2012 C L D 451

[Lahore]

Before Sh. Azmat Saeed, J

UNION BANK LIMITED through Manager and another---Petitioners

Versus

MUHAMMAD ASLAM FIAZ KHOKHAR and another---Respondents

Write Petition No. 1098 of 2005, decided on 28th February, 2005.

Financial Institutions (Recovery of Finances) Ordinance (XLVI of 2001)---

----S. 11---Specific Relief Act (I of 1877), S. 55---Contract Act (IX of 1872), S. 171---
Constitution of Pakistan, Art. 199--- Constitutional petition--- Suit for rendition of
accounts, mandatory and permanent injunction---Petitioner bank repossessed vehicle of
respondent on non-payment of monthly instalments on lease of vehicle and credit card
facility---Banking Court, on application for interim relief in suit filed by respondent,
directed restoration of vehicle in favour of respondent---Contention of petitioner-Bank
was that substantial payment was due from the respondent on credit card facility and that
the petitioner Bank had a general banker’s lien on the car---Validity---Perusal of order of
Banking Court revealed that the question of general banker’s lien on credit card liability
had not been taken into account or decided---Nature of such lien would depend not only
upon the provision of the law applicable but also upon documents executed by the
respondent in respect of credit card facility---Grant of interim relief was to be
reconsidered after taking into account the rights and obligations of the parties in respect
of vehicle in question not only with reference to the documents executed for the lease of
vehicle but also with regard to the credit card facility---Order of Banking Court was set
aside and case was remanded for decision afresh on application for interim relief---
Constitutional petition was accepted, accordingly.

Mian Tahir Maqsood for Petitioners.

Rana Zulfiqar Ali Khan with Miss Khaldia Perveen for Respondent No.1.

ORDER

SH. AZMAT SAEED, J.---This Writ Petition is directed against the order dated 13-1-
2005 passed by respondent No.l. The brief facts giving rise to the filing of this petition
are that respondent No.1 filed a suit before the respondent No.2 for rendition of accounts
and mandatory and permanent injunction seeking restoration of the vehicle repossessed
by the petitioner bank.

2. A Honda Civic motor car had been leased in favour of the respondent No.l in
addition to the facility of credit card by the petitioner hank. On account of the non-
payment of amount due under the credit card and the alleged failure to pay the monthly
installments of the leased car, the vehicle in question was re-possessed. Being aggrieved,
the respondent No.1 filed a suit along with an application seeking, interim relief and the
learned Judge of the Banking Court Gujranwala directed that the vehicle in question be
restored to the respondent No.1.

3. The learned counsel for the parties have been heard and the record appened with
this petition perused.

4. It has been contended on behalf of the respondent No.1 that at the time of the
repossession of the questioned vehicle, no default had taken place in the lease payment,
which has been controverted by the learned counsel for the petitioner-bank who states
that substantial amount is also due from respondent No.1 on account of the credit card
payment and the petitioner bank has a general bankers lien on the car.

Page No. 1 of 2
5. Perusal of the order impugned reveals that the question of the general bankers
lien, if any, of the petitioner bank in respect of the car on account of the credit card
liability has not been taken into account or decided. The nature of this lien would depend
not only upon the provision of law applicable but also upon the documents executed by
the respondent No.1 in respect of the credit card facility. It would thus be appropriate if
the grant of interim relief be reconsidered after taking into account the rights and
obligation of the parties in respect of the vehicle in question not only with reference to
the documents executed for the lease of the vehicle but also with regard to the credit card.
Thus by setting aside the order impugned, case is remanded to the learned Judge Banking
Court Gujranwala to decide he application afresh after taking into account all the
documents executed by respondent No.2 for both the financial facilities of the car and the
credit card, and the law applicable thereto.

6. Petition accepted and case remanded in the terms enumerated ibid.

K.M.Z./U-5/L Case remanded.

Page No. 2 of 2
PLJ 2008 SC 957

[Appellate Jurisdiction]

Present: Muhammad Qaim Jan Khan, Muhammad Moosa K. Leghari, Syed Sakhi
Hussain Bukhari & Sheikh Hakim Ali, JJ.

AGRICULTURE DEVELOPMENT BANK OF PAKISTAN--Appellant

versus

MUBARAK DAIRIES LIMITED and others--Respondents

Civil Appeal No. 1214 of 2001, decided on 12.3.2008.

(On appeal from the judgment dated 22.2.2001, passed by the Lahore High Court, Lahore
in EFA No. 316 of 2000).

