1. The plaintiff Messrs Eman Textile Mills (Pvt.) Limited has filed the present suit, inter alia for declaration that the defendant I.D.B.P. has committed breach of Financing Agreement in failing to pay for Locally Manufactured Machinery and further declaration that recall of financial assistance by the defendants was illegal and unwarranted. The plaintiff has sought decree for damages in the sum of Rs,50 million besides redemption of mortgage and injunction restraining the defendants from enforcing the mortgage and personal guarantees. The defendant No,1 is Industrial Development Bank of Pakistan, whereas the defendant No,2 is its Regional Manager at the Sukkur Office.
2. The facts leading to the present proceedings, according to the plains are that the plaintiff, with an intention to set up Textile Weaving Unit at S.I.T.E. Area Sukkur, had applied on 15-12-1990 to the defendant No,1-Bank for grant of financial assistance in order to procure Locally Manufactured Machinery. The plaintiff's request, upon initial scrutiny, was accepted on 18-3-1991 by the defendants who undertook to provide loan under State Bank of Pakistan Scheme for Locally Manufactured Machinery (L.M.M.) subject to the conditions, amongst others, that the debt equity ratio would not exceed 60 : 40 in overall cost of the proposed scheme, a sum of Rs,1.5 million be deposited with the defendant No,1 and collateral securities to the extent of 25% of the financial assistance be provided in the shape of urban immovable property to the defendant No,
1. It was further provided that in case the proposed loan was not utilized within nine (9) months from the date of sanction, the matter could be reviewed by the defendant No,1. Acting on the said letter, dated 18-3-1991, the plaintiff applied for grant of financial assistance in the prescribed preform on 12-9-1991 and deposited the sum of Rs,1.5 million in terms of the requirements prescribed by the defendant No,
1. The plaintiff is stated to have further deposited a sum of Rs,84,200 as the Technical Appraisal Fee whereupon the defendants undertook evaluation of the proposed project which was approved by its Board of Directors in December, 1991 followed by issuance of sanction letter, dated 5-5-1992 conveying approval for grant of local currency assistance in the sum of Rs,16.200 million under the State Bank of Pakistan Scheme for L.M.M. The Sanction letter, dated 5-5-1992 contained various terms for grant of the financial assistance which are to be treated as the agreed terms of financing as per the agreement executed between the parties on 27-6-1993. The financial assistance under the S.B.P. Scheme for L.M.M. was to be disbursed directly to the local manufacturers of machinery selected by defendant No,1 for the purpose, pursuant to bids invited through tenders. The machinery was to be procured from the approved supplier(s) of the defendants. Consequently, tenders were invited through national newspapers and a comparative statement of the bids was submitted by the plaintiff to the defendants on 3-6-1992. The lowest bidder Messrs Fine Engineering Company who had offered to supply bulk of the machinery, at that stage, was delisted by the defendants and for such reason, it was decided to invite fresh tenders.
3. However, before the tenders could be re-invited, Messrs Fine Engineering Company got itself re- enlisted and the tenders were finally approved by the defendant No,1 on 13-1-1993. According to the plaintiff, the process was delayed unnecessarily by the defendants. It is further the case of the plaintiff that the collateral securities offered by it to the defendants were evaluated on lower side and such process too was unduly delayed. The defendant No,1, eventually disbursed a sum of Rs,2.655 million to two manufacturers namely Messrs Fine Engineering Company and Messrs Manstock Engineering Company on 7-12-1993 and 22-1-1994. The amount disbursed to the two manufacturers, as above, represented about 17% of the amount of finance contrary to the undertaking of defendants to disburse a sum of Rs,3.8 million being 25% of the amount of facility.
4. The plaintiff claims to have invested an approximate sum of Rs,13.04 million towards the project acting on the understanding based on the sanction letter and was ready to implement the project by putting it into operation within two months upon arrival of the machinery. However, on 29-8- 1995 the defendants are stated to have suddenly recalled the amount of finance, without any lawful reason, refusing to honour the commitment undertaken through the sanction letter, dated 5-5-1992 and have rather demanded repayment from the local manufacturer as well. It is stated that the re-payment of finance had to be made in installment and the first installment was to become due on 31st March, 1996. But for the breach committed by the defendants as above, the plaintiff would have been able to install the machinery and commission the unit by the end of November, 1995. As a result of the illegal and unwarranted conduct of the defendants, the plaintiff is stated to have suffered damages in the sum of Rs,50 million, details whereof have been stated in paragraph 8 of the plaint. Besides the claim for damages, the plaintiff has also sought refund of the Technical Appraisal Fee, Commitment Charges, Documentation Charges etc. which were paid to the defendants.
