' The plaintiff is a limited company and is involved in the electrical and mechanical engineering business who has brought this suit against the defendants for a declaration that the two bank guarantees executed by the defendant No,4, namely, United Bank Limited, bearing performance guarantee No,2 of 1986 and mobilization guarantee No,3 of 1986 be declared to have been discharged on conclusion of the Contract' and for consequential relief that the defendants be restrained from encashing both these bank guarantees. For interlocutory relief, the plaintiffs have filed this application under Order XXXIX, Rules 1 and 2, C.P.C. (C.M.A. No,3075 of 1990) praying that the defendants Nos.1 and 2, their agents, representatives, employees be restrained from encashing guarantees bearing 2/86 dated 12-7-1986 and 3/86 dated 26-7-1986 till disposal of the suit.
2. The case of the plaintiff is that in the month of March, 1986, the plaintiff was declared the lowest bidder and was awarded the job of air-conditioning, ventilation and heating in the project known as Aiwan-e-Iqbal Complex, Lahore. The main contract for constructing the building of this Aiwan- e-Iqbal was awarded to the defendant No,3, namely, National Construction Limited (hereinafter referred to as NCL). On 14th July, 1986 NCL and plaintiff entered into contract for the abovesaid purpose. It was one of the terms of this contract that the said agreement shall not stand discharged on account of detention/substitution of the NCL and shall be binding on the plaintiff, even if any successors-in-interest or assignee of the main contractor comes into the scene. In this contract, it was further agreed that the plaintiff shall furnish a performance guarantee to the owner i,e, defendants Nos.1 and 2. It was also agreed that the plaintiff will be entitled for the mobilization amount as per contract Annexure B to the plaint. Accordingly, on. 26-7-1986 a mobilization advance guarantee was executed by the United Bank Limited (hereinafter refered to as UBL) at the instance of the plaintiff and in favour of the defendants Nos.1 and 2.
3. I have heard Mr. Mubarak H. Siddiqui, Advocate for the plaintiffs and Mr. Bilal A. Khawaja for the defendants No,1 and 2. Since the plaintiff is seeking interim injunction against the encashment of these two guarantees and as the terms and conditions of the performance guarantee and mobilization guarantee as well as the circumstances leading to such encashment are different, as such, I propose to separately deal with both these guarantees.
' Performance Guarantee:
4. This guarantee is dated 14-6-1989 filed as Annexure 'D' to the plaint.
' It was executed prior to the agreement dated 14th July, 1986 filed as Annexure 'C'. The purpose of executing this guarantee was for the due performance and observation, of all terms, provisions and stipulations of the contract by the plaintiff which contract was admittedly executed after execution of this guarantee. It is stipulated in this agreement that the UBL shall pay to the owner (defendants Nos. 1 and 2) a sum of Rs,44,97,033 which is equivalent to 10% of the contract price on demand in writing received from the owner stating that the contractor has committed default, without giving any further particulars of such default and notwithstanding any contest by the contractor. It was further agreed in the performance as follows: "We United Bank also agree that after the issuance of the completion certificate to the contract, our liability would be 50% of the amount of the performance guarantee and hereby also agree that owner can complete that portion of works which the contractor has failed to commence or not satisfactorily executed up to the amount of the performance guarantee at the expense to the Bank."
5. Mi. Mubarak Hussain Siddiqui, learned counsel for the plaintiff has vehemently urged that the defendants Nos.1 and 2 are not entitled to encash this performance guarantee as the delay caused in the completion of the contract was partially due to the delay in appointment of consultant by the owner (assured) as well as the delay caused by the NCL i,e, defendant No,3 in completion of the civil work. He has relied upon the case-law, namely, M/s. Banerjee and Banerjee v. Hindustan Steel Works Construction Ltd. And others AIRt1986 Cal. 374, Messrs Jamia Industries Ltd. v. Messrs Pakistan Refinery Ltd., Karachi PLD 1976 Karachi 644 and the case of Pakistan Engineering Consultants v.
Pakistan International Airlines Corporation and others 1993 CLC 1926.
6. Mr. Bilal A. Khawaja, learned counsel for the defendants Nos.1 and 2 has opposed this application on the ground that the plaintiff was not able to establish the three main ingredients for grant of interim injunction and that in very rare and exceptional cases, interim injunction as prayed is to be granted. He has contended that bank guarantee is a bilateral agreement executed between creditor and surety, therefore, according to Mr. Khawaja, plaintiff is an outsider and is not entitled for an interim injunction. He has relied upon the famous case of Edward Owen Engineering Ltd. v.
