This is a suit for recovery of Rs.43,67,991 arising out of four Performance Bonds and one Mobilisation Advance Guarantee executed by the defendant on behalf of Oasis Builder, Karachi.
The brief facts of the plaintiff's case are that on 2nd April, 1984, the Ministry of Labour and Manpower, Government of Pakistan awarded a contract for building construction, renovation, repairs work for National Training Project. Karachi to a contractor, namely; Oasis Builders Limited Karachi (hereinafter referred to as OBL). The construction/renovation works were to be carried out at Karachi. One of the terms of the Contract was that OBL was required to furnish either unconditional Bank guarantees or Bond furtherance of such contract. Accordingly, OBL arranged for the following Bonds, which were executed by the defendants:--
(i) Performance Bond No.:HO-ENG-BOND-LNK-24/3/84 dated 25-3-1984 for Rs.13,28,986.
(ii) Performance Bond No. HO-ENG-BOND-LNK-25/3/84 for Rs.4,31,828.
(ii) Performance Bond No.HO-ENG-BOND-LNK-26/3/84 dated 25-3-1984 for Rs.162,487.50.
(vi) Performance Bond No:HO-ENG-BOND-LNK-27/3/84 for Rs.166,484.20.
(v) Mobilisation Advance Bond No.HO-ENG-BOND-SFL-868/3/84 dated 19-3-1984 for Rs.2,078,205.
2. Subsequently, OBL committed default and, therefore, the plaintiff through various communications, called upon the defendant to pay the amounts mentioned in the Bonds. The said defendants failed to make the said payment or any part thereof, the instant suit has been filed for recovery of the above amount. It will be pertinent to note that earlier OBL invoked arbitration proceedings under section 20 of the Arbitration Act and as a result of the same arbitration proceedings were initiated where after the same were abandoned by OBL. The plaintiff has prayed for recovery of the aforesaid amount alongwith interest at the rate of 14 per cent per annum from 12-12-1984 as well as for the costs of the suit.
3. The defendant has raised Preliminary Objections to the maintainability of this suit in view of the arbitration proceedings. According to the defendant, the proper forum to decide the present controversy was that of arbitrator and unless the dispute is resolved between the owner and the Contractor, the plaintiff is not entitled for the amount claimed in the suit. On merits as well, the defendant has denied the claim of the plaintiff. As a result of the above pleadings, the following issues were settled by the Court on 12-11-1989:--
(1) Is the defendant liable to make payment in respect of the performance and Mobilisation Bonds which are subject-matter of this suit. If so, when?
(2) Whether Suit No.739 of 1984 has been disposed of or not. In either case, what is its effect, if any, on this suit?
(3) What is the effect, if any, on this suit or pendency of arbitration proceedings between the contractor concerned and the plaintiff?
(4) Whether the plaintiffs are entitled to recover the amount from the defendants pending the arbitrators award?
(5) What is the effect of orders passed by the Hon'ble Court in C.M.A. No.5710 of 1984 and C.M.A.
No.277 of 1985 dated 28-11-1984 and 8-4-1985 in Suit No.739 of 1984?
(6) Whether disposal of application under section 20 of the Arbitration Act merge all interlocutory orders?
(7) What should the decree be?
I have heard Mr. Samiuddin Sami for the plaintiff and Mr. Jamil Khan, Advocate for the defendant.
The plaintiff has produced one Amir A.I Shah as Exh.1, who had produced original of all the five Bonds and other communications exchanged between the parties. The plaintiff also produced another witnesses P.W.2, namely, Abdul Hai, who has produced the record of the arbitration proceedings. On behalf of the defendant, D.W.1, Abdul Ghafoor Nawaz as examined as Exh.20. My findings are as follows:-- Issues Nos.2, 3 and 4
4. To begin with, I would like to discuss together Issues Nos.2, 3 and 4 first which have lost importance due to lapse of time. In paragraph 7 of the plaint it is stated that this Court in Suit No.739 of 1984, which was filed under section 20 of the Arbitration Act, 1940, vide its Order dated 1st October, 1986, referred the matter to the two Arbitrators to be appointed each by the plaintiff and the OBL. In cross-examination, it was admitted by P.W.1 that the plaintiff appointed Mr. S.A. Nizami as its Arbitrator while Mr. A.Q. Helopota was appointed as Arbitrator by OBL. Thereafter, it is not clear as to what happened to the arbitration proceedings. All that was contended by the plaintiff is that the said proceedings were abandoned by OBL and on Award was passed by the Arbitrators. All these facts have not been denied by the defendant---s witness
5. According to the provisions of the Arbitration Act, 1940, the Arbitrators were required to conclude the proceedings and to give Award within 120 days after entering upon the reference. In case of any delay, they were required to obtain extension of time from this Court. No such order has been placed by either of the parties before this Court. From October, 1986 to September, 1999, is a period spread over thirteen years, which leads me to hold that arbitration proceedings were abandoned and stood frustrated/terminated without giving award.
