KARACHI, May 11: A division bench of the Sindh High Court has dismissed appeals against a single judge order pertaining to encashment of two performance bank guarantees of ABN Amro Bank.

The bench comprised the Chief Justice of the Sindh High Court, Justice Saiyed Saeed Ashhad, and Justice Zia Perwez.

The appeals, on behalf of the Dutch shipyard, K. Damen International, were directed against the orders of Jan 22 passed by the single judge in suit No 1435 and 1436 of 2001, refusing the prayer for interim orders to restrain the respondents from encashment of performance bank guarantees.

In HCA No 16/2002, the appellants had sought orders to restrain the respondent from encashment of two performance bank guarantees of ABN Amro Bank bearing No G/330/01/0088 and No G/330/01/0089 both dated March 20, 2001 for 200,000 US dollars each. Same action was taken by the appellants and the single judge also refused to allow their appeal.

The said guarantees were furnished in pursuance to the terms of contract No FP-1081/SDP-136 dated 30. 6. 1999 for supply of materials for making tugs by the Karachi Shipyard. On unsatisfactory performance, the respondents called for encashment of the said guarantees.

The appellants challenged the encashment by way of institution of an application under section 20 of the Arbitration Act of 1940 along with an application for interim orders to restrain the encashment of the said guarantees.

The single judge, while allowing the application under section 20 of the Arbitration Act of 1940, had declined to restrain the encashment of the said guarantees.

Justice Zia Perwez, who authored the judgment, observed that performance guarantees furnished under clause 2.7 of the aforesaid contracts were similar to each other and, among others, it had been specifically stipulated this guarantee was unconditional.

It was expressly understood that the sole judge for deciding whether the seller had performed the purchase contract and fulfilled the terms and conditions of the purchase contract, should be the buyer, he noted.

Arif Khan, counsel for the appellant, had argued that the contract had been substantially performed by the appellants and, on the basis of satisfactory execution of contract, the respondent even agreed to enter into further contracts for similar work.

He had further argued that any question pertaining to defective work, under the circumstances, was a question to be determined by the arbitrators in pursuance of the terms of the contract and encashment of the said guarantees under such circumstances was uncalled for and opposed to the spirit of the contract.

Aziz A. Shaikh, advocate for the respondents, had supported the impugned orders. He, in rebuttal, contended that the injunction application was not maintainable as no arbitration proceedings were pending.

In the absence of pending proceedings, the appellant was not entitled to seek injunctions as the powers under section 41 of the Arbitration Act could be invoked only with respect to proceedings pending before the Court or the arbitrator, he contended.

His second contention was that when the material equipment were put to use then only their working and performance could be determined. The performance of the equipment did not conform to the laid-down specifications and standards.

It was only after unsatisfactory performance of the equipment when subjected to physical application and use that the substandard quality was revealed. Under these circumstances, the work did not amount to due performance of contract and the respondents were entitled to enforce the encashment of bank guarantees as provided for under the terms of the contracts, counsel Shaikh had argued.

His third contention was that the intention of the parties under contract, as evident from the terms incorporated therein, was that the will of the parties should be enforced and the case did not call for any intervention by any third party by restraining the encashment of the said bank guarantees as the same would be violative of the terms of the contract and the stipulations of the bank guarantees.

Liaquat Merchant, advocate appearing for ABN Amro Bank, contended that in lieu of bank guarantees pay orders had been issued by M/s ABN Amro Bank. The pay orders had also been presented for encashment, but payment was not made in view of ad-interim orders passed in the present case. After placing these facts before the Court, he had prayed for further orders in this regard.

With regard to first contention of counsel for the respondent regarding maintainability of the application seeking interim orders, the provisions of section 41 of the Arbitration Act were attracted and orders pertaining to matters enumerated under the second schedule of the said Act were subject to the existence of conditions provided under the said section.

The question of maintainability of performance guarantee also came for consideration before the Supreme Court in the case of M/s National Construction Ltd Vs Aiwan-i-Iqbal Authority (PLD 1994 SC 311).

In the case of Asadullah Khan & Co Ltd (supra), cited by counsel for the respondent, the application for interim injunction was moved prior to the filing of an application under section 20 of the Arbitration Act. Taking this fact into consideration, the single judge of the SHC was of the view that in the absence of any proceedings before the arbitrators or the Court on the date of filing of the injunction application, the powers available to the Court under section 41 of the Arbitration Act, as specified under the second schedule, were not available.

The present case was distinguishable as the application under section 20 of the Arbitration Act was also filed by the appellants along with injunction application, Justice Perwez observed.

With the institution of the application under section 20 of the Arbitration Act, registered as suit in pursuance of Rule 278 (1) of the Sindh Chief Court Rules, (OS) the Court had powers to make the orders in respect of any of the matters set out in the second schedule.

In pursuance of the above rule the application under section 20 of the Arbitration Act was registered as suit Nos 1435 and 1436 of 2001 and the application for seeking interim orders was a subsequent application in the proceedings required to be entitled in the suit.

In view of the above, the bench was of the view that the applications to restrain the respondent from encashment of performance bank guarantees were maintainable and the objection had no force.

The next question of encashment of bank guarantees for performance of the contract during the pendency of the arbitration proceedings came for examination before the Supreme Court earlier in the case of National Construction Ltd (supra), wherein the case of Jamia Industries Ltd (supra) was also considered and a performance guarantee furnished under the terms of the contract was held to be an independent contract.

It was laid down that the courts must give effect to the covenants of the bank guarantees, the performance guarantees for the smooth performance of the contract.

Admittedly the bank guarantees furnished were unconditional, there were no prerequisite conditions or impediments for encashment in the said guarantees for which the respondent had been made the sole judge.

It was also not disputed that the respondent was a statutory organization of the Government of Pakistan and possessed sufficient assets to ensure payment of such amount under the decree determined as due and payable in pursuance of the arbitration proceedings, the award and decree.

In view of the above, this matters did not call for any interference with the orders passed by the single judge, the judgment said, adding that appeals had no merit and were accordingly dismissed along with listed applications.