IN THE SUPREME COURT OF PAKISTAN
(Appellate Jurisdiction)
PRESENT:
MR. JUSTICE UMAR ATA BANDIAL
MR. JUSTICE SYED MANSOOR ALI SHAH
MR. JUSTICE MUNIB AKHTAR
CIVIL
PETITION
NO.
607 OF 2021
(On appeal from the judgment dated 12.11.2020
passed by the Islamabad High Court, Islamabad
in R.F.A. No.196 of 2015.)
EFU General Insurance Limited … Petitioner
vs
Zhongxing Telecom Pakistan (Private)
Limited (ZTE) and others
… Respondents
For the Petitioner : Mr. Munawar-us-Salam, ASC
For Respondent No.1 : Mr. Mir Afzal Malik, ASC
Date of Hearing : 08.06.2021
ORDER
Munib Akhtar, J.: At the conclusion of the hearing, this matter
was disposed of in terms of the following short order:
“For reasons to be recorded later, this petition is converted
into appeal and allowed and the suit filed by respondent No.
1 is dismissed.”
Those reasons are given below.
2. The respondent No. 1 (herein after the “contesting
respondent”) is a company engaged in the telecoms business. On
or about 23.10.2007, it entered into a contract with the respondent
No. 2 for the latter to erect civil works and telecom installations, on
a turnkey basis, for a project owned by the former. The contract
contemplated an advance payment to be made by the contesting
respondent and required, as security, for the respondent No. 2 to
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provide an advance payment guarantee. That guarantee was
provided by the petitioner. The guarantee was issued on or about
08.11.2007 and its terms, as relevant for present purposes,
provided as follows (emphasis supplied):
“In consideration of your M/s. Zhongxing Telecom Pakistan
(Pvt.) Limited (hereinafter referred to as “The Contractor”)
agreeing to make Advance Payment of Rs.19,286,257/-
(Rupees Nineteen Million Two Hundred Eighty Six Thousand
Three Hundred Fifty Seven only) to M/s. Techcorp Holding
(Pvt.) Limited, a company incorporated in Pakistan with its
registered office at 12-A, St. No.29, F-7/1, Islamabad
(hereinafter referred to as the “Sub-Contractor”) against the
P.O. No.ZTE/CMPAK/GSM-Phase-1/PO/Tk SERVICES/
THL/001.
We, M/s EFU General Insurance Limited, 23-Shahrah-e-
Quaid-E-Azam, Lahore (an insurance company incorporated
under Companies Ordinance 1984) hereby undertake to pay
Rs.19,286,357/- (Rupees Nineteen Million Two Hundred
Eighty Six Thousand Three Hundred Fifty Seven Only) to you
immediately on receipt of your first written demand starting
that the Sub-Contractor has breached the above mentioned
contract with you.”
3. The guarantee was initially valid up to 22.12.2007 and was
thereafter extended from time to time, till 22.10.2008. On
06.10.2008, the contesting respondent wrote to the petitioner. The
letter bore the subject heading “EXTENSION OF GUARANTEE” and
provided as follows:
“It is brought to your notice that below mentioned guarantee
issued, by EFU General Insurance Ltd. on behalf of M/s
Tech Corp Holding (Pvt.) Ltd. against PO # ZTE CMPAK/GSM
Phase-1/PO/TK SERVICES/THL/001 is expiring as
mentioned below. You are advised to extend the validity of
this guarantee for further one quarter.
Guarantee No.
Amount
Issue Date
Expiry Date
71705228/11/2007 19,286,357/- 08-11-2007 22-10-2008
In case the party for which guarantee has been issued do not
agree for further extension of guarantee, this letter may be
treated as notice for encashment of guarantee.”
4. In the event, the guarantee was not extended. On or about
25.02.2010 the contesting respondent served what was termed to
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be the final notice regarding encashment of the guarantee. In this
the letter of 06.10.2008 was stated to have been a demand for
encashment. Thereafter, a last and final notice was issued on
20.04.2010. The claim remaining unattended, the contesting
respondent filed suit in the civil courts at Islamabad for recovery of
the amount payable under the guarantee. The suit was resisted by
the petitioner. After trial, the learned civil court was pleased, on
10.09.2015, to decree the suit as prayed. The petitioner appealed
to the learned High Court which, vide the impugned judgment
dated 12.11.2020, dismissed the same. Hence, this leave petition.
5. Before us, the principal ground urged by learned counsel for
the petitioner was that the guarantee was in the nature of a
demand guarantee and the law in relation to such instruments
was well established. It was submitted that it was of the essence
that a demand under any such guarantee comply with the terms of
the same, and if it did not the issuer (here the petitioner) had no
liability to the beneficiary (here the contesting respondent).