6. In the aforesaid circumstances, and since there is no award in the field, the plaintiff was entitled to file and maintain the instant suit.
Issues Nos.5 and 6.
7. Insofar Order dated 28-11-1984 in Suit No.739 of 1984 (Exh. 22) is concerned, it was an ad interim injunction. However, on 8th April, 1985, by consent of the patties, C.M.A. 5710 of 1984 was disposed of whereby the plaintiff was restrained from raising demand for encashment of the Performance Bond and Mobilisation Bond pending disposal of that suit. Subsequently, on 1st October, 1986 the said suit was disposed of and the matter was referred to two Arbitrators as mentioned above, with the direction to give Award within four months from the date of entering upon reference. Nothing was said about the ad interim injunction passed by this Court in that suit on 28-11-1984 and 8th April, 1985, thus, the legal position which emerges is that there was no prohibitory injunction in the field, restraining the plaintiff to raise demand for encashment of the Bonds. Both the issues are answered accordingly.
Issues No. 1.
8. Both the learned Advocates have argued this matter at length. It is the case of the plaintiff that they are entitled in law for the amount as mentioned in the five Bonds. Mr. Sami has placed reliance on the following cases:--
(i) Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. And others (1978) 1 Al1.E.R. 976).
(ii) Texmaco Ltd, v. State Bank of India and others (AIR 1979 Cal. 44).
(iii) Jamia Industries Ltd. v. Pak Refinery (PLD 1976 Kar. 644).
(iv) National Construction Company v. Aiwan-e-Iqbal (PLD 1994 SC 311).
(v) Messrs Trapore & Co. v. M.S. V/O Tractor Export Mascow (AIR 1970 SC 891).
9. It was contended by Mr. Jamil Khan, Advocate for the defendant that unless the question of default and thereafter the question of damages are decided in the arbitration proceedings, the plaintiff is not entitled to encash the bonds as a matter of right. He has attempted to distinguish difference between Performance Bond and Mobilisation Bond. He has placed reliance on the following cases:--
(i) McDonald Construction v. Pakistan Services Ltd. (1983 SCMR 2252), (11) Pakistan Engineering Consultants v. PIA (1989 SCMR 370), (iii) Zeenat Brothers (Pvt.) Ltd. v. Aiwan-e-Iqbal Authority and others PLD 1996 Karachi 183 and (iv) Platinium Insurance Company' Ltd. v. Daewoo Corporation Sheikhupura (PLD 1999 SC 1).
10. In order to appreciate arguments of the parties, it would be relevant if the conditions of the Performance Bonds, namely Exh.2, Exh.3, Exh.4 and Exh.5 are reproduced. For brevity sake, the terms and conditions of only Exh. 2 are reproduced hereinafter, as it is common and same in all other documents/bonds:-- "----------Now the condition of the above written Bond is such that:
(a) if the owner shall certify in writing ,that the Contractor has duly performed and observed all the terms, provisions, conditions and stipulations of the Contract on the Contrator's part to be performer and observed according to the true purpose, intent and meaning thereof, or
(b) if upon the written certificate of the owner that the Contractor has committed a default under the Contract with or without any further statement of the particulars of such default, the Surety shall pay to the owner without reference to the Contractor such sum not exceeding the amount of this Bonds as the owner shall demand in writing, then in either such event, this obligation shall be null and void but otherwise shall be and remain in full force and effect but no alteration, in the terms of the Contract made by agreement between the owner and the Contractor or in the extent or nature of the Works to be constructed, completed and maintained therein and no allowance of time by the owner or the Consultants Engineer under the contract nor any forbearance of forgiveness in or in respect in any matter or thing concerning the Contract on the part of the owner or that said Consultants/Engineer shall in any way release the Surety from any liability under the above written Bond... "
11. Mobilisation advance bond was produced in the evidence as Exh.6 which was not been called in question. Its main contents read as follows:-- " ....Now the condition of the above written Bond is such that:-- (a)if the owner shall certify in writing that the entire Mobilisation Advance has been recovered from the Contractor, or (b)if upon the written certificate of the owner stating that Mobilization Advance or any part thereof is due to the owner under the contract and has not been paid back to the Owner; the Surety shall pay to the Owner without reference to the Contractor such sum not exceeding the amount of above written Bond as the owner shall demand in writing, then and in either such even this obligation shall be null and void but otherwise shall be and remain in full force and effect but no alteration in the terms of the Contract or the conditions on which the Molilisation Advance is paid, made by the agreement between the Owner and the Contractor or in the extent or nature of the works and no allowance of time by the Owner or the Consultants/Engineer under the Contract nor any forbearance or forgiveness in or in respect of any matter or thing concerning the Contract or the Mobilisation Advance on .The part of the owner or the said Consultants/Engineer shall in any way release the Surety from any liability under the above written Bond ...."
