whatsoever. The bank in each bond further covenanted :- "We understand that this guarantee is unconditional and that the sole judge for decision whether the sellers have performed the contract and fulfilled the terms and conditions of the contract will be buyers (the defendants)."
' It however appears that though under clause 6 (b) of the contract terms, the defendants were under obligation to open the requisite letters of credits (hereinafter called the L. Cs.) within 7 days after the receipt of acceptable bank guarantees, they in respect of the contract dated 24th November, 1982 established the L. C. For U S $ 4,201,116.57 only instead of U S $ 4,252,380. As this L. C.
Was not in conformity with the contract, by telex dated 29th December, 1982 the plaintiffs were informed by their bank as follows :- "Please note that the above letter of credit was received by us on 22nd December, 1982, from National Bank of Pakistan, London, ' The amount of letter of credit for 11000 M. T. Plus/Minus 2 per cent at the rate of 379 per M.T. Is incorrect."
' The plaintiffs immediately brought this fact to the notice of the defendants who were requested to rectify the mistake.
' It appears that in spite of reminders, the mistake was not rectified and L. C. Was not amended whereupon by their letter dated 10th January, 1983 while pointing out that the plaintiffs had lost about one month and had incurred heavy losses on account of delay on the part of the defendants, requested them that in the interest of goodwill the period of shipment of the two contracts be extended till 28th February, 1983 so that they make-up for the time lost and that the shipment may be allowed to be made in one ship-load which would result in some saving of freight and would set-off some of their losses on account of delayed receipt of L.C. In question. The plaintiffs in the said letter further informed the defendants that they did not wish to press for any monetary claim under the circumstances. The defendants in reply to the above-mentioned letter while pointing out that L.C. In respect of contract dated 15th December, 1982 had been opened in time, admitted that the opening of the L. C. For the other contract dated 4th November, 1982 got delayed. They however tried to explain that the delay was caused due to some objections raised by the State Bank of Pakistan. They further wrote "However, we do not wish to raise any controversy on the issues involved and as a gesture of goodwill and to maintain cordial business relations with you, we agree to allow you to make both the shipment either is one or in two lots, at your option upto 20th February, 1983 at the latest.
However, if entire quantity of about 22,000 metric tons is shipped by you in one vessel, the demurrage rate should not exceed U S $ 12,000 per day which is the maximum prevailing rate of demurrage for vessels of this capacity.
' We hope you would find the above acceptable and signify your agreement to them so that necessary amendments are made to the respective L/Cs accordingly."
' The plaintiffs accepted the above proposal made by the defendants and on the aforementioned letter on the same date made the following endorsement "Terms accepted. Please have the L/Cs amended as soon as possible."
2. The letters of credits were accordingly amended under which the shipment of the consignments under the two contracts was allowed to be made by 20th February, 1983.
' Plaintiffs however finding themselves unable to make the shipment by 20th February, 1982 wrote to the defendants that they had been advised by their suppliers that since the Chinese New Year celeberations started from 11th to 15th February, 1983, the Far-East markets would remain closed during that period, hence the shipment of the consignments during this period was not possible.
They however assured the defendants that the ship of the requisite specifications would definitely be available during March, 1983. Further correspondence followed between the parties, the plaintiffs requested for extension of time with the assurance that no further extension beyond 31st March, 1983 would be sought but the defendants refused to accede to the same and warned the plaintiffs that in case the shipment of the consignments was not completed under both the contracts by 20th February, 1982 they would be deemed to have committed breach of the contracts and held liable for all the resulting consequential damages and losses etc.
3. It appears that the defendants in the circumstances contemplated to encash the bank guarantees which led to the filing of the present suit for declaration and injunction wherein the following reliefs have been claimed :- "It is, therefore, respectfully prayed that this Honourable Court may he pleased to pass a decree declaring that the time is not of the essence of the contract, if there was any specific time agreed between the parties the defendants have waived the said stipulation and the plaintiff is entitled to the extension of time for the performance of contracts between the parties dated 24th November, 1982 and 15th December, 1982 and the defendants are not entitled to encash the Bank Guarantees given by the Bankers of the plaintiffs.
' That the defendants may be restrained from encashing the Bank Guarantees dated 4th December, 1982 and 19th December, 1982 given Messrs Bank of Credit and Commerce International on behalf of the plaintiff to the defendants or taking any other action against the plaintiff arising out of the said contracts.
