KARACHI, Nov 16: The Sindh High Court has reserved judgment in a case of encashment of bank guarantee involving the Karachi Shipyard and the Shipyard K. Damen, Holland.

According to the facts of the case, the Karachi Shipyard and Engineering Works (KS&EW) had entered into purchase agreement worth 6,150,000 US dollars with the Ship Yard K. Damen for importing materials to build three tug boats for the Pakistan Navy.

Accordingly the Dutch shipyard and the ABN Bank Amro, Karachi, executed unconditional bank guarantee, requiring 15 days prior information for encashment at the sole discretion of the KS&EW.

Accordingly on Oct 1 the KS&EW intimated the bank which took essential steps for encashment of bank guarantees. But the Dutch shipyard moved an application in the SHC and obtained status quo on Oct 22.

The KS&EW had moved an application praying to set aside the status quo granted to the Dutch shipyard on Oct 26, as it did not affect the bank guarantee, executed by the ABN Amro (not a party to the suit).

Aziz A. Shaikh and Tayyaba Jabeen, counsel for the KS&EW, mainly contended that encashment of bank guarantee could not be stayed through interim order. The Dutch supplied substandard material which resulted in the construction of prototype vessels as against “proven” as required per the contract.

It was the contention of the KS&EW that the stop payment of unconditional bank guarantee was not protected under Order 39 Rule 1&2 of CPC.

It was also its contention that the bank guarantee was covered under section 2 (d) (iii) of the Financial Institutions Recovery Ordinance 2001, read with clause 2 (e) of the Banking Companies (Recovery of loans, advances, credits and finance) Act 1997, not triable by this court, which it claimed had no jurisdiction to entertain the present suit.

The premise was that since the KS&EW was owned by the ministry of defence, exparte status quo granted to the Dutch shipyard through the order dated Oct 26 was liable to be set aside. It did not relate to the bank which had executed the bank guarantees.

It was also contended by the KS&EW that the Dutch shipyard had recognized the KS&EW as the sole judge for the purpose of encashment of bank guarantees.

On Oct 1, the KS&EW had intimated the Dutch shipyard that its performance had been found unsatisfactory in many ways.

According to that letter, the design of the tug was found to be a “prototype” as against “proven,” required under the contract, capacity of the crane did not achieve the specified optimum lifting limit.

The material against the package was also found to be defective, short and wrong and belatedly supplied. According to this communication, some of the workshop drawings and diagrams gave rise to serious manufacturing problems and the main engine coolers, hydraulic aggregate cooling, diesel generators were defective and did not perform satisfactorily during harbour and sea trials.

After hearing the parties, Justice S. A. Rabbani reserved the order for announcement on Nov 20.