2016 C L D 1833

 
[Islamabad]
 
Before Miangul Hassan Aurangzeb, J
 
ATLAS CABLES (PVT.) LIMITED----Appellant
 
Versus
 
ISLAMABAD ELECTRIC SUPPLY COMPANY LIMITED and another----Respondents
 
R.S.A. No.2 of 2016, decided on 16th May, 2016.
 
(a) Contract---
 
----Force majeure, doctrine of--- Applicability---Force majeure refers to legal or physical
prevention and not economic activity which is not profitable---Change in economic or market
circumstances, affecting profitability of a contract or the case in which parties' obligation can be
performed is not regarded as being a force majeure event.
 
            Advanced Law Lexicon by P. Ramanatha Aiyar, 3rd Edition; Halsbury's Laws of
England, 4th Edition, Volume 51; Dhanrajamal Gobindram v. Shamji Kalidas AIR 1961 SC
1285; M/s. Alopi Parshad v. Union of India AIR 1980 SC 588; Brauer & Co. (Great Britain),
Ltd. v. James Clark (Brush Materials), Ltd. [1952] 2 All ER 497 and Thames Valley Power Ltd.
v. Total Gas and Power Ltd. [2006] 1 Lloyd's Rep. 441 rel.
 
(b) Contract Act (IX of 1872)---
 
----S. 126---Contract of guarantee or surety---Scope---Guarantee, genesis of---Guarantee
envisages two contracts, one between principal debtor and creditor and second between creditor
and surety---Guarantee has its genesis in underlying contract between principal debtor and the
creditor---Irrevocable and unconditional bank guarantees are normally couched in a language
whereby bank undertakes to give money to the beneficiary on demand without demur or
protest---If a bank guarantee is unconditional stipulating that the bank should pay, on demand,
without demur and that the beneficiary is the sole judge not only on the question of breach of
contract but with respect to the amount or loss or damage, the obligation of the bank has to be
discharged in the manner provided in the bank guarantee---When such demand is made, the bank
is not permitted to probe into the disputes between the parties---Court should not interfere
directly or indirectly to withhold payment, otherwise trust in commerce internal and international
may be irreparably damaged.
 
            Haral Textiles Milited v. Banque lndosuez Belgium, S.A. 1999 SCMR 591; Shipyard K.
Damen International v. Karachi Shipyard and Engineering Works Ltd. PLD 2003 SC 191 and
Standard Construction Company (Pvt.) Limited v. Pakistan, through Secretary M/o
Communications and others 2010 SCMR 524 rel.
 
(c) Contract---
 
----Construction of contract---Principle---First rule of construction of a contract or a document is
to ascertain intention of parties to it.
 
(d) Contract Act (IX of 1872)---
 
----S. 74---Liquidated damages and penalty---Distinction---Liquidated damages are recognized
as a genuine pre-estimate of losses suffered due to another party's breach of contract, whereas
penalty is a sum of money so stipulated in terrorem so as to drive a party to fulfil a contract.
 
            Muhammad Karimuddin v. Kanza Food Industries Ltd. 1989 MLD 3900 rel.
 
(e) Specific Relief Act (I of 1877)---
 
----Ss. 42 & 54---Contract Act (IX of 1872), Ss. 73, 74 & 126---Suit for declaration and
injunction---Performance bonds, encashment of---Liquidated damages and penalty---Recovery---
Plaintiff company entered into a contract of supply and the Bank issued performance bonds in
support of plaintiff---Due to change in market situation, plaintiff failed to supply goods as per
contract, therefore, defendant sought encashment of performance bonds and also sought recovery
of damages as well as liquidated damages---Suit and appeal filed by plaintiff company were
concurrently dismissed by Trial Court and Lower Appellate Court---Validity---Damages had to
be first pleaded and thereafter proved by leading trustworthy and cogent evidence---Damages
required evidence regarding details of losses actually suffered and liquidated damages, as a rule,
required positive evidence to show actual loss suffered by party claiming the damages---Even
fixed amount stipulated in contract as liquidated damages could not be recovered if quantum of
actual loss suffered was not proved through sufficient evidence---Defendant did not plead or
prove any loss caused by breach of contract by plaintiff, therefore, it could not encash
performance bond which was furnished to compensate defendant for the losses it was to suffer
on account of such breach--- Defendant was not entitled to invoke provisions of performance
bond or encash the same unless it was established through adjudicatory process that plaintiff
committed default of the provisions of purchase orders and as a result of the default defendant
suffered damages---Once such default on the part of plaintiff and loss suffered by defendant as a
result of such default was proved, performance bonds could have been encashed to the extent of
such loss---High Court set aside judgments and decrees passed by two courts below and suit was
partially decreed in favour of plaintiff---Second appeal was allowed accordingly.
 
            Jamia Industries Ltd. v. Pakistan Refinery Ltd. PLD 1976 Kar. 644; Pakistan Engineering
Consultants v. PIA Corporation 1993 CLC 1926; Pakistan Engineering Consultants v. P.I.A.
Corporation 1989 SCMR 379; Zeenat Brother (Pvt.) Ltd. v. Aiwan-e-Iqbal Authority PLD 1987
Kar. 183; China International Water and Electric Corporation v. WAPDA 2001 YLR 2191;
Mehboob Enterprises v. Karachi Development Authority 1997 MLD 3085; Mercury Corporation
v. Pakistan Steel Mills Corporation (Private). Ltd. 2000 YLR 734; Messrs A.Z. Company,
Karachi v. Government of Pakistan and another PLD 1973 SC 311; Sandoz Limited v.
Federation of Pakistan 1995 SCMR 1431; Muhammad Farooq Azam v. Bank Al-Falah Limited
2015 CLD 1439; Bhai Panna Singh and others v. Bhai Arjun Singh and others AIR 1929 Privy
Council 179; Saudi-Pakistan Industrial and Agricultural Investment Company (Pvt.) Ltd.,
Islamabad v. Messrs Allied Bank of Pakistan PLD 2003 SC 215; Messrs Khanzada Muhammad
Abdul Haq Khan Khattak and Co. v. WAPDA through Chairman WAPDA, and another 1991
SCMR 1436; Industrial Development Bank of Pakistan v. Messrs Baloch Engineering Industry
(Pvt.) Ltd. 2010 CLD 591; Messrs United Bank Limited v. Messrs M. Esmail and Company
(Pvt.) Limited 2006 CLD 394; Allied Bank of Pakistan Limited, Faisalabad v. Messrs Asisha
Garments 2001 MLD 1955; National Development Finance Corporation v. Moona Liza Fruit
Juices Limited 1999 YLR 500 and Messrs HITEC Metal Plast (Pvt.) Ltd. v. Habib Bank Limited
PLD 1997 Quetta 87 ref.
 
(f) Qanun-e-Shahadat (10 of 1984)---
 
----Arts. 117 & 120---Damages---Onus to prove---Scope---Burden to prove actual loss is on the
party who claims damages or compensation, even in the cases of liquidated damages.
 
            Rashid Hanif for Appellant.
 
            Muhammad Khalid Zaman for Respondent No.1.
 
            Dates of hearing: 1st, 2nd, 18th, 22nd and 24th March, 2016.
 
JUDGMENT
 
            MIANGUL HASSAN AURANGZEB, J.---Through the instant Regular Second Appeal
under Section 100 of the Code of Civil Procedure, 1908, ("C.P.C."), the appellant, M/s. Atlas
Cables (Pvt.) Limited, assails the judgment dated 04.01.2016, passed by the Court of the learned
Additional District Judge, Islamabad, whereby the appellant's first appeal against the judgment
and decree dated 15.04.2015, passed by the Court of the learned Civil Judge, Islamabad (West),
was dismissed. Vide the said judgment and decree dated 15.04.2015, the learned Civil Court
dismissed the appellant's suit for declaration and permanent injunction.
 
2.         The facts essential for the disposal of the instant appeal are that after a tender bidding
process conducted by the Islamabad Electric Supply Company ("respondent"), for the supply of
ACSR RABBIT ("Cable"), the following three purchase orders were issued to the appellant:--
 
1.         Purchase order No.1188, dated 07.01.2006, for the supply of 1,300 Km. of Cable
for a total contract price of Rs.38,047,750/-.
 