5. The defendants, through their common written statement, have denied the claim. It is averred in the written statement that the plaintiff was responsible to arrange delivery of machinery from the local manufacturer within 11 months from the date of disbursement but despite repeated written communications, had failed to take delivery with ulterior motive and had failed to complete the project which was required to go into normal production by April, 1995. It is pleaded by the defendants that the plaintiff had lost interest in completing the project and the defendants were constrained to withdraw the remaining financial assistance and to recall the amount already disbursed to the local manufacturer on behalf of the plaintiff. It is further claimed that the defendants had already instituted Suit No,250 of 1997 against the plaintiff before the Banking Court at Sukkur for recovery of the amount disbursed, as above. On the basis of above averments, dismissal of the suit has been sought.
6. On the basis of the pleadings of the parties, the following issues were settled on 16-2-1998:--
(1) Whether the defendant-bank has committed breach of the terms of the finance agreement between the parties? If so, its effect?
(2) Whether the plaintiff has suffered any loss and is entitled to damages from the defendant? If so to what extent?
(3) What should the decree be?
7. The plaintiff, in support of its claim has examined its Chief Executive, namely, Abdus Salam as Exh.5 whereas the defendants have examined one Tahir Hussain Memon, one of its officer, as Exh.6.
8. I have heard the learned counsel and gone through the record with their assistance. During arguments on 5-11-1998, the Chief Executive of the plaintiff insisted for arguing the matter himself and the learned counsel for plaintiff sought discharge of his Vakalatnama. The matter was then argued by the above-named Abdus Salam himself. On 10-11-1998, the judgment was reserved leaving it open to the parties to file written arguments, if they so desired, within 15 days. From the plaintiff's side written arguments were submitted on 25-11-1998 after supplying its copy to the learned counsel for defendants. The latter, however, has not filed any written arguments.
9. My finding issuewise are as follows:-- Issue No,
1. The plaintiff's case in relation to this issue is that the defendants have recalled the amount of finance without any lawful reason and have failed to honour the commitment undertaken through the sanction letter, dated 5-5-1992 produced as Exh.5/2. The case of plaintiff, deducible from sub-para. (4) of para.12 of the plaint is that the 1st instalment of resale price was to fall due on 31st March, 1996. The plaintiff's Chief Executive has referred to term 4 contained in the sanction letter Exh.5/2, which is as follows:-- "Duration and repaym ent for L.M.M. Scheme. First instalment of resale price shall be payable by the company on March, 31 and September, 30 whichever date falls first after 2 years from the date of disbursement of I.D.B.P's. financial assistance."
10. ' The first disbursement admittedly was made on 7-12-1993 and the grace period of 2 years contemplated under the above-referred term of agreement expired on 6-12-1995; the 1st instalment of resale price, therefore, became due on 31st March, 1996. The defendants have not controverted the above aspect seriously but have rather based their defence on the letter, dated 29-8-1995, Exh.5/13, copy whereof has also been produced as Exh.6/9. It may be noted here that the copy of said letter, dated 29th August, 1995, Exh.6/9, contains an endorsement addressed to the Senior Vice-President, Project Implementation Department, I.D.B.P. Head Office, Karachi to the effect that the machinery had not been received by the plaintiff due to non-completion of the project building. The letter sent to the plaintiff, Exh.5/13, however, does not contain the above-referred endorsement and is in the following terms:-- "We refer to our Engineer's visit to your project and your subsequent meeting at our office regarding implementation of your project. In this connection we understand that there is no chance of the completion of the project. You are, therefore, advised to liquidate Bank's liabilities with up-to-date mark-up by 30-9-1995 failing which legal action will be taken against you."