12. P.W.1 Amir A.I Shah in his evidence categorically stated that the O.B.L. After receiving amounts of Mobilisation advance of Rs.2,078,205 did not start the work and abandoned the project. It was also stated by him that the plaintiff tried his best to locate the whereabouts of O.B.L. But could not accused. As a result, the entire work of construction was assigned to some other contractors after a lapse of more than a year which resulted in escalation of price of the construction material. P.W.
Amir A.I Shah has further stated that "the claim in our suit is in respect of loss suffered by the plaintiff ---------.In case the Oasis Builders has carried out this performance the plaintiff would have saved about Rs.80 to 90 lacs." This plaintiff's witness was extensively cross-examined.
However, he was not able to produce the completion certificate of the project, although he claimed that the project was completed by another contractor. The defendant's witness Abdul Ghafoor Nawaz has deposed that the plaintiff was not entitled for the amount prayed as the arbitration proceeding did not terminate into an award. This question I have already dealt within the earlier part of this judgment. No other plea was raised in his entire deposition disentitling the plaintiff from claiming the reliefs as prayed.
12-A. Insofar as Moblisation Advance (Exh.6) is concerned, it was an amount plaid to the O.B.L. To start the construction work. It is not the case of the defendant that no such amount was paid to the O.B.L. Such advances are made particularly in respect of building construction in order to enable the contractor to commence execution of the work. According to the terms of Moblization advance, the defendant company/surety was required to pay the owner/plaintiff, the amount not exceeding Rs.2,070,205 only upon demand made by them in writing. It was further stipulated in the Performance Bond that the same shall remain in fall force and effect and in no way it will release the surety from any liability under the above written Bond, therefore, no defence is available to the defendant not to pay the amount of Mobilization bond to the plaintiff after the required certificate was placed before them.
13. The four Performance Bonds (Exh.2 to Exh.6) were in respect of the performance of the contractor in concluding the project. In this case the plaintiff was required to file a written certificate of the surety /defendant that the contractor has committed a default under the contract with or without any further statement; thereafter, surety was to pay the owner, the amount not exceeding as mentioned in the four bonds. In the case of Messrs Platinium Company Limited (supra), it was held, inter alia that "a Performance Bond is executed on behalf of a contractor is order to ensure that the contractor work is completed. And in case of failure the surety to execute the performance bond is to indemnity the employer". Both the Performance Bond and Mobilisation Advance Bonds were compared by the Hon'ble Supreme Court in the case of Platinum Insurance, whereafter it was held that the Performance Bond was conditional. In the instant case, perusal of the four Performance Bonds indicate that it was dependent on the performance of Messrs O.B.L. 1n the case of Zeenat Brother (supra) the nature of Mobilisation Bonds and Performance Bonds were considered, whereafter it was held as follows: .