Barclays Bank International Ltd. (1978) All ER 976. In this reported case, one English supplier entered into a contract with Libyan buyers to supply goods to them in Libya against which the plaintiff submitted a performance bond for 10% of the contract price guaranteeing performance of their obligations under the contract. Accordingly, Libyan Bank issued a letter of guarantee. However, due to some dispute in opening of letter of credit, the plaintiffs repudiated the contract which resulted in filing of a cause. One Judge granted an interim injunction as prayed but subsequently another Judge discharged the injunction which resulted in appeal before the Court of Appeals wherein Lord Denning Mr., after considering the cases Malas v. British Imex Industries Ltd. (1958) 1 All ER 262, ' R.D.
Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd. (1977) 2 All ER 862, Bank Russoiran v.
Gordon Woodriffe & Co. Ltd. (1972) The Times, 4th October) and the case of Sztejn v. J. Henry Schroder Banking Corpn. (1941) 31 NY Supp. 2d 631 held as follows:-- "All this leads to the conclusion that the 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 is 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."
7. In the case of M/s. Banerjee & Banerjee v. Hindustan Steel Works Construction Ltd. And others, a learned Single Judge of Calcutta High Court after considering the above-quoted law and other laws from the England and Indian jurisdiction (including the case of Edward Owen Engg. Ltd.) held that the bank guarantee or the Letter of Credit are completely an independent document and in case if it is enforced bona fide strictly in accordance with the term then the contractor cannot prevent its enforcement. It was further held that the Court should consider the following facts while considering whether the enforcement of a bank guarantee should be allowed or not in a particular case:
(i) Whether demand for enforcing the bank guarantee has been made strictly in accordance with the terms of the document concerned? Or
(ii) Whether there is any allegation of fraud against the beneficiary of which the Bank has notice?
Or
(iii) Whether there is any special equity arising out of the particular situation giving rise to a strong prima facie arguable case against enforcement of such, guarantee?
8. There are other cases from the Indian jurisdiction earlier in time than the case of Banerji and Banerjee in which the question of encashment of bank guarantees was considered by the superior Courts of India. For further reference see the cases of United Commercial Bank v. Bank of India AIR 1981 SC 1426, Pesticides India, Props Mewar Oil & Gen. Mills Ltd. v. State Chemical and Pharmaceutical Corporation of India Limited AIR 1982 Delhi 78, M/s. Banwari Lal Radhe Mohan v.
Punjab State Cooperative Supply and Marketing Federation Limited AIR 1982 Delhi 357, Premier Tyre Limited v. State Trading Corporation 1981 Rajdhani LR 138 and the case of M/s. Harprashad & Co. Ltd. v. M/s. Sudarshan Steel Rolling Mills and others AIR 1983 Delhi 128. In the case of United Commercial Bank AIR 1981 SC 1426, it was held by the Supreme Court of India that sometimes a Letter of Credit, resembles and is analogous to a contract of guarantee the Court will do their utmost to enforce it according to its terms. In the case of M/s. Harprashad & Company a Division Bench of Delhi High Court followed the principles laid down in the case of United Commercial Bank and held that the bank cannot be restrained by an injunction from discharging its obligation arising out of a bank guarantee.
9. The criteria for grant of interim injunction in the cases arising out of Letter of Credit and unconditional bank guarantees, were considered by a Division Bench of this Court and it was held in the case of Pakistan Engineering Consultants v. Pakistan International Airlines Corporation and others 1993 CLC 1926 that the Court should be reluctant to grant ad interim injunction restraining a bank from honouring its contractual obligation. It was further held in this reported case by the then Chief Justice of this Court Mr. Ajmal Mian, C.J. (as his Lordship then was, now Judge of the Supreme Court) that "however in exceptional cases, where refusal to grant of interim injunction, will perpetuate fraud or injustice, which should be apparent from the material on record, the Court may grant an ad interim injunction." Against this order, the appellants went before the Hon'ble Supreme Court seeking leave to appeal which was refused (See Pakistan Engineering Consultant v.