4. Alongwith the above suit, the plaintiff moved the application under consideration for grant of temporary injunction to restrain the defendants from encashing the bank guarantees.
5. The learned counsel for the plaintiff argued that time for perform. Ance of the cantracts was not essence of the contracts and that the delay in the first instance was caused by the defendants. It was accordingly contended that the bank guarantees are not liable to be encashed by the defendants. The learned counsel in support of his arguments placed on the case of Jamia Industries Ltd. v. Pakistan National Refinery Ltd., Karachi (1).
' The facts of the said case were that the plaintiffs applied under section 20 of the Arbitration Act for filing of arbitration agreement in Court on the allegation that differences and disputes had arisen between the parties out of a contract between them under which the plaintiff agreed to purchase for export certain quantities of fuel oil from the defendants as would be available after meeting the internal requirements in Pakistan. A bank guarantee for ,Rs, 5 lacs was furnished by the plaintiff as a condition of the tender document to ensure the performance of the contract. The bank undertook :- to make an unconditional payment of Rs, 5,00,000 (Rupees five lacs only) to you on your written demand without further question or reference to Jamia Industries Ltd., in case of any default on their part in the due performance by them of all or any of their obligations under the said contract." .
' The learned Judge (Mr. Justice Zafar Hussain Mirza), as he then was, after referring to the facts of the case and observing that there could be no cavil against the proposition of law that the existence of a dispute is
(1) PLD 1976 Kar. 644 ' an essential condition for making a reference to the arbitrator for that constituted cause of action for an application under section 20 of the Arbitration Act and that the dispute must be real as the Court will not leave a mere pretence of dispute to arbitrator for decision, proceeded to decide the application filed under Order XXXIX, rules 1 and 2, C.P.C. For restraining the defendants from encashing the bank guarantee. The learned Judge after taking notice of contentions of the two parties (the plaintiffs asserted that the bank guarantee was conditional upon their committing breach which was subject-matter to be adjudicated while the defendants urged that the guarantee expressly made payable the amount unconditionally) held as follows :- "It is not necessary for me to give my findings on these questions ; but I am clearly of the view that even if a breach was committed by the plaintiffs the defendants could not, ipso facto, appropriate the whole amount, in the light of the principle of law postulated by their Lordships of the Supreme Court in the Province of West Pakistan v. Mistree Patel & Co. PLD 1969 SC 80. In that case Mistree Patel & Co. Had agreed to purchase rice and in pursuance of one of the terms of the contract instead of depositing any earnest money with the sellers give in lieu thereof a bank guarantee to pay the amount of earnest money on its failure to fulfil its 'obligation under the contract. On failure of the said company to lift the goods within the stipulated time, the Government sold the goods to a third party and by that transaction instead of suffering any loss made a profit. Thereafter, the Government filed a suit against the company for recovery of the amount of earnest money on the basis of the bank guarantee. On the question whether in view of the guarantee given by the bank the Government was entitled to forfeit the amount covered by the guarantee and recover the same, the contention was that the Government was entitled to claim the amount of earnest money irrespective of the fact whether it suffered loss or not in the transaction in question. The contention was repelled and Abdul Sattar, J., at page 89 of the report observed 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 contract by the Firm. In the present case we had already seen that the plaintiff instead of suffering any loss for the failure of the Firm made a profit of Rs, 10,000.'
' And further :- 'The question that arises therefore is whether in spite of the above fact the claim of the plaintiff in whole or any part can be justified, we are of the view that the plaintiff is not entitled to any part of claim whether the term of the contract regarding forfeiture comes within the purview of section 74 of the Contract Act or not.'
' The defendants do not deny that the disputes relating to the bank guarantee are part of the contract. Indeed, they could not have contended so in view of the clear language of the arbitration agreement. It would, accordingly appear that a substantial dispute with regard to the question whether the defendants are entitled to claim and appropriate the entire guarantee amount or only a part thereof has arisen which is covered by the arbitration agreement and can only be referred to the forum chosen by the parties."
' The learned Judge after holding that the rule laid down in the case of Messrs Alavi Sons I td. v.