Drawing attention to the terms of the guarantee and the letter of
06.10.2008 (i.e., the stated demand), learned counsel submitted
that there complete non-compliance with what was required under
the former. Therefore the petitioner had rightly refused payment
and the learned courts below had erred materially in coming to the
contrary conclusion. It was prayed accordingly. Learned counsel
for the contesting respondent on the other hand submitted that the
courts below had reached the correct conclusion both on the law
and the facts, and prayed that the leave petition be dismissed.
6. After having heard learned counsel and considered the
record, we were of the view that the petitioner ought to succeed in
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terms of the short order already set out. It is clear that the
guarantee in question was in the nature of a demand guarantee.
The law relating to performance bonds and demand guarantees,
and the conceptual framework regarding the same, especially as to
the enforcement (or otherwise) of such instruments, in now well
settled in common law jurisdictions. In our country one of the
leading decisions is of this Court, reported as Shipyard K. Damen
International v Karachi Shipyard and Engineering Works Ltd. PLD
2003 SC 191, 2003 CLD 1 (“Karachi Shipyard”). It is a leave
refusing order of a learned three member Bench. Reference was
made therein to a large number of authorities, including English
and Indian cases, and many were considered in detail. The
principles deducible were set out in para 7 (pp. 201-3), with which
(subject to what is stated below) we are in agreement. For
convenience, the relevant portions are given below (emphasis
supplied; we may note that the case involved a reference to
arbitration):
“7. After having gone through the precedent[] law as
mentioned hereinabove the judicial consensus seems to be
as follows:‑‑
(i) The performance of guarantee stands on the footing similar
to an irrevocable letter of credit of Bank, which gives
performance guarantee must honour that guarantee according
to its terms. It is not concerned in the least with the relations
between 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
all demand if so stipulated without proof or conditions. Only
exception is when there is a clear fraud of which Bank has
notice.
(ii) There is an absolute obligation upon the banker to
comply with the terms and conditions as enumerated in the
guarantee and to pay the amount stipulated therein
irrespective of any disputes there may be between buyer and
seller as to whether goods are up to contract or not.
(iii) The bank guarantee should be enforced on its own terms
and realization against the bank guarantee would not affect
or prejudice the case of contractor, if ultimately the dispute
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is referred to arbitration for the reason, once the terms and
conditions of the guarantee were fulfilled, the bank's liability
under the guarantee was absolute and it was wholly
independent of the dispute proposed to be raised.
(iv) The contract of bank guarantee is an independent contract
between the bank and the party concerned and is to be
worked out independently of the dispute arising out of the
work agreement between the parties concerned to such work
agreement and, therefore, the extent of the dispute and
claims or counter‑claims were matters extraneous to the
consideration of the question of enforcement of the bank and
were to be investigated by the arbitrator.
…
(vi) The Bank guarantee is an autonomous contract and
imposes an absolute obligation on the bank to fulfil the
terms and the payment on the bank guarantee becomes due
on the happening of a contingency on the occurrence of
which the guarantee becomes enforceable.
…
(viii) In the absence of any special equities and the absence
of any clear fraud, the bank must pay on demand, if so
stipulated and whether the terms are such must be have to
found out from the performance guarantee as such.…”
7. It will be seen that demand guarantees are regarded as being
in nature similar to letters of credit, and the guarantee constitutes
an autonomous contract between the issuer and the beneficiary.
Now, one aspect of the law relating to letters of credit is the rule of
strict compliance. The documents presented by the beneficiary to
the issuing (or, if such be the case, confirming) bank must comply
strictly with the terms thereof. If so, the bank is (subject to
exceptions and conditions not presently relevant) bound to pay. If
not, the bank is bound to refuse payment. Now, the key document
(indeed, in most instances the only document) in respect of a
demand guarantee/performance bond is the demand itself. Does
the rule of strict compliance apply in relation thereto? A leading
treatise (The Modern Contract of Guarantee by O’Donovan and
Phillips, 3
rd
English ed. (2016)) gives the following answer (para 13-
021; internal citations omitted):
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“There has been some difference of opinion as to the
standard of compliance required for a beneficiary to satisfy
the conditions for a demand specified in the bond. It seems
that a standard of literal compliance will often be applied;
that is, whatever is done or provided by the beneficiary
should exactly match the requirements of the bond. But this
may be tempered to substantial compliance where the
circumstances or construction of the bond so indicate. The
generally stringent standard can be justified by the nature of
the bond, namely, that the obligor does not enquire into the
merits of any underlying dispute but merely pays in
response to a conforming demand. Although it is often
assumed that literal compliance favours the obligor, it may
favour the beneficiary.”