2.         Purchase order No.1255, dated 13.05.2006, for the supply of 1,000 Km. of Cable
for a total contract price of Rs.36,800,000/-.
 
3.         Purchase order No.1811, dated 20.02.2009, for the supply of 1,800 Km. of Cable
for a total contract price of Rs.77,290,200/-.
 
3.         These three purchase orders shall hereinafter collectively be referred to as "the POs". The
terms and conditions of the POs are more or less the same. Under the terms of the POs, the
appellant was required to furnish performance bonds for an amount equal to 5% value of the POs
in favour of the Chief Executive Officer of the respondent. These performance bonds were
required to be issued by a scheduled bank of Pakistan and were to be valid for one year from the
date of the completion of the supply of material.
 
4.         The appellant had furnished the following three performance bonds issued by Habib
Metropolitan Bank Limited in favour of the respondent:-
 

  Performance Bond No. Date Amount Expiry

1. HBZK/LG15818/06 16.01.2006 Rs.1,903,000/- 30.03.2014
2. HBZK/LG16816/08 24.12.2008 Rs.4,444,000/- 30.03.2014
3. HBZK/LG16848/09 13.02.2009 Rs.1,840,000/- 29.03.2014
Total 8,187,000/-
 
5.         The purchase orders stipulated the dates within which the contracted material was to be
supplied. Under Purchase Order No.1188, dated 07.01.2006, the appellant was required to
deliver 700 KMs of Cable at Rawalpindi, 300 KMs of Cable at Islamabad, and 300 KMs of
Cable at Rajjar. 50% of the material was to be supplied within three months of the establishment
of the letter of credit, and balance 50% within six months. Under Purchase Order 1255, dated
13.05.2006, the appellant was required to deliver 500 KMs of Cable at Rawalpindi, 250 KMs of
Cable at Islamabad, and 250 KMs of Cable at Rajjar. 50% of the material was to be supplied
within two months of the establishment of the letter of credit, and balance 50% within four
months. Purchase Order No.1811, dated 20.02.2009 required 300 KMs of the Cable to be
supplied within 45 days, and the balance in lots of 300 KMs in each subsequent month from the
date of the issuance of the letter of credit.
 
6.         As can be seen from the above, the delivery period under Purchase Order No.1188 was
six months, and that under Purchase Order No.1255 was four months. The delivery period under
Purchase Order No.1811 extended over a period of six and half months. Under the POs, the
delivery period was agreed to be of the essence of the contract. In this regard, Clause 4 of the
POs is reproduced herein below:-
           
"Delivery period is the essence of the Contract and delivery must be completed not later
than the dates specified. "1st day of inspection or 15th day of inspection call whichever,
shall be reckoned as date of delivery of Store to IESCO Consignee provided the goods
accepted for supply have been delivered within 20-days of issue of inspection certificate
subject to the condition that the supplier/manufacturer offers the material for inspection at
least 15-days prior to the due date and the offer is not rejected due to being a fake call or
material not conforming to the specification". (Emphasis added)
 
7.         The appellant made partial supplies under the POs. The appellant vide letter dated
31.01.2008 (Ex.D-9), informed the respondent that the delay occasioned in the delivery of the
Cable under Purchase Order No.1188 dated 07.01.2006 was on account of the bifurcation of the
group of companies to which the appellant belonged; that such bifurcation had resulted in
financial and banking disputes for the appellant; and that the resolution of these disputes caused
the appellant to go behind schedule in most of its business dealings including the deliveries
which it had to make under the said Purchase Order. Furthermore, the appellant stated that its
problems had been compounded by an unprecedented fluctuation and rise in the London Metal
Exchange ("LME") rates which had rendered the contracts financially unviable. The appellant
requested the respondent to waive the imposition of liquidated damages under the said Purchase
Order, and to consider their case patiently and favorably to alleviate them from their financial
difficulties and to bail them out from crises.
 
8.         Vide letter dated 18.08.2008 (Ex.D-1), the appellant proposed a new delivery schedule
for the balance quantities of the Cable under Purchase Orders Nos.1188 and 1255. The appellant
asked for a period of 60 days to make the balance supplies of 206 KMs of Cable under Purchase
Order Nos.1188, and 328 KMs of Cable under Purchase Order No.1255. The excuse put up by
the appellant for not supplying the material within the period stipulated in the said Purchase
Orders was the "rapid increase in prices and other inputs".
 
9.         The respondent acceded to the said request of the appellant. The Board of Directors of the
respondent, in its 66th meeting held on 21.07.2008, decided to amend the delivery schedule in
the said Purchase Orders. With respect to Purchase Order No.1188, the appellant was required to
deliver 100 KMs of Cable within 30 days of the amendment, and 106 KMs within 60 days.
Similarly, as regards Purchase Order No.1255, the appellant was required to deliver 150 KMs of
Cable within 30 days, and 178 KMs within 60 days. This was conveyed by the respondent to the
appellant, vide letter dated 26.08.2008 (Ex.D-2). Furthermore, the appellant was warned that in
case it did not comply with the amended delivery schedule action would be taken under the
provisions of the said Purchase Orders.
 
10.       After the expiry of the amended delivery schedule, the appellant vide letter dated
12.12.2008 (Ex.D-3) informed the respondent that the shipment of the basic raw material
required for all the conductors had been delayed due to "unavoidable circumstances". The
appellant assured the respondent that the balance supplies would be made immediately.
 
11.       As the appellant did not make the supplies within the period stipulated in the amended
delivery schedule, the respondent, on 16.12.2008 (Ex.D-12), issued a notice of default in the
delivery of goods against Purchase Orders Nos.1188 and 1255 to the appellant. As per the said
notice, the appellant had not supplied 205.6 KM of Cable under Purchase Order Nos.1188, and
328 KM of Cable under Purchase Order No.1255. The appellant was called upon to explain
within ten days as to why the following 'penalties' in terms of the said Purchase Orders may not
be imposed on the appellant:-
 
1.         Blacklisting of the appellant;
 
2.         Forfeiture of the Performance Bonds furnished by the appellant and;
 
3.         Cancellation of the Purchase Orders and purchase of material from any other
manufacturer / supplier at the appellant's risk and cost.
 
12.       Furthermore, in the said notice, the appellant was requested to deliver the balance
material by 26.12.2008. The appellant, vide letter dated 19.12.2008 (Ex.D-4), informed the
respondent that it was facing difficulties due to unprecedented power and gas load-shedding. The
respondent was again assured that supplies would be made under the contracts.
 
13.       As no supplies were made by the appellant, the respondent, vide notice 14.03.2009
(Ex.D-5) reiterated its position taken its earlier notice dated 16.12.2008.
 
14.       The appellant vide letter dated 28.07.2010 (Ex.D-6) proposed yet another revised
delivery schedule for the supplies to be made under the POs. The appellant requested the
respondent to re-schedule the deliveries without imposing liquidated damages. In response, the
respondent, vide letter dated 13.08.2010 (Ex.D-7) extended the delivery period without imposing
liquidated damages. The appellant was required to make the balance deliveries between
30.08.2010 to 30.12.2010.
 
15.       As the appellant did not deliver the Cable in accordance with the revised delivery
schedule, the respondent vide letter dated 29.07.2011 (Mark-F) cancelled Purchase Order
No.1811. The respondent is also said to have imposed the `penalty' of forfeiting the performance
bond furnished by the appellant. The other two Purchase Orders were also said to have been
cancelled by the respondent. The respondent then took steps to encash the three performance
bonds.
 
16.       Vide letter dated 29.08.2012 (Ex.P-1), the appellant inter alia informed the respondent
that the "main reason for the stoppage of supplies is due to the unprecedented increase in the cost
of input materials in the local and international market." It is pertinent to reproduce the third
paragraph of the said letter dated 29.08.2012 hereinbelow:-
 
"Sir, you are well aware that since the start of above P.O. there has been massive increase
in the prices of LME and it had become difficult for us to supply the conductor on the
rates quoted by us. After losing huge amounts we were able to supply major quantity
under their P.O. In this connection we have approached to MD PEPCO, Lahore to allow
us for Price Escalation, after that PEPCO, Lahore issued directive
No.1657-71/GM/(C&M) P/CE(P&D)/DPE dated 01.07.2008 (copy attached) addressed
to all DISCOS regarding provision of Price adjustment/escalation in Contracts for supply
of goods due to increase in prices of metal and other input materials. We have
immediately requested to your goodself to allow us price escalation as per PEPCO
directive."
 