Government of Pakistan (1) was not attracted, pointed out that the law enunciated, in that case was in relation to the permanent injunction sought under section 56 of the Specific Relief Act which was refused on the view that if the surety by making the payment under the guarantee had applied its own funds to the discharge of the guarantee he would be entitled to claim indemnity.
' The learned Judge, then with the observation that the circumstances of the said case were totally different and that the defendants may not be entitled to claim the entire guarantee amount as it was in the nature of earnest money and that it is well-settled law that temporary injunctions are governed by provisions of Order XXXIX, C. P. C. And the considerations for grant of such relief need not be the same as applied to the grant of the relief of permanent injunction, granted temporary injunction bolding as follows "Once again, therefore, the question as to what rights the creditor has against the principal debtor (the plaintiffs in this case) is yet to be adjudicated and determined. It would, therefore, be exposing the plaintiffs to injury or loss by the bank appropriating their funds towards the guarantee debt as well as they would be exposed to the rigorous of litigation with the bank. All this would be obviated if the guarantee is held over to be utilised in terms of the award when the liability of the plaintiffs will have been determined. Of course, the guarantee will remain in force for the benefit of the defendants as they have already demanded payment under the same from the bank."
6. Reference may also be made here to the case of Elian and another v. Matsas & Matsas (2). The facts of the said case were that a vessel for carriage of plaintiffs cargo from Beruit to Rejeka was chartered. The discharge of the goods at Rejeka was however delayed and ship owners exercised lien on the cargo in respect of demurrage. The third defendant bank put up guarantee in London in favour of the second defendant (London agents) to secure release of the cargo. However, there was a claim of Yogosalavian Company to distrain on the goods involving the shiping further delay and the master of the said ship on lifting original lien, immediately exercised another lien in respect of extra delay. About two years later, the ship owners claimed arbitration with characters to assess demurrage for which first lien was exercised and claimed to enforce the bank guarantee. In the circumstances plaintiff claimed declaration that the bank guarantee was not valid and sought injunction to restrain the ship-owners and their agents from enforcing the bank guarantee. On the facts
(1) PLD 1968 Kar. 222 (2) (1966) 2 LLR 495 ' or the case in the opinion delivered by Lord Denning M. R. It was observed :- "Now I quite agree with Mr. Goff that a bank guarantee is very much like a letter of credit. The Courts will do their utmost to enforce it according to its terms. They will not, in the ordinary course of things, interfere by way of injunction to prevent its due implementation. Thus they refused in Malas v. British Imex Industries, Ltd. (1957) 2 LLR 542. But that is not an absolute rule. Circumstances may arise such as to warrant interference by injunction. The question is whether this is such a case."
' Having observed as above the learned Judge further proceeded to hold as follows :- "I think this is a special case in which an injunction should be granted. There is prima facie ground for saying that, on the telex messages which passed (and indeed I would add, on the first three lines of the guarantee, the ship-owners promised that, if the bank guarantee was given they would release the goods. I know that the only lien they had in mind at that time was the lien for demurrage. But would any one suppose that the goods would be held for another lien ? It can well be argued that the guarantee was given on the understanding that the lien was raised and no further lien imposed ; and that when the ship-owners, in breach of that understanding, imposed a further lien, they were disabled from acting on the guarantee. In these circumstances I think an injunction should be granted."
7. Mr. Liaqat Merchant, learned counsel for the defendants however, submitted that the bank guarantees furnished in the case would be governed by the principles which are applicable to quashment of confirmed L. Cs. And therefore it is not a fit case in which Court may exercise its discretion in favour of the plaintiffs who are seeking order to restrain the defendants from making a demand upon the bank for payment under the bank guarantees executed in their favour. The learned counsel made reference to the terms of the bank guarantees which are identical in terms under which the concerned bank undertook and guaranteed unconditionally and absolutely to make payment of the amounts specified therein to the buyers, or as directed by the buyers on the date of receipt of demand from them in writing, without any question whatsoever.
8. Having referred to the terms of the bank guarantees, the learned counsel then placed reliance on the case Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. (1), Howe Richardson Scale v. Polimexcekop and another (2), Tarapore & Company, Madras v. Tractorexport Moscow (3) and Alavi Sons Ltd., v. Government of East Pakistan and others.
' In order to appreciate the submissions made by the learned Counsel for the defendants it would be relevant to examine the abovemen-tioned cases.