Pakistan International Airlines Corporation and others 1989 SCMR 379). Resume of the above case- law will indicate that in. Our country, there 'exists an additional reason to stay enforcement of a bank guarantee, that is, the case of "injustice" but in exceptional cases. Besides, the two conditions of fraud and injustice, there is third ground available to a plaintiff or contractor to resist enforcement, particularly in the case of performance bond which is in the nature of penalty in view of section 74 of the Contract Act. This question came up for consideration before a learned Single Judge of this Court Mr. Zafar Hussain Mirza, J. (as his Lordship then was) in the case of Messrs Jamia Industries Limited v. Messrs Pakistan Refinery Limited PLD 1976 Karachi 644 wherein a bank guarantee was furnished by the plaintiff for Rs,5,00,000 encashable in case of any default in the due performance of all or any of the obligations under a contract executed between the plaintiff and the defendant. The learned Judge while referring to the dictum laid down in the case of Province of West Pakistan v. Messrs Mistri Patel & Co. And another PLD 1969 SC 80 held that even if a breach was commated by the plaintiffs, the defendants could not, ipso facto, appropriate the whole amount. With this view, the learned Judge granted interim injunction and restrained the encashment of the performance bond.
10. The allegation raised by the plaintiffs that the alleged delay in completion of the assignment was caused, partly due to non-appointment of consultant by the defendant No,1 and partly due to delay caused . By the defendant No,3 in completion of civil work were not satisfactorily controverted by the defendants Nos.1 and 2 which amounts to establishing a prima facie good arguable case. These issues are now pending adjudication before this Court and unless proper evidence is led from both the sides and are analysed it will be very difficult to say as to who was responsible for such delay. The question of delay in the present case was also noted by the Hon'ble Supreme Court in the case of Messrs National Construction Limited v. Aiwan-e-Iqbal Authority PLD 1994 SC 311. The question of encashing a performance bond was also considered by a Division Bench of this Court in the case of Pakistan Engineering Consultant v. PIAC (supra) wherein it was held as follows:-- "10. As regards the performance bond, in our view, the same stands entirely on different 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."
(Underlining is mine).
11. In view of the law laid down by this Court in the case of M/s. Jamia Industries and Pakistan Engineering Consultant, I am of the considered view that the defendants are not entitled to encash the performance guarantee dated 12-7-1986 Annexure ' D' to the plaint, otherwise the plaintiff would suffer irreparable loss. I am also of the tentative view that the balance of convenience is also in favour of the plaintiff. Accordingly, defendants Nos.1, 2 and 4 are restrained from encashing the same till disposal of this suit. (for further reference see the case of Macdonald Layton & Co. Ltd. v.
Pakistan Services Ltd. And others 1983 CLC 2252 and the case of Sirafi Trading Establishment v.
Trading Corporation of Pakistan Ltd. 1984 CLC 381.
' Mobilization Bond:
12. The need or requirement for executing a mobilization bond is quite different from the need and circumstances leading to the execution of performance bond. A mobilization bond is generally executed by a contractor (principal debtor) after he had received certain adyance amount from the owner (creditor) against some agreement, while the performance bond are executed by a surety at the instance of principal debtor guaranteeing satisfactory fulfilment of the terms and conditions of the contract or completion of the assignment within a particular period. Therefore, in my humble view, encashment of performance bond is dependent on the determination of a question as to who has committed default in fulfilment of its obligations or in completion of an assignment within a given period but this question is not relevant as far as encashment of a mobilization bond or guarantee is concerned as in such cases the principal debtor had received consideration from the owner or the main contractor (creditor) which he is liable to return or refund as a result of any revocation, termination or completion of the contract. In such cases, the burden is upon the principal debtor at whose instance such mobilization bond was executed or on the surety, as the case may be, to show that either no amount was advanced to them as mobilization or advance amount or such amount if received then it has been duly incurred or that he is entitled for appropriation of certain outstanding amount against the amount of mobilization bond. In absence of these conditions, the Courts will always be reluctant to grant interim injunction restraining encashment of a bank guarantee executed against receipt of advance or mobilization fund.
13. The Mobilization advance guarantee was executed on 26-7-1986 in favour of the owner of Aiwan-e-Iqbal Complex, Lahore (defendants Nos. 1 and 2). This guarantee was issued at the instance of the plaintiff (principal debtor) by the United Bank Limited (defendant No,4/surety) in favour of the owner of Aiwan-e-Iqbal Complex, Lahore who are the creditors in this guarantee. It has been admitted in this guarantee that at the request of the Surety and the principal debtor the creditor had agreed to .Advance a sum of Rs,67,45,548 for the purpose of supply, installation of heating, ventilating and air-conditioning system for the Aiwan-e-Iqbal Complex, Lahore. It was agreed that the advance amount was to be used for the procurement of transport of plant and for the purchase of the material for the work as agreed in the contract dated 14-7-1986. The following conditions as embodied in the mobilization advance guarantee are material as well as relevant for the disposal of this application which are reproduced as hereinunder:-- "2. That the Contractor Shall repay the abovesaid advance to you (owner) either by getting the same deducted from his (plaintiff) running bills as per the Conditions of the Contract or from his own resources.