17.       The appellant requested the respondent either to allow price escalation due to the increase
in the prices of metals and other input materials, or to cancel the balance quantities in the POs. In
its letter dated 19.12.2012 (Ex.P-2), the appellant reiterated its position taken in the above
referred letter dated 29.08.2012. The respondent was unmoved by such protestations by the
appellant on whose request the deliveries were rescheduled on two occasions.
 
18.       The respondent wrote several letters, including letter dated 24.02.2014 (Mark-G) to
Habib Metropolitan Bank for the encashment of the three performance bonds for a cumulative
amount of Rs.8,187,000/-.
 
19.       As the respondent had taken steps to encash the performance bonds furnished by the
appellant, the appellant vide legal notice dated 20.03.2014 (Ex.P-3) called upon the respondent
to desist from taking such steps until a court of competent jurisdiction resolved the disputes
between the parties.
 
20.       As the respondent was firm in its resolve to encash the performance bonds, the appellant
on 22.03.2014 instituted a suit for permanent injunction against the respondent and Habib
Metropolitan Bank Limited before the Court of learned Civil Judge, Islamabad, praying for inter
alia a decree for permanent injunction restraining the respondent from encashing the
performance bonds. This suit was subsequently amended to make the same for declaration and
permanent injunction, and to challenge the letters sent by the respondent to Habib Metropolitan
Bank for the encashment of the performance bonds. The respondent contested the suit by filing a
written statement. The respondent's main defence was that as the appellant had committed breach
of contract by not supplying the balance material under the POs in the extended delivery period,
the respondent had the right to encash the performance bonds.
 
21.       On 27.06.2014, the learned Civil Court framed the following issues:--
 
"1.        Whether the plaintiff is entitled for a decree for declaration to the effect that the
letters dated 29.07.2011 and 24.02.2014 issued by defendant No.1 are null and void and
of no legal effect or consequences whatsoever? OPP
 
2          Whether the plaintiff is entitled for a decree for permanent injunction restraining
the defendants from encashment of the bank guarantees in any manner whatsoever? OPP
 
3.         Whether an unexpected price hike in the world market of Aluminum base metal
falls within the ambit of force majeure as defined in the purchase order? OPP
 
4.         Whether the plaintiff has not come to the court with clean hands? OPD
 
5.         Whether the suit of the plaintiff is not maintainable in its present form? OPD
 
6.         Relief."
 
22.       The contesting parties produced one witness each. Vide judgment and decree dated
15.04.2015, the learned Civil Court dismissed the suit. The appellant challenged the said
judgment and decree before the Court of the learned Additional District Judge, Islamabad
through Civil Appeal No.62/2014. This appeal was also dismissed, vide judgment and decree
dated 04.01.2016. The said concurrent judgments of the learned Courts below have been assailed
by the appellant in the instant regular second appeal filed under section 100 of the C.P.C.
 
23.       Learned counsel for the appellant submitted that the appellant was not able to make the
balance supplies under the POs, for reasons beyond its control. He tried to take refuge behind the
force majeure cause in the POs. Learned counsel further submitted that as the appellant was
going to import the Cable from abroad and then supply it to the respondent, and as the
international prices of copper during 2008 went very high, the appellant was not able to purchase
and import the same. He further submitted that import at such high rates would have rendered the
transaction with the respondent financially unviable for the appellant.
 
24.       Learned counsel for the appellant further submitted that even though there was no
escalation clause in the POs, the respondent ought to have, on account of the sharp increase in
the international prices of copper, given the benefit of price escalation to the appellant. He
submitted that the Managing Director of Pakistan Electric Power Company (Pvt.) Limited
("PEPCO") had constituted a committee to devise a formula for price adjustment in contracts for
the supply of goods; that the constitution of this committee was necessitated on account of
increase in the prices of some of the input materials; and that reasonable escalation should have
been granted to the appellant in the prices of the material to be supplied.
 
25.       Learned counsel for the respondent submitted that as the appellant had clearly breached
the provisions of the POs, no restraint could have been placed on the respondent from encashing
the performance bonds. He submitted that the performance bonds were furnished to ensure that
the appellant faithfully performed its obligations under the POs, and that as the breach of
contract on the part of the appellant had been proved, the performance bonds were liable to be
encashed to cover the loses suffered by the respondent on account of such breach. In order to
combat the contention of the learned counsel for the appellant that on account of force majeure,
the appellant was relieved of his obligations under the POs, learned counsel for the respondent
submitted that the respondent did not commit any illegality in invoking the performance bonds
because Clause 11 of the POs entitled the respondent to recover liquated damages to the extent of
10% of the contract price, and that under the Note to the said Clause 11, force majeure could not
be taken into consideration; in determining liquidated damages. He further submitted that
through the encashment of the performance bonds, the respondent would recover the liquidated
damages due and payable under Clause 11 of the POs.
26.       Learned counsel for the respondent further submitted that the decision of Pakistan
Electric Power Company ("PEPCO") Limited to allow escalation to suppliers, was not binding
on the respondent, which was not a subsidiary of PEPCO; and that the prices mentioned in the
P.Os. were fixed and there was no provision for escalation in the POs.
 
27.       I have heard the arguments of the learned counsel for the contesting parties and perused
the record with their able assistance.
 
28.       The facts of this case have been set out in sufficient detail in paragraphs 2 to 20 above
and need not be recapitulated here.
 
29.       Now, there is no escape for the appellant from the fact that by not supplying 205.6 KMs
of Cable under Purchase Order No. 1188; 328 KMs of Cable under Purchase Orders Nos.1255;
and 1800 KMs of Cable under Purchase Order No.1811, the appellant had committed breach of
contract. These supplies were not even made in the extended period, which was granted on the
request of the appellant. The respondent had shown enough magnanimity to the appellant by
rescheduling, on two occasions, the dates within which the balance supplies were to be made by
the appellant.
 
30.       The delivery period in the POs was agreed to be the essence of the contracts. By
accepting the terms of the POs, the appellant had committed that the deliveries would be made
not later than the dates specified in Clause 4 of the POs. As the appellant did not supply the
material even by the rescheduled/extended dates, it can be clearly held to have committed breach
of all the three purchase orders.
 
31.       As regards the assertion of the learned counsel for the appellant that the appellant was
entitled to escalation, the same is untenable because there is no provision or escalation in the
POs, and the respondent has, at no material stage, allowed escalation in the contract price fixed
in the POs.
 
32.       The case of the appellant is predicated on the fundamental plea of the force majeure
clause in the POs. A force majeure event absolves a party from liability for the non-performance
of a contract due to a supervening impossibility. When a dispute arises, regarding such a force
majeure event, the same should be proved in the appropriate forum by a party who wants to be
absolved from its contractual obligations. Now, does the force majeure clause in the POs absolve
the appellant from all liability for not supplying the balance material under the POs? Clause 10
of the POs reads as follows:-
 
"(10) Force Majeure
           
The right of the IESCO to terminate the Contract, or to claim penalty or liquidated
damages shall be subject to the follow circumstances, provided as a result of all or any of
these events there has been delay in the performance of the contract by the Manufacturer
or Supplier, or the contract has become incapable of being performed:-
 
i.          Act of God.
 
ii.          Act of State, or War or any Act of the Enemy.
 
iii.         Lock outs, Riots or Civil Commotion.
 
iv.         Injunctions granted by a Court of Competent jurisdiction not resulting from any
fault of the Manufacturer or Suppliers.
 
v.         Restriction imposed by the government on the Import of any material relating to
the manufacturer of goods.
 
vi.         Non-receipt of raw material from abroad for reasons beyond the control of the
manufacturer.
 
vii.        Port delays due to bunker age or lighter age.
  
viii.       Diversions of supplies by the Carrier without any fault or knowledge of the
manufacturer or suppliers.
           
Provided further that the Manufacturer or supplier has given notice to the IESCO within
14-days of the happening of any such event."
 