11. Thus, the sole reason for recall of financial assistance contained in the letter, dated 29th August, 1995, Exh.5/13, is the conclusion reached by the manager of defendant No,1-Bank namely Tahir Hussain Memon to the effect that there was no chance of completion of the project. Before adverting to the question if the defendants, at that stage, could lawfully recall the financial assistance extended to the plaintiff, I find it appropriate to dilate on the question if there was any material available before the author of the letter Exh.5/13, to conclude that there was no chance of completion of the project. In this behalf, the defendants have referred to various inspection reports produced as Exh.6/4, Exh.6/5 and Exh.6/13. The report produced as Exh.6/4 is based on inspection conducted on 21-4-1994 by the very officer who has authored the above-referred letter, dated 29- 8-1995, Exh.5/13, and contains remark to the effect that implementation of the project was behind schedule due to late disbursement of loan and although pace of implementation was reportedly slow, completion of the project building was acknowledged to the extent of 74%. It is an admitted position on record that the plaintiff was required to construct Main Machinery Hall with a covered area of 2000 square metres as per Armexure "I" to the sanction letter Exh.5/2. The total covered area which had to be constructed was 2451 square metres. According to the inspection report, Exh.6/4, the plaintiff had constructed Main Machinery Hall with covered area of 3100 square meters besides Office, Generator Room, Gate Office and Boundary Wall. From the said document, it appears that the plaintiff had already raised construction in excess of what was agreed between the parties and a note to such effect is contained in the inspection report Exh.6/4, itself showing that the covered built-up area, planned originally, had been increased. The next inspection report produced as Exh.6/5 appears to have been based on physical inspection, dated 11-1-1995. The inspection was apparently conducted by the same officer namely Tahir Hussain Memon. The data with regard to construction, contained in Annexures to the inspection report, shows that little progress was made towards completion of structure. Nonetheless, however, a sum of Rs,6,357,800 was acknowledged to have been spent out of the estimated cost of Rs,7,994,200. The inspection report Exh.6/5, further contains the following recommendations recorded by the reporting officer and the financial analyst respectively:-- "On the day of inspection construction work of building was in progress. Building is about 80% complete. Machinery has not arrived at project site. About 1/3rd portion of main machinery hall has been covered by the prestressed RCC sheets. Details may be seen Annexure. Mr. Abdus Salam informed that machinery will arrive after completion of main machinery hall.
12. 16-1-1995 Engineer Date Banks over dues may be recovered before entertaining any request of the borrower. Since the L.C. for the machinery has expired and the machinery manufacturers are passing hard, he may be advised to get the L.Cs. extended for the additional period. Considerable delay in implementation has been observed. This should be avoided by continuous follow-up and pressure to run the project in due course. Date Financial Analyst ' According to the plaintiff, the subject project was not inspected after the above-referred inspection, conducteu on 11-1-1995. According to the defendants, however, the project site was further inspected by an engineer from the Head office on 30-7-1995 who gave varying figures with regard to completion of Main Machinery Hall and opined that to complete the project, the plaintiff needed to invest another sum of Rs,6,00,000 whereas it had already spent Rs,4,751,700. The final observations and recommendation made by the Engineer in the report, Exh.6/13, are as follows:-- "Observation On the day of inspection the unit was closed. About 40% roofing was complete and a lot of pre- stressed slabs for roof was lying at site. It appeared that the construction work has been stopped all of a sudden with some building materials still lying on the ground.
13. About 2-1/2 years have passed since the last disbursement and the borrowers have neither completed project building nor brought any machinery. During talk with the director it become known that he is skeptical about visibility of the project.
14. Recommendations We may request R.O. to ask the borrowers to complete the project within a decided dead line and bring machinery at site failing which they be advised to liquidate the entire dues."
15. According to the defendants, the letter, dated 29-8-1995, Exh.5113, was sent on the basis of the said inspection report Exh.6/13, and the following statement is made by witness Tahir Hussain Memon, Exh.6, in his examination-in-chief:-- ?"After inspection of project by the Engineer from the Head Office of the defendant, it was felt that the plaintiff was not seriously interested in setting up the project and, therefore, notice for repayment was sent to the plaintiff on 29-8-1995."