(1) (1978) 1 A R 976 (2) (1978) 1 LLR 161
(3) AIR 1970 SC 891 ' The facts of the case of Edward Owen Engineering Ltd. (ibid) were that the suppliers had entered into a contract with the buyers to supply the goods to them in Libya. The contract was subject to the condition precedent that the plaintiffs would arrange for performance bond or guarantee to be given for 10% of the contract price guaranteeing performance of their obligations under the contract. On the instructions of the defendants, the Libyan Bank issued a letter of guarantee for the stipulated amount to the buyers. Disputes arose between the parties on the ground that the L. C.
Opened by the buyers was not confirmed L. C. And did not therefore comply with the contract. The plaintiffs for the said alleged non-compliance repudiated the contract. In the circumstances of the case, although it was the buyers who appeared to be in default and not the plaintiffs, the buyers nevertheless claimed on the guarantee given by the Libyan Bank, who in turn claimed against the defendants on the guarantee they had given. The plaintiffs issued a writ against the defendants claiming an injunction to restrain them from paying any sum under the performance guarantee.
The learned Judge granted the plaintiffs an interim injunction but subsequently, another Judge discharged the injunction whereupon the plaintiffs preferred an appeal. The Court in appeal considered the legal aspects of the case concerning what it discribed 'a new business transaction called a performance guarantee or performance bond'.
' Reference in the above cited case was made to the case of Malas v. British Impex Industries Ltd. (1) where Jenkin L. J. Giving the judgment of the said Court observed as follows :- ...It seems to be plain that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes on the hanker an absolute obligation to pay, irrespective of any dispute which there may be between the parties on the question whether the goods are up to contract or not. An elaborate commercial system has been built upon the footing that bankers confirmed credits are of that character, and, in my judgment, it would be wrong for this Court in the present case to interfere with that established practice."
' To the general principles laid down as above, the learned Court held that, there is an exception in the case of what is callad established or obvious fraud to the knowledge of the bank. The case of Sztejn v. Henry Schrod Banking Corporation (2) was cited wherein it was held- "It is well-established that a letter of credit is independent primary contract of sale between the buyers and sellers. The issuing bank agrees to pay upon presentation of documents, not goods.
This rule is necessary to preserve the efficiency of the letter of credit as an instrument for finding of the trade."
' The learned Judge Shientang, J. Further observed that in a situation where the sellers fraud has been called the bank's attention before the drafts and documents have been presented for payment, the principle of independence of the bank's obligations under the L. C. Should not be extended to protect unscrupulous seller.
(1) (1958) 1 A E R 262
(2) (1941) 31 N Y Supp. 2d 631 ' The case of Bank Russo-Iran v. Gordon Woodroffe & Co. Ltd. (1972) The Times, 4th October, was also referred wherein Browne L. J. Observed :- "In my judgment if the documents are presented by the beneficiary himself and are forged or fraudulent, the bank is entitled to refuse payment if the bank finds out before payment, and is entitled to recover the money as paid under a mistake of fact if it finds out after payment."
' Observation of Kerr, J. Was also referred with approval wherein it was held that in cases of obvious fraud to the knowledge of the banks, the Courts may preclude banks from fulfilling their obligation to third parties.
' Having dealt with the law as applicable to the confirmed letters of credit the learned Judge (Denning, M. R.) proceeded to examine as to how does it stand with regard to a performance bond or a performance guarantee and came to the following conclusion :- "So, as one takes instances after instance, these performance guarantees are virtually promissory notes payable on demand. So long as the Libyan customers make an honest demand, the banks are bound to pay and the banks will rarely, if ever, be in a position to know whether the demand is honest or not. At any rate they will not be able to prove it to be dishonest. So they will have to pay.
' All this leads to the conclusion that performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It if not concerned in the least with the relations between the supplier and the customer : nor with the question whether the supplier has performed his contracted obligation or not ; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee on demand if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has notice."
' The learned Judges after referring to the cases of R. D. Harbottle Mercantile Ltd. v. International Westminster Bank Ltd. (I) and the case of Howe Richard Sons Scale Company Ltd. v. Polimex-Cekop further held :- "So there it is, Barclays Bank International has given its guarantee. I might almost say its promise to pay, the Umma Bank on demand without proof or conditions. They gave that promise, the demand was made. The bank must honour it. This Court cannot interfere with the obligations of the bank."
