BANK GUARANTEES

The Courts in Pakistan have no doubt recognized that contracts of guarantee are independent contracts between the guarantor and the beneficiary of the guarantee and as such the guarantee is to be construed independent of the underlying contracts. Accordingly the nature and language of the independent contract, namely the bank guarantee, assume great importance. (See National Construction Ltd. Vs. Aiwan-e-Iqbal Authority PLD 1994 Supreme Court 311). Generally, courts in Pakistan have created two categories of contracts of guarantee. One category relates to those situations where a person on whose behalf his bank guarantee is given has received a mobilization advance. The second category relates to situations where the guarantor guarantees the performance of certain works, to be done by the party procuring the guarantee. The first category of bank guarantees is commonly referred to as “mobilization guarantees” and the second kind is commonly referred to as “Performance Guarantees”. If at all the guarantee that you require is to be categorized, it will be more in the nature of a performance guarantee and not a mobilization guarantee.

The Courts in Pakistan have generally construed guarantees for mobilization advance as not being subject to a restraining order by the Court even if there is a dispute between the parties to the primary or underlying contracts. However, in cases of guarantees other than mobilization advance guarantees, the courts have given or refused injunction to restrain its encashment, depending upon the literal words used in the guarantee. Where the language used in the Bank Guarantee is to the effect that “the guaranteed sum is payable irrespective of any dispute which may arise between the parties regarding the breach of the primary contract” or that ‘the beneficiary of the guarantee shall be the sole judge of default on the part of the other party in performing the primary contract or in performing contracts sought to be secured” or that “a certificate of the beneficiary of the guarantee as to whether breach has been committed or not shall be treated as conclusive evidence for the purpose of invoking the guarantee” the courts have refused to grant injunction restraining the encashment of the bank guarantee.. (See the case of National Grid Company Vs. Govt. of Pakistan 1999 Supreme Court Monthly Review 2367; Zeenat Brothers Vs. Aiwan-e-Iqbal Authority PLD 1997 Kar. 183, Century Link Development Corporation (Pvt) Ltd. Vs. Habib Bank PLD 2000 Kar. 269.

On the other hand, if the guarantee contains a stipulation to the effect that the guarantor shall pay “if default is made by the person at whose behest the guarantee is given” the Courts have granted an injunction restraining the encashment of the guarantee on the theory that until “default” is proved by evidence there is no “default”. The word “default” has been interpreted to mean a “willful failure to pay without cause”. (See Mercury Corporation Vs. Pakistan Steel Mills 2000 Yearly Law Reports 734.)

More cases:
1999 SCMR 591
PLD 2003 SC 191
PLD 2003 SC 295
2003 CLD 596 (Sapico)
1993 MLD 1234

1993 CLC 882, Haral Textile