3. In the event of the Contractor failing to utilize the advance for the purpose for which it has been given by you and/or the Contractor failing to make the payment of the same to you as per the General Terms and Conditions of the Contract as hereby guarantee the payment of the amount of Rs,67,45,548 (Rupees sixty-seven lac forty-five thousand five hundred and forty-eight only) or such other amount as may be outstanding against the "Contractor" within two days after demand made by you on us without any question or without any reference of any nature whatsoever to the Contractor and irrespective of existence of any dispute between you and the Contractor and irrespective of pendency of any dispute with Contractor before any Arbitrator or any Court of law.
4. That a demand certifying that the Contractor has failed to utilize the advance for the purpose for which it has been given and/or has failed to repay the same duly signed by the P.M. Will be conclusive against the Contractor and against us which certified demand shall not be questioned by us for any reason whatsoever and it would be sufficient authority for us to make the payment to you
5. That our liability under this guarantee shall stand reduced automatically to the extent of the adjustment made from the running bills of the Contractor and a certificate signed by the P.M. To this effect shall be conclusive and binding on us."
14. According to Mr. Bilal A. Khawaja, the plaintiff has admittedly received the amount as mentioned in the mobilization guarantee and he is bound to return/refund the same irrespective of the fact whether who was at fault for delay in the completion of the said project. He has also contended that as per terms of the mobilization guarantee the owners of Aiwan-e-Iqbal Complex, Lahore have already adjusted/deducted the amount which they have received from the running bills and it was due to this reason that the owners have made a demand for Rs,65,50,777 (loss Rs,1,94,771 of the initial amount mentioned in mobilization guarantee). On the other hand, Mr. Mubarak Hussain Siddiqui has contended that the defendants are not entitled to encash the mobilization guarantees. In the alternate Mr. Mubarak has pleaded that the plaintiff is entitled to deduction of Rs,29,29,147.89 in view of an office memo.. Which the plaintiff has filed alongwith their counter- affidavit. Mr. Khawaja Bilal has challenged the legality of such office memo. And denied that it was executed by any Authorised Officer of the defendant Nos. 1 and 2. Be that as it may, it appears, from the affidavits filed by the parties that some movable properties were left by the plaintiffs at the site which have been taken over by the owners of the said complex amounting to Rs,1,14,754. I am of the tentative view that the plaintiffs have established a prima facie case for reimbursement of this amount.
15. In our country the law on the question of granting interim injunction to restrain the encashment of mobilization advance guarantee is now well settled. The Courts are generally reluctant to grant an interim injunction restraining a bank from honouring its contractual obligations. In support of this position reference can be made to the cases Pakistan Engineering Consultants v. Pakistan International Airlines Corporation 1993 CLC 1926, Messrs Kohinoor Trading Establishment v. Trading Corporation of Pakistan Ltd. And 2. Others 1987 CLC 1533 and the case of M/s. National Construction Limited v. Aiwan-e-Iqbal Authority PLD 1994 SC 311. The last-mentioned case arises out of the construction of the same building but in the said case the main contractors (National Construction Limited) have gone in appeal, against the order of the Lahore High Court whereby injunction was refused through which the appellant was seeking injunction restraining the respondent from encashing the mobilization guarantee. The Hon`ble Supreme Court dismissed the appeal and held as follows: "In the instant case, therefore, the Bank guarantee furnished by the appellants contained categorical undertaking and impose absolute obligations on the banks to pay the amount, irrespective of any dispute which may arise between the parties regarding the breach of contract.
In our view. The Courts must give effect to the covenants of the bank guarantees, the performance guarantees, for the smooth performance of the contracts. Those guarantees are independent contracts and the bank authorities must construe them, independent of the primary.. Contracts.
They should encash them notwithstanding any dispute arising out of the original contract between the parties. In the instant case, therefore, the encashment of bank guarantees cannot be postponed pending decision of the arbitration proceedings, which may take years to conclude."
16. The result of the above discussion is that the plaintiffs' application is disallowed up to the extent of mobilization advance guarantee while it has been granted up to the extent of performance bond/guarantee. The owners of Aiwan-e-Iqbal Complex shall be entitled to encashment of the same as per original demand but after deduction of Rs,1,14,754 from the amount as claimed by them vide letter dated 7-6-1990.
17. This order. Will become operative/effective after expiry of the appeal period in order to enable the parties to seek any relief by filing their respective appeals, if any, since some serious questions of facts and law are involved, C.M.A. No,3075 of 1995 stands disposed of.