Contract Act, 1872 (IX of 1872)--

----Ss. 59 & 171--Respondents obtained loans from bank--Suit for recovery, decreed--
Question for resolution with regard to appropriation of specific amount which was
adjusted by the appellant/bank in another account of judgment debtors/respondents on its
own discretion, after having received that amount with specific instructions of
respondents, to appropriate that amount in the present decree--Bone of contentions
between the parties--Held: If the customer has deposited the amount with specific
instruction to adjust the amount in such and such account, in that event, when the bank
accepts it as such, it cannot vary it or change and adjust it to any other account--Section
171 of the Contract Act, would apply when no such specific, express or implied
instructions at the time of deposit were conveyed or imparted to the bank--Appeal
dismissed.

[Pp. 959 & 960] A & B

Mr. Iftikhar Malik, ASC for Appellant.

Ray Muhammad Nawaz Kharal, ASC for Respondents No. 1-5.

Date of hearing: 12.03.2008.

Judgment

SHEIKH HAKIM ALI, J.--Through this Civil Appeal, judgment dated 22.2.2001
delivered by a learned Division Bench of the Lahore High Court, Lahore, in EFA No. 316
of 2000 has been assailed.

2. Precis of the facts can be narrated in the following sentences. Respondents had
obtained different loans of various natures from the appellant bank on different dates.
Three loans obtained by the respondents were through separate three sanctioned letters
dated 23.12.1987 amounting to Rs. 27,15000/-, additional financial assistance of Rs.
30,00,000/- on 20.06.1988 and the amount of Rs. 15,00,000/- through letter dated
04.02.1989, which had swollen up to the extent of Rs.85,10,596/-, for the recovery of
which appellant-bank had instituted suit before the Banking Tribunal, Lahore on
04.02.1995 with additional prayer for the award of cost of Rs.21,504/- also. Admittedly,
the suit was decreed and execution of that decree had also commenced, before the
concerned Executing Court. Respondents paid different amounts, on different dates, the
detail of which is available in the impugned judgment also. Payment and receipt of the
amounts are not being disputed by either of the parties. The question for resolution in the
case is with regard to appropriation of an amount of Rs.29,20,000/-, which was adjusted
by the appellant bank in another account of judgment debtors/respondents on its own
discretion, after having received that amount with specific instruction of respondents to
appropriate that amount in the present decree. This became the bone of contentions

Page No. 1 of 3
between the parties. The judgment debtors/respondents filed a petition before the
Banking Court/Executing Court on 07.08.2000 with a prayer that the amount of
Rs.29,20,000/- has wrongly been adjusted by the Bank against the specific instructions.
While Bank invoked the Provision of Section 171 of the Contract Act, 1872 and pleaded
that it had got the right to adjust that amount to any debt obtained by the aforementioned
respondents. The petition was dismissed, so the judgment debtors/respondents filed the
above noted EFA No. 316/2000 before the learned Lahore High Court, Lahore, which
was accepted with direction to adjust the amount in dispute against the decretal amount.
The learned Division Bench, however was apprised of the payment of all the decretal
amount of the decree, so the execution petition, was dismissed by holding it to have been
satisfied.

3. Learned counsel for the appellant-Bank submits that Section 59 of the Contract Act,
1872 has wrongly been applied to the case. The proper provision applicable to the facts
and circumstances of the case was Section 171 of the Contract Act, 1872, by which
discretion was conferred upon bankers to retain as security for a general balance of
account, any goods bailed to them i.e. the disputed amount. Elaborating his arguments,
learned counsel submits that the above mentioned amount of Rs.29,20,000/- was rightly
and correctly appropriated to the others debts which were to be paid by the respondents.

4. We have considered the arguments of the learned counsel for the appellant bank. To
appreciate the arguments, reproduction of Provisions of Sections 59 and 171 of the
Contract Act, 1872 are necessary for ready reference:--

Section 59: “Application of payment where debt to be discharged is indicated. Where a

debtor, owing several distinct debts to one person, makes a payment to him, either with
express intimation, or under circumstances implying that the payment is to be applied to
the discharge of some particular debt, the payment, if accepted must be applied
accordingly.”

Section 171: “General lien of bankers, factors, wharfingers, attorneys and policy brokers.
Bankers, factors, wharfingers, attorneys of a High Court and policy brokers may, in the
absence of a contract to the contrary, retain, as a security for a general balance of account,
any goods bailed to them; but no other persons have a right to retain, as a security for
such balance, goods bailed to them, unless there is an express contract to that effect.