' In the same case, Browne, L. J. Observed as follows :- "The event in the present case was the demand by the Umma Bank on Barclays Bank. Barclays Bank had agreed to pay without conditions or proof. They are not concerned with the dispute between the plaintiffs and the buyers under the underlying contract. Accordingly, as I have said I agree that the appeal must be dismissed."
(1) (1977) 2 A E R 862 ' Reference may also be made to the observation of Jeofrey Lane L. J. Who after referring to the contention of the plaintiff that the buyers were guilty of fraud, and that indeed the fraud was clear and obvious, that the bank knew about it and thus according to him the plaintiff was entitled to grant of injunction, held :- "I disagree that amounts to any proof or evidence of fraud. It may be suspicious, it may indicate the possibility of sharp practice, but there is nothing in those facts remotely approaching true evidence of fraud or anything which makes fraud obvious or clear to the bank. Thus there is nothing it seems to me, which casts any doubt on the bank's prima facie obligation to fulfil its duty under the two tests which I have set out.
' It may be harsh in the result, but the plaintiffs must have been aware of the dangers involved or, if they were not, they should have been aware of them, and either they should have declined to accept the terms of the performance bond or else they should have allowed for the possibility of the present situation arising by making some adjustment in the price.
' I agree that the appeal should be dismissed."
' It may be noted here that, the learned Judge referred to the only circumstances which could justify the bank not complying with a demand made under the agreement would be those which would exonerate them under similar circumstances if they had entered into a letter of credit, "and that is this, if it had been clear and obvious to the bank that the buyers had been guilty of fraud."
9. In the case of Howe Richardson Scale Co. Ltd. v. Polimex-Cekop and another under the contract for sale and delivery of some valuable equipment amongst other, provided for payment of 25,000 as part of the contract price in advance within 45 days of the contract on presentation by the sellers, bank guarantee. The guarantee which was provided by the defendants (the bank) stated Inter alia : - "We agree to give the guarantee for refund of the advance payment amounting to, 25,000 in favour of Messrs Polymer on their first demand in case of non-delivery of the ordered goods until 31st March, 1977.
This guarantee is irrevocable and valid until 30th November, 1977."
' On the events which followed Polimex claimed repayment of 25,000 under the guarantee on the ground that the delivery had not been made by 31st March, 1977, the bank took the view that it was bound to honour its obligations under the guarantee and advised the sellers of its view. The sellers applied for an injunction to restrain Polimex from claiming under the guarantee. After discussing the case law, and observing that the case of Elian and another v. Matsas & Matsas and others, as observed therein by Denning, M. R., be regarded as a very special case, dismissed the appeal against the judgment refusing to grant injunction, with the observation :- "It is said that the bank has an answer to Polimex because there is some evidence to show that delivery was made into warehouse before March 31, 1977. As I have already indicated, I do not propose to decide whether the bank's obligation is absolute or not. The hank, in principle, is in a position not identical with but very similar to the position of a bank which has opened a confirmed irrevocable letter of credit. Whether the obligation arises under a letter of credit or under a guarantee the obligation of the bank is to perform that which it is required to perform by that particular contract, and that obligation does not in the ordinary way depend on the correct resolution of a dispute as to the sufficiency of performance by the seller to the buyers or by the buyer to the seller as the case may be under the sale and purchase contract ; the bank here is simply concerned to see whether the event has happened upon which its obligation to pay has arisen. The bank takes the view that time has come and that it is compelled to pay : in my view it would be quite wrong for the Court to interfere with Polimex's apparent right under this guarantee to seek payment from the bank, because to do so would involve putting upon the bank, an obligation to inquire whether or not there had been timeous performance of the sellers' obligations under the sale contract. Further, in accordance with the principles laid down by the House of Lords in the American Cyanamid case the balance of convenience, it seems to me, is against the grant of an injunction."
10. Messrs Tarapore & Co. v. Tractoroexport was a case which dealt with the desirability of interference with established practice built upon the footing that banker's confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any there may be between the parties whether the goods are upto contract or not, held "There is this to be remembered, too, a vendor of goods selling against a confirmed letter of credit is selling under the assurance that nothing will prevent him from receiving the price."