16. The letter, dated 29th August, 1995, as already observed, contains the finding that there was no chance of completion of the project. The observation and recommendations contained in the three inspection reports particularly the one dated 30th July, 1995, Exh.6/13, however, do not show that completion of the project was not possible. The defendant has not produced any other material to show that completion of the project had become or was rendered impossible. The sole reason contained in the notice, dated 29th August, 1995, Exh.5/13, thus, does not appear justified or reasonable on the basis of material produced before me for the purpose. The engineer deputed by the Head Office had himself A recommended that the plaintiff be asked to complete the project within a decided dead line and to bring machinery at site. In my view, therefore, no justification existed for recall of the facility extended to the plaintiff, muchless, at a premature stage. The concept of Islamic banking read with the Financing Agreement, herein, obliges the defendant to disburse the entire amount to become eligible for resale of goods at the marked-up price.
17. Otherwise, the financing agency does not acquire ownership of goods. A financing agreement postulates sale/purchase of goods and is distinct from a loan agreement. If the financing agency
(Bank) fails to make full payment of the entire sale price, the agreement collapses and recovery of only the actual amount advanced remains possible without any additional amount either by way of interest or by way of mark-up.
18. Reverting to the other ground which finds mention in the copy (if it can so be called) of Exh.5/13, produced as Exh.6/9, the letter of credit established by the defendant No,1 in favor of the machinery supplier(s) had expired and the plaintiff had failed to take delivery of the machinery despite request by the machinery supplier(s) due to non-completion of project building. Although such ground has not been pleaded by the defendants in their written statement and cannot, therefore, be considered. I have found that the defendants have produced three letters as Exh.6/6 to Exh.6/8 to substantiate the averment that the machinery suppliers had required the plaintiff to take delivery of the machinery which was ready. The three letters referred by defendants rather disclose that the defendants had been called upon by Messrs Manstock Engineering Company (Pvt.)
19. Limited to carry out pre-shipment inspection of the machinery in terms of the Letter of Credit before the expiry thereof. The 1st of the three letters is, dated 19th April, 1994 whereas the Letter of Credit as per the contents of letter Exh.6/8, was due to expire on 30th April, 1994. The three letters produced by the defendants, clearly support the plaintiff's case to the effect that despite arranging for transportation of the machinery to the project site, it could not be delivered for failure on the part of defendants to arrange pre-shipment inspection. Although the Letter of Credit itself has not been produced on record by any party to the proceedings, the defendants, own witness in his cross-examination has admitted as follows:-- "It is correct that the plaintiff had arranged for Transit Risk Insurance cover through Muslim Insurance Company on 9-12-1993 and 11-12-1993 for transportation of machinery, in question, to the site. It is correct that under clause 4(f) of the Letter of Credit, the machinery had to be inspected by Engineer of defendant-Bank at the workshop of the manufacturer before its transportation.
20. However, such inspection has to be undertaken at the request of the plaintiff. It is correct that the Engineer of defendant-Bank had to conduct pre-delivery inspection of machinery."
21. I have not found anything on the record to accept that the pre-shipment inspection had to be undertaken by defendants at the request of the plaintiff. The pre-shipment inspection was prescribed as a condition by the defendants themselves which they have failed to perform. The non-delivery of machinery can be attributed solely to the default committed by defendants. The defendants, therefore, cannot take advantage of inaction or wrong on their own part. In any event, such plea having not been raised in the written statement or even in the notice, dated 29th August, 1995 (Exh.5/13 and Exh.6/9), cannot be entertained at this stage.