"...Resume of the above case law will indicate that in our country, there exits 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 m 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 guaranteewas 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 Petal & Co. And another PLD 1969 SC 80 held that even if a breach was committed by the plaintiffs, the defendants could not, ipso facto, appropriate the whole amount .... "
(Emphasis added)
14. The cases cited from both the sides mostly pertain to the decisions interlocutory applications.
The case Kargil International (1996) 4 All E.R. 563) and its appellate decision reported in (1998) 2 All E.R. 406) arise from the question of payment resulting from the execution of Performance Bond. The case of Edward Owen (1978) 1 All E.R. 976 alongwith other English cases were also considered. In the case of Kargil (supra) the issues involved were whether the defendant is entitled to make a call for full amount of the Performance Bond in the case of breach of contract, whether he suffered loss or not. Lord Marison, J. Of Queens' Bench answered the same in the following manner:-- " ....In my view, the answer to the question which have been asked to determine are as follows (1) whether the defendant was entitled to make a call for the full amount of the Performance Bond, if the breach of breaches of contract (a) caused no loss to the defendants (b) Some loss to the defendants which was less than the amount of the Performance Bond, (c) caused some loss to the defendant which was equal to or greater than the amount of the Performance Bond. Yes, in all cases (2) Whether, in the event of the defendant having obtained payment under the Performance Bond as a result of any such call as it was entitled to make the defendant was entitled to retain (a) all of the moneys received by it (b) only such amount as was equal to the amount of the loss suffered by it; or (c) some other, and if so what, amount. The answer is (b).
15. Entitlement to claim a certain amount as damages or loss suffered consequent to a breach of contract either agreed for a particular sum through a contract or for the loss suffered as a breech of contract was considered by the Supreme Court in several cases. Recently this Court has also considered forfeitures of advance payment as agreed in a contract for the loss suffered; in the case of Transocan Asia Ltd. v. Rice Export Corporation of Pakistan (1999 MLD 1600 at 1603) in the following manner:-- ---.....It was also argued that mere mentioning of any penalty in an agreement will not authorise a party for forfeiture of earnest money. Reliance was placed on section 74 of the Contract Act and on the case of Province of West Pakistan v. Messrs Mistry Patel & Co. And another (PLD 1969 SC 80). Mr. Javed Farooqi, as against this has cited cases of Syed Sibte Raza and another v. Habib Bank (PLD 1971 SC 743) and Messrs Aslam Saeed & Co. v. Messrs Trading Corporation of Pakistan Ltd. (PLD 1985 SC 69). In the case of Mistri Patel & Co. (supra), a suit was filed before this Court claiming for the recovery of Rs.72,405.30 being the earnest money which was dismissed mainly on the ground that plaintiff was not entitled to sue for the recovery of some promised amount of earnest money. The letters patent appeal filed against the order of a learned Single Judge was dismissed with costs. Id that case, no cash amount was deposited as earnest money but an unconditional Bank Guarantee was furnished with the Government of Sindh with the stipulation that on the failure of the firm to fulfil its obligation, the agreed earnest amount will be paid by the bank. It was held by the Hon'ble Supreme Court, while interpreting section 74 of the Contract Act that it deals only with the right to receive a reasonable compensation from the party who has broken a contract and not the right to forfeit what has already been received by the aggrieved party..... "
The claim for the amount as agreed in the Performance Bonds is dependent on the terms and conditions of the contract between the employer and the contractor.
16. The plaintiff has claimed that as a result of the acts of the O.B.L. In deserting the construction project and as a result of rewarding of the contract to the other contractor, the plaintiffs have suffered loss about 80 to 90 lacs rupees; however, during cross-examination, their witness was not able to disclose as to whom the contract of the project in question was awarded to after the O.B.L.
Abandoned the same. No copy of contract entered between the plaintiff and subsequent contractor was placed on record. It was not C shown as top how much amount was agreed between the plaintiff and the subsequent contractor. At the same time no substantial documents were placed on record to show that the project in question was successfully completed by the subsequent contractor which resulted in payment of excess amount over and above the agreed contract money with O.B.L. Therefore, in my considered view the plaintiffs are not entitled for the whole amount as accepted by this defendant in the total of all the four Performance Bonds which comes to Rs.20,89,786,40. In the aforesaid circumstances, the plaintiff is not entitled for the whole amount of the aforesaid four Performance Bonds.
Issue No.7.
17. As a result of above discussion, this suit is decreed to the following extent with costs:--
(i) For the amount of mobilisation advance i.e. Rs.20,78,205.
(ii) Against the performance bond a sum of Rs.5 lacs.
The plaintiff shall also be entitled for interest at the rate of Rs.14 % per annum from the date of suit till realization.