' Mr. Liaquat, the learned counsel for the defendants placed reliance on the above case, in support of his plea that the confirmed letters of credit and the bank guarantees are governed by the same principles.
11. Mr. Liaquat Merchant, learned counsel then referred to the case of Alavi Sons Ltd. v. Government of East Pakistan and others. In the said case plaintiffs were required to give security for the due performance of the contract by depositing with the Government Rs, 66,000 in cash and by executing a security bond in the sum of Rs, 30,000. Under the terms of the contract this security was liable to be forfeited in case of default in the performance of the contract. The condition as to cash deposit of Rs, 66,000 was latter substituted by the bank guarantee in the like amount, the bank undertaking to pay the said sum "without any further question of reference to the contractor on contractor's failure to perform the contract in conformity with the contract". On the plea that the contractor/ plaintiff had committed default in performance of the contract, the government made a claim upon the bank for payment of Rs 66,000 under its guarantee. The plaintiff filed suit in which he claimed reliefs for (1) declaration that they had not committed any breach and therefore the security given in the form of bank guarantee was not liable to be encashed and (2) for an injunction against the defendants No, 3/bank from making overpayment of guaranteed amount of Rs, 66,000 to the defendants.
' The learned Judge while holding that the declaration sought could not be granted under section 42, Specific Relief Act, further held that the suit for the relief that the defendant/bank be restrained from paying over the guaranteed amount to the Government also could not be granted firstly for the reason that an injunction of this nature does not come within the scope of Chapter X of the Specific Relief Act and secondly the reliefs which the plaintiffs sought in the suit could be effectively obtained in other usual proceedings. This case was considered in the case of Jamia Industries v.
Pakistan National Refinery Ltd., to which reference has already been made above.
12. Reference may lastly be made to the case of Province of West Pakistan v. Messrs Mistri Patel & Co. And others (I). The facts of the case, relevant for the purposes of the present suit may briefly be stated. The plaintiff firm agreed to purchase 4,000 to 5,000 tons of rice from the Govt. Messrs Mercantile Co-operative Bank Ltd., gave an unconditional and irrevocable guarantee of the earnest money deposit payable by the said firm in the event of its failure to carry out the terms of the contract. The firm only took delivery of 1,550 bags out of the contracted quantity (4,000 tons) and failed to lift the balance of the goods within the stipulated period. Disputes thus arose between the parties and the remaining bags of rice were resold by the Government to another party in which transaction instead of suffering any loss, the Government made a profit of Rs, 10,500. The suit filed by the Government for recovery of earnest money, was resisted by the defendants on various grounds wherein, inter alia, it was also pleaded that the Government was not entitled to claim the earnest money by enforcing the bank guarantee against the defendants. On these facts the Honourable Supreme Court with the observations, already reproduced in para. 5 above, dismissed the appeal filed by the Government and refused to interfere with the decisions of the Courts below.
13. It may be observed here that the bank guarantee given here cannot be equated with earnest money which is appropriated as part of purchase money when the transaction goes forward and is forfeited when the transaction fails through by reasons of the fault or failure of the vendee Chiranjit Singh v. Har Swarup (2).
14. From the discussion as above, I find that the bank guarantee furnished would be governed by the same principles of law, which are applicable to payments by the banks against confirmed letters of credit. Thus an absolute obligation is imposed upon the bank which executes the guarantee to honour the same according to its terms. There may exceptions to the general rule in special cases or in cases of fraud to the knowledge of the bank, where the Court may preclude banks from fulfilling their obligation to third parties. Prima facie no case falling under any of the exceptions having been made out, interim injunction granted in the case was discharged by short order passed on 21st March, 1983 with the direction to the Nazir to encash the bank guarantees and invest the amounts received for, the benefit of the party who ultimately succeeds. The above are the reasons for the said order.
15. I may before concluding, mention here that as the record stands, there is nothing to show that the defendants have suffered any loss though Mr. Liaquat Merchant, the learned counsel, during his arguments stated that his clients have suffered heavy losses on account of default on the part of the plaintiffs in the performance of the contracts. He further stated that the defendants would have no objection, if the bank guarantee in question are encashed and the money received is deposited with the Nazir of the Court. I may also clarify that observations made by me are tentative in nature and shall not prejudice any of the parties at the trial.
(1) PLD 1969 SC 80 (2) A 1 R 1926 P C 1