22. The defendants' case about breach of agreement between the parties, as can be found from the written statement, is based on the assertion that the plaintiff had failed to take delivery of machinery with ulterior motives and had further failed to complete the project within the stipulated time. The time schedule for different stages towards completion of the project and repayment of the financial assistance is provided initially in the Evaluation Report Exh.5/4. The report was prepared in December, 1991 and the construction schedule was mentioned in Annexure "III" thereof as follows:-- Construction Schedule Acquisition of land (Already acquired)
23. Building construction started February, 1992 Machinery Order placed March, 1992 Building construction completeNovember, 1992 Arrival of Machinery at site completedJanuary, 1993 Installation of Machinery completedFebruary, 1993 Unforeseen delays May, 1993 Trial Runs June, 1993 Commercial production startedJuly, 1993 Obviously, such schedule had mutually been modified and the Financing Agreement was itself executed between the parties on 27-6-1993 meaning around the date when commercial production was initially supposed to (sic). Indeed, the 1st disbursement was made on 7-12-1993 and the 1st installment towards repayment became due on 31st March, 1996. The parties had never protested in relation to delays committed by either of them prior to institution of the present proceedings. The concern about slow pace of work or non-completion of project-building and delay in non-acceptance or under-valuation of collateral securities etc. all stood waived due to concurrence and I am not impressed by the grievance made by the two parties subsequently, on such basis. What appears from the conduct of the parties, which is manifest from the record, is that the time schedule was never considered sacrosanct or of essence. Consequently, the contract between the parties, upon application of principle contained in section 55 of the Contract Act did not become voidable merely due to non-fulfillment of time schedule by the two parties. The only right which can be pressed by the parties in such circumstances is compensation for the loss, if any, occasioned on account of failure to abide by the time schedule. I am mindful of the obligation specifically undertaken by the plaintiff under clause (e) of Article 4.01 of the Agreement and under Article 7.02 of the Agreement to comply with all the time limits prescribed for completion of the project. However, in the present case, I am of the considered view that such terms had lost their efficacy and cannot be enforced unilaterally. Moreover, as already observed, non-completion of project within the stipulated time is not the ground mentioned in letter, dated 29-8-1995, Exh.5/13, for recall of finance. In the present case, while I propose to deal with the question of compensation under issue No,2 hereafter, suffice to observe that the defendant No,1 had recovered Commitment Charges in relation to the entire limit of facility and mark-up rate chargeable on the amount of facility availed by the plaintiff had already been settled. The local manufacturers/suppliers of the machinery had been selected by the defendants and part payment was also made to them directly. The delivery of machinery, as already found, could not be effected due to failure on the part of defendants to arrange pre-delivery inspection thereof. In view of the admitted fact that the plaintiff had arranged Transit Risk Insurance cover for transportation of the machinery from the local manufacturers, the contention that it, had failed to take delivery despite repeated written communications, cannot be accepted. Indeed, the defendants have failed to show if the plaintiff had lost interest in completing the project and had failed to take delivery of machinery with ulterior motives or for mala fide reasons.
24. I am mindful of the fact that the issue presently being dealt with by me, is about breach of agreement, if any, committed by the defendant-Bank and its effect. The various contentions raised by the defendants have been considered in order to ascertain the truth or otherwise thereof and I have found such adjudication relevant to the controversy herein. The plaintiff's assertions contextually are based on dual aspects. The first assertion about delay caused at different stages has already been found by me as immaterial and of no consequence. As regards recall of the finance, availed by the plaintiff, I have found that it was premature and unwarranted. The finance agreement between the parties, Exh.5/3, includes, by reference, the sanction letter as its integral part by virtue of Article 8.10 contained therein. Furthermore, under Article 5.02 of the financing agreement, Exh.5/3, the defendant-Bank is entitled to suspend or terminate the agreement. In the event of suspension or termination of the agreement, the marked-up price and the charges are postulated to become due and payable forthwith. The financing agreement could be suspended or terminated by virtue of Article 5.02 upon occurrence or continuance of any event of default. The events of default have been described under Article 5.01 of the agreement, and, under clause (a) thereof, non-fulfillment of the conditions of disbursement by the customer (plaintiff) within the period(s) stipulated by the defendant-Bank is classified as an event of default. However, the learned counsel for the defendants, during his arguments has clearly taken the position, that the defendants have not terminated the agreement or taken action under clause 5.02 thereof but have merely recalled the financial assistance upon reaching the conclusion that the plaintiff had lost interest in completing the project. The agreement between the parties, however, does not permit recall of the finance for any reason whatsoever- except as provided under clause 5.02 of the agreement. The defendants, having not chosen to terminate or suspend the agreement, as above, could not recall the financial assistance granted to the plaintiff. The repayment was agreed to be made in 16 equal half yearly installments commencing on 31st March or 30th September falling after two years from the date of 1st disbursement. The demand for repayment through letter, dated 29th August, 1995, Exh.5/13, therefore, was contrary to and in breach of the terms of the financing agreement and amounted to breach thereof. The defendants could not demand what was not due, then.
25. As to the effect of the said breach committed by the defendants, I propose to deal therewith under issue No,2 hereafter. My finding, therefore, on issue No,1 is in the affirmative.