33.       If the occurrence of any of the force majeure events listed in Clause 10 of the Pos result
in a delay in the performance of the contracts or the inability of the appellant to perform the
contracts, the respondent cannot terminate the POs or claim liquidated damages. The said Clause
10 of the POs requires the appellant to give a notice to the respondent of the happening of such a
force majeure event. The record does not contain any notice from the appellant in terms of
Clause 10 of the POs, of the happening of a force majeure event.
 
34.       The Advanced Law Lexicon by P Ramanatha Aiyar, 3rd Edition, explains force majeure
as follows:-
           
"Events outside the control of the parties and which prevent one or both of the parties
from performing their contractual obligations;
           
A contract provision that stipulates that unforeseen events - wars, acts of God, certain
strikes - that will excuse a party from its duty to perform the contract;
           
Standard clause in a contract that absolves either of the parties of blame for non-
fulfillment of obligations caused by events beyond their control, such as earthquakes,
floods or acts of war;
           
A contractual provision allocating the risk if performance becomes impossible or
impracticable as a result of an event or effect that the parties could not have anticipated or
controlled."
 
35.       In the Halsbury's Laws of England, 4th Edition, Volume 51 force majeure has been
explained as follows:--
           
"2.300: Force majeure.--- In certain contexts and legal relationships, force majeure may
justify derogating from the strict requirements of the law, especially from the legal
consequences resulting from the non-fulfilment of an obligation. Force majeure
presupposes an external cause which has consequences which are inexorable and
inevitable to the point of making it objectively impossible for the person concerned to
comply with his legal obligations. Where, in relations between an individual and the
public administration, to exceed the material date does not involve the non-fulfilment of
an obligation binding the individual but merely renders him subject to a system less
favourable than that in force before that date, force majeure may not be relied on."
 
36.       In the case of Dhanrajamal Gobindram v. Shamji Kalidas, reported as AIR 1961 SC
1285, it has been held at paragraph [19] of the report as follows:--
 
"19.      McCardie J. in Lebeaupin v. Crispin [1920] 2 K.B. 714, has given an account of
what is meant by "force majeure" with reference to its history. The expression "force
majeure" is not a mere French version of the Latin expression "vis major". It is
undoubtedly a term of wider import. Difficulties have arisen, in the past as to what could
legitimately be included in "force majeure". Judges have agreed that strikes, breakdown
of machinery, which, though normally not included in "vis major" are included in "force
majeure". An analysis of rulings on the subject into which it is not necessary in this case
to go, shows that where reference is made to "force majeure", the intention is to save the
performing party from the consequences of anything over which he has no control. ..."
 
37.       In so far as the argument of force majeure was concerned, learned counsel for the
appellant submitted that the international hike in the rates of metals rendered the appellant unable
to perform its part of the contract. That does not mean that this price hike made it impossible for
the appellant to perform the contract. 'Inconvenience' was to be distinguished from 'inability' to
perform the contract. If the contention of the learned counsel for the appellant is accepted, any
party/supplier could get out of a contract, if it turns out to be uneconomical for him after its
execution. Thus this was not a case of 'inability' to perform a contract but 'refusal' to perform it
on account of contract being no longer profitable. Even if the appellant had to procure the
contracted material at rates higher than the ones at which the appellant had agreed to sell such
material to the respondent, and in this way incur a loss in the transaction, that would also not
constitute force majeure.
 
38.       In the case of M/s. Alopi Parshad v. Union of India, reported as AIR 1980 SC 588, it has
been held by as follows:-
           
"There it was observed that a contract is not frustrated merely because the circumstances
in which the contract was made, altered. The Contract Act does not enable a party to a
contract to ignore the express covenants thereof, and to claim payment of consideration
for performance of the contract at rates different from the stipulated rates, on some vague
plea of equity. The parties to an executory contract are often faced, in the course of
carrying it out, with a turn of event which they did not at all anticipate, a wholly
abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle
or execution, or the like. There is no general liberty reserved to the courts to absolve a
party from liability to perform his part of the contract merely because on account of an
uncontemplated turn of events, the performance of the contract may become onerous."
 
39.       In the case of Brauer & Co. (Great Britain), Ltd. v. James Clark (Brush Materials), Ltd.
[1952] 2 All ER 497, a contract for the shipping of goods from Brazil provided that the contract
should be void for any quantity which was not shipped one month after the expiration of the
contract period where the shipment was prevented by force majeure. The contract was subject to
a Brazilian export licence. The sellers gave the buyers a notice that they could not ship the goods
on the basis of the contract price because the Bank of Brazil required that the goods could only
be shipped at a certain minimum F.O.B. price, which price was higher than the contract price. If
the sellers had paid the minimum higher price to their suppliers, they could have obtained a
licence to export the contract goods and shipped them within the contract period. The Court of
Appeal held that as there was no embargo or physical or legal prevention of export, the sellers
were not relieved from liability by the 'force majeure' clause. It was also held that merely
because the sellers were required to pay more for the goods then the agreed selling price, did not
show that the sellers were unable to obtain an export licence. The sellers were not relieved from
their liability because they had not taken reasonable steps to obtain a licence. Denning L.J. in his
separate note held, at-page 501 of the report, as follows:-
           
"After all, any person who sells goods forward must be ready himself to bear any
increase in the market price. It would be a strange thing if the seller could insist on the
contract if the prices fell, and could escape his own obligations if it rose. ... Just as the
buyer takes the risk of a fall in the price, the seller takes the risk of a rise."
 
40.       In the case of Thames Valley Power Ltd. v. Total Gas and Power Ltd. [2006] 1 Lloyd's
Rep. 441, the notion that economic circumstances can generally form a claim for force majeure
was, disapproved. In the report, it was held as follows:--
           
"... It does not at all follow that the supplier is entitled to rely upon an increase in the
market price in comparison to the contract price as a force majeure circumstance. ... This
conclusion is consistent with a line of cases, both on force majeure clauses and on
frustration, ..., to the effect that the fact that a contract has become expensive to perform,
even dramatically more expensive, is not a ground to relieve a party on the grounds of
force majeure or frustration. I take as an example Tennants (Lancashire) Ltd. v. CS
Wilson & Co. Ltd. [1917] AC 495, a force majeure case where Lord Loreburn observed
at page 510:-
           
The argument that a man can be excused from performance of his contract when it
becomes "commercially impossible" seems to me to be a dangerous contention which
ought not to be admitted unless the parties plainly contracted to that effect."
 
41.       In view of the foregoing, I am of the opinion that even if the international prices of metals
escalated abnormally after the issuance of the POs, this by itself would not constitute a force
majeure event. A change in economic/market circumstances, affecting the profitability of a
contract or the ease with which the parties' obligations can be performed, is not regarded as being
a force majeure event. Therefore, the appellant's attempt to get out of its contractual obligations
by invoking Clause 10 of the POs is not tenable.
 
42.       The appellant's sole witness, Gohar Ali Khan (PW-1) in his examination-in-chief deposed
that the reason why the appellant could not make the balance supplies of Cable to the respondent
was the sharp increase in the international prices of aluminum. In his cross-examination, the said
witness deposed that the supplies under the Purchase Order were to be made after the
international crisis in the prices of aluminum had ended. Even if it is assumed that force majeure
would apply on account of the sharp increase in the international price of aluminum during 2008,
this would not come to the appellant's aid, because under the extended schedule, the balance
supplies under the POs were to be made much after 2008, when the prices had stabilized.
 
43.       The term "Non-receipt of raw material from abroad for reasons beyond the control of the
manufacturer" in Clause 10 (vi) of the POs was not connected or relatable to any economic
downturn. A rise in price owing to unforeseen circumstances did not excuse the appellant from
delivery, and therefore the respondent was entitled to damages for the losses it suffered due to
non-delivery of the balance contracted material. Force majeure refers to legal or physical
prevention, and not economic un-profitableness. A change in economic or market circumstances,
affecting the profitability of a contract or the case with which the parties' obligations can be
performed, is not regarded as being a force majeure event.
 