An interesting case, considered in the cited treatise, is Franz
Maas (UK) Ltd. v Habib Bank AG Zurich [2001] Lloyd’s Rep. Bank
14, [2001] CLC 89. The demand guarantee obligated the issuing
bank to make payment to the beneficiary on the latter’s first
demand “in writing stating therein that the Principals have failed
to pay you under their contractual obligation”. The demand
actually made by the beneficiary, dated 14.12.1998, stated that the
principals had “failed to meet their contractual obligations to us”.
The question whether this complied with the requirements of the
guarantee was answered in the negative. The Court held that the
rule of strict compliance did not apply in the case, but concluded
that on a true construction of the guarantee the difference in
wording, though ostensibly very minor, made it non-compliant. It
was held as follows:
“62. The statement in the demand of 14 December 1998 does
not in terms allege a ‘failure to pay’ but a ‘failure to meet
contractual obligations’. Without there being any question of
resorting to the doctrine of strict compliance, it seems to me
that a failure to ‘meet a contractual obligation’ is far from
being the same as ‘failure to pay under a contractual
obligation’. In effect, the former concept is wide enough to
cover any claim for damages for unliquidated or
unascertained sums arising from any breach of the WTA
[i.e., the principal agreement], which would seem to me to
widen the scope of the guarantee far beyond that which the
parties intended. In my view the natural scope of the
guarantee is limited to the failure to pay the liquidated and
ascertained sums falling due under the WTA from time to
time.”
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This decision amply demonstrates the importance of how
closely the demand actually made must track the requirements of
the bond/guarantee in order to be compliant with the same.
8. In our view, the correct approach to be adopted in this
jurisdiction is for the Court to initially proceed on the basis that
strict compliance is required. If this test is not met it is then for the
party claiming otherwise to show that the test of substantial
compliance should be applied in the facts and circumstances of the
case, while keeping in mind the actual text of the bond/guarantee.
However, it should be kept in mind that the threshold required for
the party to succeed on such a submission is a high one and is not
to be lightly or easily accepted by the Court. There must be clear
justification (which must be recorded in appropriate reasoning) for
the Court to so hold, i.e., to uphold the claim notwithstanding that
the rule of strict compliance has not been met.
9. When the facts of the present case are considered in light of
the above, it is clear that the demand purportedly made by the
contesting respondent fell far short of what was required. It is
obviously not in strict compliance with the terms of the guarantee
since that required a categorical statement in the demand that the
respondent No. 2 had breached the contract. Such statement was
entirely missing. Nothing was shown as would justify the
application of the rule of substantial compliance, but even there
the case of contesting respondent would have failed. This is for the
reason that the purported demand did not remotely come near, let
alone cross, the threshold required for such compliance. The letter
was in substance nothing but a request for further extension in the
validity period. The guarantee, as noted, had been extended many
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times before and it seems that all that the contesting respondent
was really looking for was another such period. The statement at
the end (“this letter may be treated as notice for encashment of
guarantee”) was essentially an afterthought, designed to cover the
contesting respondent’s position if the extension was not granted.
The purported demand was not in accordance with what the law
required. Therefore, the petitioner had no obligation to pay and
could not be held liable to the contesting respondent. The learned
High Court, with respect, erred materially in coming to the
contrary conclusion.
10. Before concluding, something must be said of the decision in
Karachi Shipyard. It is now almost two decades old. In certain
respects, the law relating to performance bonds and performance
guarantees has moved on. It may therefore be that some of the
observations made and points touched upon in the cited decision
require a revisit or at least to be updated. For example, para 7
recognizes fraud as a well established ground for refusing to make
(or the Court restraining) payment on a bond/guarantee. Clause
(viii) makes passing reference to “special equities” as an additional
ground that may also be so available. In one common law
jurisdiction, Singapore, unconscionability is now a well established
ground for the Court intervening to restrain payment (see
O’Donovan and Phillips, op. cit., para 13-049 and the cases
gathered at f.n. 153). It may be that this is a ground which comes
within the rubric of “special equities”. However, whether it does or
not and if so should be made subject to any conditions or
modifications such as are appropriate for our jurisdiction, remains
yet to be seen. This and other developments in the law are to be
determined in future cases. While Karachi Shipyard is clearly an
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important milestone in this area of the law, the High Courts should
not consider themselves as limited only to what may be regarded
as falling strictly within the four corners of the decision. In
commercial and corporate matters in particular the development of
the law must continue apace and it should be recognized that the
real engines of change are the High Courts. While of course always
keeping Article 189 of the Constitution in mind and adhering to
the requirements thereof, the decisions of this Court should, in
these areas of the law, be regarded as being akin (to borrow a
famous phrase from elsewhere in the law) to “living tree[s]”,
“capable of growth and expansion within [their] natural limits”.
11. For the foregoing reasons, this leave petition was converted
into an appeal and allowed.
Judge
Judge
Judge
Islamabad, the
8
th
June, 2021
Naveed Ahmad/*
Approved for reporting