26. Issue No,2: In relation to this issue, the plaintiff has based its claim on the averments contained in para.8 of the plaint and the break-up therein, which is as follows:-- "(i) On account of commitment and documentation charges, cash amount paid by the plaintiffs to the defendant/Bank. Rs,1,92,243
(ii) On account of opening of L.C. charges.Rs,57,710
(iii) Technical appraisal fee. Rs,84,200
(iv) Inspection fee Rs,15,000
(v) On account of purchase of land and construction of building at the present rate of Rs,400 sq. ft. of 36000 sq. ft.Rs .1,44 ,00,000
(vi) On account of investment as pre-operating expenses.Rs,15,00,000
(vii) On account of losses of expected income for the period of 5 years, if the machinery would have been received in time.Rs,1,50,00,000
(viii) The plaintiffs were doing the iron business, cultivating their lands, doing business at Gambat Iron Store, Ranipur, having tractors and threshers which has been closed since then, therefore, estimated losses thereof for the 5 years. Rs,15,00,000
(ix) On account of persuasion of the matter at Sukkur, Karachi and other officesRs,1,00,000
(x) On account of mental torture and other damages sustained by the plaintiffs of which the details will be submitted in due courseRs,90,00,000
(xi) Since the building is lying vacant and is subject-matter of the alleged mortgaged, therefore, on account of rent of the same for the period of 5 years. Rs .85,00 , 000 Total Rs,5,00,00,000 The plaintiff has produced receipts showing payment of Commitment and Documentation Charges besides the Technical Appraisal Fee and L.C. Charges.
27. The learned counsel for the defendants, however, in quite unequivocal terms, has contended that the financing agreement has not been terminated. Thee citizens which has been policy of the Government. Collector, Mandi Baha-u-din impugned policy letter grading the transactions of Commitment Documentation and L.C. Charges had been paid in relation to the entire amount of financial assistance undertaken to be provided by the defendant No,
1. The recall of finance through letter, dated 29-8-1995, Exh.5/13, in the context of plea to the effect that the agreement itself has not been terminated cannot lead to the conclusion that the payment of the various charges amounts to loss suffered by the plaintiff. Although the demand for refund of amount by the defendants from the machinery suppliers tends to negate the stand taken by the learned counsel for defendants about non-termination of the agreement, I would prefer to accept the position now taken about non-termination of finance agreement in the larger interest of both the parties particularly on account of the affirmative answer given by the Chief Executive of the plaintiff in response to the question during his cross-examination to the effect that the plaintiff was still interested in setting up Textile Weaving Mill at the project site. Whatever be the reservation from either side, in my view, setting up-of an industrial unit always advances the cause of national economy which surely needs a boost towards setting up of an egalitarian society visualized by the Holy Qur'an and the founders of this country. The plaintiff has not been able to offer any evidence in relation to items Nos.IV to XI mentioned in para. 8 of the plaint.
28. What remains to be considered is if the plaintiff, in absence of tacit proof, is entitled to grant of general damages on account of premature recall of finance through letter, dated. 29-8-1995, Exh.5/13. The cardinal principle governing award of damages is to compensate the plaintiff for the loss suffered by it. The plaintiff can only claim restoration of the position as it would have enjoyed but for the breach. As a result of finding that the letter, dated 29-8-1995 had been issued in violation of the terms of financing agreement and was unwarranted, the agreement for finance has to be treated as valid and subsisting which position is taken by learned counsel for the defendants as well. In order to restore the plaintiff to the same position, I consider it appropriate to burden the defendants with token damages in the terms that the machinery undertaken to be supplied by Messrs Fine Engineering Company and Messrs Manstock Engineering Company Ltd. may be arranged to be delivered to the plaintiff by the defendants for the originally contracted price upon payment to be made by the defendants to the account of the plaintiff according to the agreement between the parties, the same being treated subsisting and valid; the difference in price, if any, would be borne by the defendants; the repayment schedule shall be reworked in a manner so that the position prior to the issuance of letter, dated 29-8-1995 shall be deemed to have existed on the date of the decree herein. The defendants shall also not be entitled to claim any Commitment Charges or mark-up on the amount of finance for the period from 29-8-1995 till the date of decree.
29. Issue No,3: In the result, the suit is decreed in the foregoing terms with costs of the proceedings.