44.       The record shows that the appellant was running out of excuses for not supplying the
balance material under the POs. The appellant, in its letter dated 31.01.2008, took the position
that balance supplies of the material could not be made due to the bifurcation of the group of
companies to which the appellant belonged; in its letter dated 12.12.2008, the appellant asserted
that the balance supplies could not be made due to "unavoidable circumstances"; in its letter
dated 19.12.2008, the appellant stated that it was facing difficulties due to unprecedented power
and gas load-shedding; in its letter dated 29.08.2012, the appellant asserted that the balance
supplies could not be made "due to the unprecedented increase in the cost of input materials in
the local and international market." All these, I believe, were lame excuses. The appellant simply
wanted to get out of the bargain which had become unprofitable for it. The appellant was not
even able to make the balance supplies within the schedule that it had itself proposed in its letter
dated 18.08.2008. Hence, there is a clear default/breach of contract on the part of the appellant.
 
45.       Now the vital question that needs to be answered is whether, on account of the said
breach of contract on the part of the appellant, the respondent was ipso facto entitled to encash
the performance bonds by way of a penalty, or whether it was incumbent on the respondent to
plead its loss on account of the said breach in its written statement and substantiate/prove the
same through cogent evidence, and encash the bonds only to the extent of such loss. The Learned
counsel for the respondent did, in his arguments, submit that the respondent has sustained a loss
in the re-procurement process but no evidence to this effect was produced during the trial.
 
46.       A performance bond, just like a bank guarantee, is usually issued by a bank. It is
essentially a contract of guarantee as contemplated under section 126 of the Contract Act, 1972,
which is reproduced herein below:-
 
"126. Contract of guarantee, surety, principal debtor and creditor-. A 'contract of
guarantee' is a contract to perform the promise, or discharge the liability, of a third person
in case of his default. The person who gives the guarantee is called the 'surety' the person
in respect of whose default the guarantee is given is called the 'principal debtor', and the
person to whom the guarantee is given is called the 'creditor'. A guarantee may be either
oral or written."
 
47.       The contract of guarantee, as is clear from the above definition, involves three parties - a
principal debtor, whose liability may be actual or prospective; a creditor, and a third party called
surety who promises to discharge the debtor's liability if the debtor fails to do so. The guarantee,
thus envisages two contracts, one between the principal debtor and the creditor and the second
between the creditor and the surety. The guarantee has its genesis in the underlying contract
between the principal debtor and the creditor.
 
48.       Irrevocable and unconditional bank guarantees are normally couched in a language
whereby the bank undertakes to give money to the beneficiary on demand, without demur or
protest. If a bank guarantee is unconditional stipulating that the bank should pay, on demand,
without demur and that the beneficiary shall be the sole judge not only on the question of breach
of contract but with respect to the amount of loss or damage, the obligation of the bank has to be
discharged in the manner provided in the bank guarantee. When such a demand is made, the
bank is not permitted to, probe into the disputes between the parties. The courts will not interfere
directly or indirectly to withhold payment, otherwise trust in commerce, internal and
international, would be irreparably damaged.
 
49.       In the case of Haral Textiles Milited v. Banque lndosuez Belgium, S.A. (1999 SCMR
591), the Hon'ble Supreme Court applied the principles relating the encashment of a letter of
credit to a bank guarantee, by holding as follows:-
 
"A contract of Bank Guarantee is a trilateral contract under which the bank has
undertaken to unconditionally and irrevocably abide by the terms of the contract. It is
founded on an act of trust with full faith to facilitate free growth of trade and commerce
in internal or international trade or business. It, like a Letter of Credit, creates an
irrevocable obligation to perform the contract in terms thereof. A Bank must honour a
Bank Guarantee free from interference by the Courts otherwise trust of any commerce,
internal and international, would be irreparably damaged. If a Bank Guarantee is
unconditional and irrevocable, the Bank concerned must pay when demand is made
unless the Bank has pledged own credit involving its reputation. Generally, it has no
defence except in case of fraud."
 
50.       It is essential for a Court to examine whether the bank guarantee is unconditional or
whether it can be invoked on the happening of a particular contingency as stated in the bank
guarantee. In certain instances a bank guarantee can be invoked by the beneficiary only if, there
is loss or damage caused or suffered by the beneficiary by reason of non-fulfillment of the
contractual terms. In such circumstances, the contention of the party at whose instance the bank
guarantee is given is normally that unless loss or damage caused or suffered is proved, the bank
guarantee cannot be invoked. As mentioned above, this would depend upon language of the bank
guarantee. The terms of a bank guarantee are, therefore, extremely material. The invocation,
therefore, will have to be in accordance with the terms of the bank guarantee, or else, the
invocation would be bad.
 
51.       In the case of Shipyard K. Damen International v. Karachi Shipyard and Engineering
Works Ltd. (PLD 2003 SC 191), it has been held that the rights and liabilities of the parties are to
be determined with reference to terms and conditions of the guarantees. Furthermore, it was held
that "[t]he guarantee as provided could be scanned to ascertain whether it is conditional,
unconditional or an autonomous contract by itself or otherwise."
 
52.       The text of the three performance bonds issued under the POs is more or less the same. It
is, however, pertinent to reproduce the 3rd and 4th paragraphs of the said Bond:-
           
"NOW THEREFORE, if the Principal shall [well], truly and faithfully perform and,
fulfill all the undertakings covenants, terms and conditions of the Contract in the manner
and within the time provided in the Contract and any extension thereof that may be
granted by the Employer with or without notice to the Surety, which notice is hereby
waived, and shall also well, truly and faithfully perform and fulfill all the undertakings,
covenants, terms and conditions of any and all modifications to the Contract that may
hereafter be made, notice to which modifications of the Surety being hereby waived, then
this obligation to be null and void otherwise to remain in full force and effect till
22.12.2009. Our total liability under this Bond is limited to the penal sum stated above.
           
We the undersigned Bank (surety), do hereby irrevocably and independently guarantee to
pay to the Employer without delay upon the Employer first written demand the penal sum
stated above against the Employer written declaration that the Principal has refused or
failed to perform his obligation under the Contract which payment will be effected by the
Surety to the Employer." (Emphasis added)
 
53.       A scan of the terms of the performance bonds show that the term, "if the Principal shall
well, truly and faithfully perform and fulfill all the undertakings, covenants, terms and conditions
of the Contract" is obviously a reference to the underlying POs, which constitute the genesis of
the performance bonds. In other words, but for the POs, the performance bonds would not have
come into existence. On account of the employment of the words as mentioned above, the
obligations of the guarantor bank under the performance bonds cannot be held to be independent
of the POs. Rather such obligations are interdependent and contingent and conditional upon the
breach of contract committed by the appellant (the principal debtor).
 
54.       If it had been the intention of the parties that on the appellant's simple demand for the
encashment of the performance bonds, the bank was under the obligation to encash the same
without demur or reservation or reference to the underlying contract, the performance bonds
would have contained no stipulation to the effect that they would be rendered null and void upon
the fulfillment of the contractual obligations by the appellant; they would also not have required
a "written declaration from the respondent that the appellant Principal had refused or failed to
perform its obligations under the contracts. Therefore, it is my view that the performance bonds
furnished by the appellant were conditional in nature."
 
55.       A read of the performance bonds makes it clear that if the appellant performed its
contractual obligations under the POs, the respondent could not seek the encashment thereof.
Rather upon the faithful performance of such contractual obligations by the appellant, the
obligations of the guarantor bank under the performance bonds were to be rendered null and
void. Clause 15 of the POs explicitly provides that the respondent would have the right to forfeit
the "security bond/bank guarantee (performance bond)" in the event the appellant fails to supply
the goods within the time specified or commits any breach of contract. The appellant had
furnished the performance bonds as security for compliance of obligations under the POs.
Therefore, it is my view that the performance bonds were conditional in nature and could be
invoked only if the appellant failed to fulfill its contractual terms.
 
