KARACHI, Jan 23: The Sindh High Court allowed on Tuesday encashment of bank guarantee of Dutch Shipyard Damen worth 615,000 US dollars in a suit involving the Karachi Shipyard and Engineering Works.
The order was announced in open court by Justice S.A. Rabbani who vacated the earlier interim order and encahsment of the bank guarantee was allowed. However, the application of the plaintiff (Dutch Shipyard Damen), under section 20 of the Arbitration Act, was allowed to the extent of filing the agreement.
The main contention of Aziz A. Shaikh, the counsel for the KS&EW, was that the bank guarantee recognized the defendant as the sole judge of encahsment. The arbitration clause of purchase contract was restricted in disputes regarding supply of material for construction of tugs by the KS&EW. It had no nexus or relevance to encahsment of bank guarantee.
The counsel for the defendant prayed for recall of the interim relief granted to Dutch Shipyard Damen by this court and the application and counter- affidavit to injunction application of the KS&EW be allowed.
According to facts of the case, the parties had entered into a contract for purchase and supply of material mentioned in the contract that was needed by the defendant for making of tugs.
The contract contained an arbitration clause and provisions of bank guarantee. Dispute arose in respect of the supplies and, therefore, this application, under section 20 of the Arbitration Act of 1940, was filed with a prayer for filing of the agreement.
It was also prayed that the defendant be restrained from encashing the bank guarantee till the matter was decided in arbitration.
On notice under section 20 (3) of the Arbitration Act, the defendant filed objections in the form of counter-affidavit to the injunction application. Since an ad-interim order was passed restraining the defendant from encashing the bank guarantee, CMA No 8472/2001 had been filed by the defendant for vacation of that order.
Arif Khan, counsel for the plaintiff, had submitted that bank guarantee was furnished in compliance with clause 2.7 of the agreement and the plaintiff made supplies in accordance with the agreement. The material was used in preparation of tugs by the defendant and the tugs were under operation by Pakistan Navy. He submitted that the defendant was satisfied by the supplies and, therefore, they issued a letter to the plaintiff on May 29, 2001, for a proposal with regard to another tug.
He referred to the provisions in the agreement with regard to the reference of the matter to arbitration. With regard to encashment of the bank guarantee, he submitted that it should be postponed till the dispute was decided by arbitration.
Aziz A. Shaikh, the counsel for the defendant, submitted that the performance of the plaintiff was not satisfactory. He submitted that the Pakistan Navy had refused to accept the tugs for the deficiencies caused by the material supplied by the plaintiff.
With regard to encashment of the bank guarantee Mr Shaikh submitted that the defendant had been recognized as sole judge for deciding whether the seller had performed the purchase contract and fulfilled the terms and conditions of the contract.
Two questions were raised in this case: one related to a reference to arbitration and the other to encashment of bank guarantee.
With regard to the first question, it was for the defendant to show cause why the agreement should not be filed. It was not disputed that there was an agreement between the parties which contained a clause for reference to arbitration in case of a dispute. It was the case of the defendant in the counter-affidavit filed on their behalf that the plaintiff had not supplied the material of exact description specified in the contract. The defendant put the plaintiff on notice pointing out the defects in performance of the contract, where there was a clause in the contract for reference to arbitration in case of dispute and where there was a dispute between the parties, a reference to arbitration was natural and legal course.
As far the question of encashment of bank guarantee was concerned, the guarantee itself mentioned that it was unconditional and the buyer, ie, the defendant in this case, was the sole judge for deciding whether the seller, the present plaintiff, had performed the purchase contract and fulfilled the terms and conditions.
In view of this provision in the guarantee there was no legal justification for restraining the defendant from encashing the bank guarantee, Justice S. A. Rabbani held.
The only reason that the dispute was to be decided and the claim and liability were to be determined in arbitration was not sufficient to interfere with the agreed term about the defendant being the sole judge of the performance.
In case a decree was passed in favour of the plaintiff and against the defendant ultimately, the plaintiff should be compensated by execution of the decree and the defendant, being an organization under the Government of Pakistan, there was no likelihood that the decree would be executable for want of adequate assets of the defendant.
He, therefore, held that the prayer for restraining the defendant from encashing the bank guarantee could not be allowed. The CMA filed by the plaintiff was, therefore, dismissed and consequently the CMA filed by the defendant was allowed. Since no sufficient cause had been shown by the defendant why the agreement should not be filed, the main application, under section 20 of the Arbitration Act, was allowed to the extent of filing of the agreement.