56.       In the case of Standard Construction Company (Pvt.) Limited v. Pakistan, through
Secretary M/o Communications and others (2010 SCMR 524), the Hon'ble Supreme Court
observed that there were certain guarantees, which in their contents, prescribe certain
eventualities on the happening whereof the beneficiary is entitled to the demand of the
encashment of the guarantee. The employment of the words, "...in the event that obligations
expressed in the said clause of the above mentioned agreement have not been fulfilled by the
company giving the right of claim to the NHA for recovery of the whole or part (of the Toll
Money from the Company under Agreement" in the guarantee were held by the Hon'ble Supreme
Court to make the encashment of the bank guarantee conditional on the fulfillment of certain
conditions in the main agreement. The Hon'ble Supreme Court restrained the encashment of such
a guarantee, whereas bank guarantees which contained no stipulation to the effect mentioned
above, were allowed to be encashed.
 
57.       It must be appreciated that the performance bonds issued under the terms of the POs are
not in the nature of advance payment guarantees or mobilization advance guarantees to secure
the repayment of an amount advanced by the creditor to the principal debtor. The POs do not
contemplate any advance payment to the appellant. Payments under these POs were to be made
through an irrevocable letter of credit in favour of the appellant. No payment could be made to
the appellant without inter alia submission of a delivery challan duly stamped and signed by the
consignee, and an inspection certificate with respect to the goods supplied issued by the Chief
Engineer of the National Transmission and Dispatch Company or his authorized representative.
Under this mechanism, the appellant would be entitled to receive payment only for the goods
supplied and no more. The performance bonds in question were furnished to ensure that the
appellant complies with its contractual obligations under the POs. The fulfillment of the
contractual obligations on the part of the appellant renders the performance bonds void.
 
58.       A bank guarantee has to be treated differently from a performance bond. The distinction
between an unconditional/irrevocable bank guarantee and a performance bond/guarantee has
been drawn by the Superior Courts in Pakistan. Reference in this regard may be made to the
following case law:--
 
i.          In the case of Jamia Industries Ltd. v. Pakistan Refinery Ltd. (PLD 1976 K 644),
the Hon'ble High Court granted an injunction restraining the encashment of a
performance guarantee, which was unconditional in nature. It was, inter alia, held that as
the dispute between the parties was yet to be adjudicated upon by the Arbitrator, the
performance guarantee should be utilized in terms of the award when the liability of the
Plaintiffs will have been determined.
 
ii.          In the case of Pakistan Engineering Consultants v. PIA Corporation, (1993 CLC
1926) a distinction was drawn between a bank guarantee and a performance bond in the
following terms:-
 
"10.      As regards the performance bond, in our view, the same stands entirely on
different footing than the bank guarantee and unless and until the Court prima facie finds
that the default was on the part of the consultants, it would not be just and proper to allow
its encashment as the encashment depends on the commission of default. We have
already observed hereinabove that on the basis of material available on record, it cannot
be said who has committed the default."
 
The Honourable Supreme Court of Pakistan in the case of Pakistan Engineering
Consultants v. P.I.A. Corporation, (1989 SCMR 379) dismissed the petition against the
said judgment.
 
iii.         In the case of Zeenat Brother (Pvt.) Ltd. v. Aiwan-e-Iqbal Authority (PLD 1987
K 183), at Page 188 of the report a performance bond was held to be in the nature of a
penalty in view of Section 74 of the Contract Act. Further, it was held that unless
evidence was led from both the sides and are analyzed of will be very difficult to say who
was responsible for the delay in the performance of the Contract. In this case the Hon'ble
High Court distinguished a Performance Bond/Guarantee from a Mobilization Advance
Guarantee and passed an injunction restraining the encashment of the performance
guarantee.
 
iv.         In the case of China International Water and Electric Corporation v. WAPDA
(2001 YLR 2191), the Hon'ble High Court, after making reference to the case of (Zeenat
Brother (Pvt.) Ltd. v. Aiwan-e-Iqbal Authority) held on Page 2201 of the report as
follows:-
 
"It is further observed in the said judgment that encashment of Performance Guarantee
amounts to penalty since it is otherwise encashable in the event of default in due
performance of all or any of the obligations under the contract between the parties; and
imposition of such penalty, even if they or such was committed by the Plaintiffs, could
not be permitted until the same was established through evidence. In view of reference of
disputes between the parties to arbitration, the matter has yet to be adjudicated upon on
the basis of evidence as may be produced before the Arbitrator. Encashment of the
Performance Guarantee, in the circumstances at this stage, is likely to put the defendant
No.1 in a position of advantage and on other hand expose the Plaintiff to serious financial
strain. The Application is granted to such extent."
 
v.         In the case of Mehboob Enterprises v. Karachi Development Authority (1997
MLD 3085), it has been inter alia held, at Page 153 of the report, as follows:-
           
"I am also of the view that in the case of encashment of a bank guarantee which in its
nature is a performance bond, the owner/creditor is required to establish that the principal
debtor/contractor has committed default and secondly he is also required to show that as a
result of such default he has suffered damages."
           
In this case interim injunction was granted and the creditor was restrained from encashing
the bank guarantee.
  
vi.         In the case of (Mercury Corporation v. Pakistan Steel Mills Corporation
(Private). Ltd. (2000 YLR 734), it has been held, at Page 736 as follows:--
           
"I have gone through all the facts which have been given in detail above and relying on
the decision of the Honourable Supreme Court where it has been repeatedly held that
even if an arguable case is made out then stay has to be granted. I am also aware of the
fact that decisions have also been given about the sanctity and validity of bank guarantees
simpliciter. In this case a cursory glance at the bank guarantees clearly show that indeed a
demand can be made but that demand is pursuant to a commission of default under the
contract. From the wording of the bank guarantee and the different terms used in the
contract as mentioned above, it is clear that, it is a guarantee based on performance and
hence that can only be encashed if through evidence it is proved that a default had indeed
occurred which was the fault of the person on whose behalf such guarantee was
issued….. (Emphasis added)
 
59.       In view of the above case-law, the encashment of a performance bond/guarantee is
inherently preconditioned on established default on the part of the principal debtor. Having said
that, another question that must be answered is whether a breach of contract on the part of the
appellant established through an adjudicatory process would, by itself, entitle the respondent to
encash the performance bonds or whether respondent was required to plead and prove the losses
and damages suffered by it and encash the performance bonds only to the extent of such losses
and damages. To answer this question, the purpose behind furnishing the performance bonds has
to be discovered. In this regard, a read of Clause 15 of the POs is essential:--
           
"(15) FORFEITURE OF SECURITY BOND/BANK GUARANTEE
           
(Performance Bond)
           
The Contracting Officer will have the right to forfeit the Security Bond/Bank Guarantee
(Performance Bond)
 
(A)       If the Contractor:-
 
(i)         Fails to supply the goods within the time specified.
 
(ii)        Commits any breach of contract.
 
(iii)       Fails to account for the Import License issued on account of the purchaser.
 
(iv)       Fails to account for the raw material secured by the contractor against any
License or permit issued on account of the Contracting Officer.
 
(v)        Fails to return drawings, design or any material belonging to the Contracting
Officer which was to be returned in good condition to the Contracting Officer after the
successful termination of the contract.
  
(B)       For the other reasons specified in the Purchase Order by the contracting officer
for forfeiting the security deposit.
           
If the forfeiture of the security deposit does not compensate the contracting officer for
losses suffered due to non-delivery or breach of contract or for any other reasons, the
Contracting Officer will have a right to forfeit other security deposits or to recover the
same from any other security deposit made in favour of any other unit of
WAPDA/IESCO or from any moneys due to the Contractor from any unit of
WAPDA/IESCO. "(Emphasis added)
 
60.       The first rule of the construction of a contract or a document is to ascertain the intention
of the parties to it. For the purpose of ascertaining the intention of the parties behind the
requirement to furnish the performance bonds, reference again is warranted to the provisions of
the POs. The term, "[I]f the forfeiture of the security deposit does not compensate the contracting
officer for losses suffered due to non-delivery or breach of contract..." in Clause 15(B) of the
POs makes it clear the raison detre behind furnishing the performance bonds was to compensate
the respondent for the losses suffered by it due to non-delivery of the contracted material or
breach of contract on the part of the appellant. Other than the requirement to furnish performance
bonds, the POs contain no provision for a security deposit.
 
61.       The argument of the learned counsel for the respondent that through the encashment of
the performance bonds, the respondent would recover the liquidated damages due and payable
under Clause 11 of the POs, does not appeal to me. It is my view that it was necessary for the
respondent to show that, on account of the appellant's breach of contract and the losses suffered
by the respondent as a consequence thereof, it had become entitled to recover its losses by
encashing the performance bonds. In the case of Messrs A.Z. Company, Karachi v. Government
of Pakistan and another (PLD 1973 SC 311), it has been held that, where there is a breach of
contract by the purchaser and the goods had to be imported from a foreign country, the supplier
was at least entitled to be placed in the same situation with respect to damages as if the contract
has been performed. Now, by analogy, if the supplier commits a breach of contract and does not
supply the contracted material, and the purchaser has to procure the material from other sources
in the market, the supplier has to pay to the purchaser the losses it may have suffered in the re-
procurement process. However, where there was no evidence at all as to the specific nature of the
loss suffered in the re-procurement process, except general assertions of vague nature, such
assertions were by no means sufficient to establish that the loss flowed directly, as a consequence
of the breach. Damages for breach of contract were to be calculated in terms of actual loss. When
a person claims special damages, it is incumbent upon him to show as to under which head of
account and how such damages were sustained.
 
62.       The respondent made no attempt to plead in its written statement that it had suffered
losses in the re-procurement process. The respondent also did not adduce any evidence to prove
the losses, if any, sustained by it. The record is silent as to the losses suffered by the respondent
on account of the breach of contract on the part of the appellant. As there was no way for the
Court to know whether the respondent had suffered any losses on account of the appellant's
breach of contract, it is my view that the respondent could not have invoked the performance
bonds.
 
63.       In all the three performance bonds, the guaranteed amount is referred to as "penal sum".
The wording of the performance bonds makes it clear that invocation of the said bonds by the
respondent is an imposition of a penalty on the appellant for breach of contract. In the notices
dated 16.12.2008, 14.03.2009 and 29.07.2011, the respondent expressly referred to the forfeiture
of the performance bonds as a "penalty". Reference to the said correspondence was necessary in
order to eliminate any element of doubt as to intention of the parties behind the requirement to
furnish performance bonds. In the case of Sandoz Limited v. Federation of Pakistan (1995
SCMR 1431), it has been held that the Court, in order to ascertain the real intention of the
parties, can have resort to the correspondence preceding or subsequent to the execution of the
contract.
 
64.       Penalty clauses in contacts are something that our Courts frown upon and do not enforce.
In the case of Muhammad Farooq Azam v. Bank Al-Falah Limited (2015 CLC 1439), the
Division Bench of the Hon'ble Lahore High Court held that if there was a clause in an agreement
regarding late payment charges and penalty, the same would be disregarded by the Courts being
unconscionable against the law, and against the Islamic system of finance.
 
65.       Under Clause 15 of the POs, the forfeiture/encashment of the performance bonds is
conditioned on the breach of contract/failure on the part of the appellant to supply the material
under the POs. If the encashment of the performance bonds is to be treated as a penalty, it would
certainly not be enforceable. If, on the other hand, it is treated as recovery of liquidated damages,
then it has to be determined whether in the light of the law laid down by the superior Courts in
Pakistan such encashment was permissible.
 
66.       English law differentiates between liquidated damages and penalties. Liquidated damages
are recognized as a genuine pre-estimate of losses suffered due to another party's breach of
contract, whereas a penalty is a sum of money so stipulated in terrorem (in order to frighten) so
as to drive a party to fulfill a contract. Section 74 of the Contract Act, 1872, has diluted the
difference between liquidated damages and penalties. For ease of reference section 74 (ibid.),
without its two Explanations and the Exception, which are not material here, is in the following
terms:-
 
"74.      When a contract has been broken, if a sum is named in the contract as the amount
to be paid in case of such breach, or if the contract contains any other stipulation by way
of penalty, the party complaining of the breach is entitled, whether or not actual damage
or loss is proved to have been caused thereby, to receive from the party who has broken
the contract reasonable compensation not exceeding the amount so named or, as the case
may be, the penalty stipulated for".
 
67.       The distinction between a 'penalty' and 'liquidated damages' has been well-explained by
the Hon'ble Mr. Justice Saeeduzzaman Siddiqui (as he then was) in the case of Muhammad
Karimuddin v. Kanza Food Industries Ltd. (1989 MLD 3900) in the following terms:-
 
 "8.        In so far as the recovery of damages for breach of a contract by a party is
concerned, it is not disputed that the position will be governed either under section 73 or
under section 74 of the Contract Act. It is agreed that in the present case section 73 of the
Contract Act will have no application as the damages are claimed on the basis of a
stipulation in the contract which provided for payment of a named sum in the event of
breach. The damages accordingly will be payable as provided in section 74 of the
Contract Act. There is however, disagreement between the plaintiffs and the defendants
with regard to the nature of stipulation in the agreement which provides for forfeiture of
the balance of sale consideration by defendants in case of breach by the plaintiffs. While
it is contended by the plaintiffs that is a penalty and as such not enforceable under the
law, the defendants treat it as liquidation damages legally recoverable in the event of
breach. In view of the pronouncement of the Supreme Court in the case of the Province
of West Pakistan v. Messrs Mistry Patel & Company (now reported (1989) 3 WLR 175
and West Pakistan Industrial Development Corporation v. Aziz Kureshi (1989) 3 WLR
189 LR) I venture to say that difference which exists under the English law between
liquidated damages and a penalty is not recognized by section 74 of the Contract Act and
therefore irrespective of the fact whether the amount as mentioned in the agreement is a
penalty, or liquidated damages, a party complaining of the breach is entitled to recover
damages whether or not actual damages have been suffered by it subject to the maximum
limit of such damages which will be the amount so mentioned in the agreement.
Therefore, merely because a specific sum by way of liquidated damages is mentioned as
payable in the event of a breach in the agreement, is not a sufficient ground for the Court
to grant the same to the party complaining of the breach of this amount only represents
the maximum limit of damages which may be recovered by such party in the event of a
breach. In spite of mention of a specific sum in an agreement to be paid as damages to a
party in the event of a breach by the other, the Court still has to hold that such amount
would normally arise as damages to such a party in the case of a breach by the other.
Therefore, in cases, where the party complaining of the breach in fact, suffered no
damages at all and on the contrary gained some advantage in spite of the breach or where
the Court finds that the sum mentioned as damages in the agreement in case of breach, is
such that it could not reasonably arise from such breach, the Court may refuse to grant
the same."
 
68.       Damages have to be first pleaded and thereafter proved by leading reliable trustworthy
and cogent evidence. Damages require evidence regarding details of losses actually suffered.
Liquidated damages, as a rule, require the positive evidence to show the actual loss was suffered
by the party claiming the damages. Even a fixed amount stipulated in a contract as liquidated
damages cannot be recovered if the quantum of actual loss suffered is not proved through
sufficient evidence. At this stage reference to the following case-law would be apposite:-
 
i.          Lord Atkin in the case of Bhai Panna Singh and others v. Bhai Arjun Singh and
others, (AIR 1929 Privy Council 179), observed that the effect of Section 74 is to
disentitle the plaintiff to recover simpliciter the penal sum named in the agreement as due
and payable on a breach of contract, whether as penalty or liquidated damages, unless he
proves the damages he has suffered.
 
ii.          In the case of Saudi-Pakistan Industrial and Agricultural Investment Company
(Pvt.) Ltd., Islamabad v. Messrs Allied Bank of Pakistan (PLD 2003 SC 215), the bank
guarantee also contained a sum payable by the surety/guarantor to the
creditor/beneficiary as liquidated damages. As the creditor had brought no evidence on
record to show that it has sustained damages on account of the default on the part of the
principal debtor, the creditor was held not entitled to any amount as liquated damages. In
paragraph 11 of the report, it is held as follows:-
           
"Liquidated damages, as a rule, require the positive evidence to show the actual loss was
suffered by the party claiming the damages. Even fixed amount stipulated for liquidated
damages cannot be recovered if the quantum of actual loss is not proved."
 
iii.         In the case of Messrs Khanzada Muhammad Abdul Haq Khan Khattak & Co. v.
WAPDA through Chairman WAPDA, and another (1991 SCMR 1436), after making
reference to section 74 of the Contract Act, 1972, the following observations were
made:---
           
"... section 74 of the Contract Act undoubtedly says that the aggrieved party is entitled to
receive compensation from the party who has broken the contract, whether, or not actual
damages or loss is proved to have been caused by the breach. Thereby, merely dispenses
with proof of actual loss or damages. It does not justify the award of compensation when
in consequence of the breach no legal injury at all has resulted, because compensation for
breach of contract can be awarded to make good the loss or damage which naturally arose
in the usual course of things, or which the party knew they made the contract to be likely
to result from the breach."
 
iv.         In the case of Industrial Development Bank of Pakistan v. Messrs Baloch
Engineering Industry (Pvt.) Ltd. (2010 CLD 591), it was held by the Hon'ble High Court
of Sindh, as follows:-
           
"It is, by now, well-settled proposition of law that claiming of fine, liquidated damages or
penalty solely based upon the terms of finance agreement between the parties itself will
not be sufficient to grant the fine, liquidated damages or the penalty amount inasmuch as
the party claiming such fine, liquidated damages or penalty has to in the first place plead
such fact in its plaint or petition and thereafter to prove the same through cogent and
reliable evidence and that too, the Court, if satisfied with the evidence, will not
necessarily grant the specific amount of fine liquidated damages or penalty as stipulated
in the finance agreement but only a reasonable compensation to be ascertained from the
evidence adduced by the parties."
 
v.         In the case of Messrs United Bank Limited v. Messrs M. Esmail and Company
(Pvt.) Limited (2006 CLD 394), a suit for recovery of loan amount and liquidated
damages was filed by the plaintiff/Bank against the defendant/borrower. The bank had
not made any assertion in the plaint about the nature of losses or actual damages suffered
by the bank due to non-fullfilment of obligation by the borrower or violation of the terms
of the loan agreement executed by the borrower in favour of the bank. It was held that
non-awarding of claim of liquidated damages, which was solely based on the breach of
terms of loan agreement was fully justified in circumstances.
 
vi.         In the case of Allied Bank of Pakistan Limited, Faisalabad v. Messrs Asisha
Garments (2001 MLD 1955), it has been held at paragraph 12 of the report as follows:-
           
"Under section 74 of the Contract Act, when liquidated damages are entered in a contract
itself, then in case of breach of such contract, the damages are to be assessed in the
ordinary way, subject to that fixed amount as a maximum. In that case the plaintiff is
under a legal obligation to prove the exact amount of damages, which he has allegedly
suffered, irrespective of the specific amount mentioned in the contract, which is not at all
a concrete proof and in such-like cases the plaintiff who is complaining the breach of
contract and also demanding the damages, shall have to first plead and then to prove the
damages, suffered by him. We are of the considered view that liquidated damages under
section 74 of the Contract Act, 1872, call for the proof and the person claiming such
damages is under obligation to bring sufficient material on record in order to prove that
he had suffered so much of losses. Without proving the actual loss, even fixed amount
stipulated as liquidated damages does not automatically become payable."
 
vii.        In the case of National Development Finance Corporation v. Moona Liza Fruit
Juices Limited (1999 YLR 500), the Hon'ble High Court of Sindh, after referring to
Section 74 of the Contract Act, 1872, held as follows:--
           
"From a bare reading of the section, it is apparent that if a contract contains any
stipulation by virtue of which any specified amount or a penalty becomes payable when a
breach of contract is committed, then the party complaining of the breach is entitled to
receive from the party who has committed the breach of contract not the amount or
penalty specified therein but reasonable compensation not exceeding the amount
mentioned in the contract. What is reasonable compensation is a question of fact and the
party who claims compensation must prove the fact. This can only be done by producing
evidence or by placing on record documents to prove reasonable compensation in the
circumstances of the case if the law permits or requesting the Court for permission to
adduce evidence."
           
In the said case despite a liquidated damages clause in the contract, the party complaining
of the breach of contract did not adduce any evidence to show as to what would be
reasonable compensation for the breach of contract. The Hon'ble High Court held that in
the absence of any evidence adduced by the claimant, it was not possible to award
reasonable compensation. However, a token compensation of Rs.1,000/- was awarded.
 
viii.       In the case of Messrs HITEC Metal Plast (Pvt.) Ltd. v. Habib Bank Limited
(PLD 1997 Quetta 87), it has been held as follows:--
           
"General principle for granting compensation when beneficiary alleges breach of
contract; are obviously regulated by sections 73 and 74 of Contract Act. Evidently
without proving actual loss even fixed amount stipulated for liquidated damages does not
 become automatically payable. Record manifestly displays that respondent-Bank has not
adduced an iota of evidence suggesting quantum of actual losses suffered by reasons of
default on the part of appellants. We, therefore, feel that demand for specified liquidated
damages by creating liability through forced finance account against the appellant was
not justified."
 
69.       The whole claim of the respondent in imposing a penalty or encashing the performance
bonds or recovering liquidated damages against the appellant was based on the breach of the
terms of the POs. In the case at hand, the respondent had made no assertion in the written
statement about the nature of losses or actual damages suffered by it due to non-fulfillment of the
contractual obligations or the violation of the terms of the POs by the appellant. Had the
respondent pleaded such loss or damages in the written statement and substantiated them through
cogent evidence, it would have been able to encash the performance bonds to the extent of the
loss so pleaded and proved. Absent such proof of loss, the respondent had no right to take steps
to encash the performance bonds.
 
70.       In the case of Province of West Pakistan v. Mistri Patel and Company (PLD 1969 SC 80),
a bank guarantee was furnished in lieu of earnest money/security, in a transaction for the
purchase of rice. The purchaser had breached the contract by not taking the goods. This caused
the supplier to take steps to encash the bank guarantee. As the supplier had not suffered any
damages due to the purchaser's breach of contract, it was held that he was not entitled to encash
the bank guarantee. In the said report, it was held as follows:--
           
"In the present case we are, therefore, to see whether the Province of West Pakistan can
claim the whole or any part of the amount which the firm was to deposit by way of
earnest money. It will be wrong to argue that since the firm had agreed to deposit a sum
as earnest money and in lieu thereof furnished Bank Guarantee for the said amount the
Government would be entitled to claim the whole of this amount simply because there
was a breach of the contract by the firm. Such a contention does not even receive support
from the cases where the view taken was that the forfeiture clause of a deposit in a
contract does not come within the purview of section 74 of the Contract Act. In these
cases also forfeiture was held to be justified if the amounts were found to be reasonable."
 
71.       Applying the principles derived from the above mentioned judgment, as the respondent
did not plead or prove any loss caused by the appellant's breach of contract, it could not encash
the performance bond which was furnished to compensate the respondent for the losses it would
suffer on account of such breach.
 
72.       In view of the above, I am of the opinion that the respondent was not entitled to invoke
the provisions of the performance bond or encash the same unless (1) it was established through
an adjudicatory process that the appellant had committed default of the provisions of the POs,
and (2) as a result of the default the respondent had suffered damages. Once such default on the
part of the appellant and the loss suffered by the respondent as a result of such default is proved,
the performance bonds could have been encashed to the extent of such loss.
 
73.       The burden to prove actual loss lies on the party who claimed the damages or
compensation, even in cases of the liquidated damages. The respondent had an opportunity,
during the trial, to adduce evidence to prove the losses and damages suffered due to the
appellant's breach of contract. But they chose not to do so and this opportunity go by. This
appeal is being allowed essentially on the ground that the respondent has failed to prove the
amount of damages suffered by him, and that the learned lower Courts did not take account of
this essential requirement of the law. The appellant has been successful in showing that the
learned lower courts had failed to determine a material issue of law. The performance bonds
have also been erroneously interpreted. I find the concurrent judgments of the learned lower
courts to be contrary to law as stated above. This case, therefore, warrants interference under
section 100, C.P.C.
 
74.       In view of the above, this second appeal is allowed, the impugned judgments dated
15.04.2015 and 04.01.2016, passed by the learned trial court and the learned appellate court,
respectively, are set aside and the appellant's suit is decreed to the extent of declaration that the
call on the encashment of the performance bonds is not lawful; and permanent injunction
restraining the respondent from encashing the performance bonds. In the circumstances of the
case, there shall be no order as to costs.
 
MH/98/Isl.                                                                                           Appeal allowed.