The words used in Section 171 of the Contract Act, 1872 “in the absence of the Contract
to the contrary, and unless there is an express contract to that effect” are very important
and cannot be neglected from consideration. The pre-condition for the applicability of
Section 171 of the Contract Act, 1872 is that there must not be an explicit or implied
contract indicative of the intention of the depositors. If the customer has deposited the
amount with specific instruction to adjust the amount in such and such account, in that
event, when the bank accepts it as such, it cannot vary it or change and adjust it to any
other account. Section 171 of the Contract Act would apply when no such specific,
express or implied instructions at the time of deposit were conveyed or imparted to the
Bank. Moreover, the provision of Section 171 of the Contract Act is not applicable to the
case on other counts also. In the instant case, the petitioner was made to know through
letter, the specific instructions by the judgment debtors. Therefore, the Bank having
accepted that amount with specific directions to adjust the amount into the indicated loan
amount (decretal amount), was bound to adjust it in that account. The Bank, in pursuance
of the indicated instructions, afterwards had no discretion/power/authority to vary that
agreed adjustment for any other account on its own whim and will, without express
consent of the judgment debtors/respondents. Therefore, the provision of Section 59 of
the Contract Act, 1872 has rightly been applied by the learned Division Bench, through
its judgment to the facts and circumstances of the present case. The wordings of the
Section “whether a debtor in several distinct debts to one person makes a payment to him,
either with express intimation, or under circumstances implying that the payment is to be
applied to the discharge of some particular debt, the payment, if accepted must be applied
accordingly................” are clear, used with lucidity and unambiguous, and need no
further comments or interpretation to apply it to the fact and circumstances of the case,
wherein express intimation was given to the Bank by the judgment-debtors to adjust the
disputed amount into the decretal amount.

Page No. 2 of 3
4. From the above discussion, we are not in agreement with the argument of the learned
counsel for the appellant-bank that Section 171 of the Contract Act, 1872 was applicable
to the instant facts and circumstances of the case. The judgment reported in PLD 1952
Dacca 279 (Munshi Emamuddin Ahmed, through Muhammad Abdur Rehman and others
Vs. Province of Bast Bengal and others) was correctly applied to the facts and
circumstances of the case. The appeal having no merit is, therefore, dismissed.

(M.S.A.) Appeal dismissed.

Page No. 3 of 3
 PLJ 2002 Quetta 1 (DB)

Present: RAJA FAYYAZ AHMAD, C. J. AND TARIQ

MEHMOOD, J.

M/s. QASIM & COMPANY and others-Appellants

versus

M/s. BOLAN BANK LTD. through its MANAGER, BRANCH

QUETTA -Respondent

R.F.A. No. 58 of 1999, decided on 4.6.2001.

Contract Act, 1872 (IX of 1872)--

—-S. 171-Deduction of specified amount from the account of plaintiffs to adjust

liability of principal debtor (their father) who had stood guarantor— Effect-Bank can
exercise right of set off only when money owed by it is a sum ascertained which
was due against his same customer and where there was no agreement, expressed
or implied, to the contrary-Banker should, therefore, always be guided by his
knowledge of circumstances, and should be conscious in exercising right of set off in
such cases-Record showed that either title of account was changed and/or the same
was being operated by plaintiffs even in the life time of their father, the original
account holder-Question of banker’s lien over amount in dispute did not arise and
respondent bank could not claim it as a set off as the amount did not belong to father
of plaintiffs-Mutuality is essential to the validity of set off but the same was liability
and plaintiffs were not guarantors of principal debtor-Plaintiffs, thus, were not liable
for the alleged guarantee of their predecessor or father, unless, the same was
established in Court of law and to the extent of the estate of deceased coming to their
hand-Pecuniary obligation arising out of contract by a deceased party would binjd
his legal representative to the extent of the estate of deceased to his hand—Action of
respondent bank to deduct specified amount from the account of plaintiffs as a set off
of their predecessor’s liability as a guarantor was patently illegal and plaintiffs were
entitled to the amount claimed and transferred from their account- Suit was decreed
against respondent in the specified amount with interest at the rate of 10 per cent
from the date of institution of suit till the date of decree and from the date of decree
till its realization.

[Pp. 10 to 13] A, B, C & D

PLD 1982 Karachi 200; PLD 1980 Karachi 115; PLD 1967 Karachi 829; (1846) 12 Cl. &
Fin 787; PLD 1980 Karachi 115; AIR 1960 Punj. 632; 1956 Mad. 570; AIR 1945 Mad.
447; PLD 1988 SC 67 ref.

SyedAyaz Zahoor, Advocate for Appellants.

Mr. H. Shakeel Ahmad, Advocate for Respondents.

Date of hearing: 28.5.2001.

JUDGMENT

Tariq Mehmood, J.--Facts, in brief, are that Qasim Khan had opened an
Account No. 251 with the respondent-bank on 25th March, 1992. It appears from record
that on 27th May, 1992, Azam Khan was allowed to operate the account. Further that
on 21st January, 1995, Qasim Khan had executed an unlimited letter of authority in
favour of his sons Muhammad Azam and Mir Alam to operate the account and also to
deal with bank on all matters, relating thereto. Ex. D/4 and D/6 also reflect that on
19th November, 1996, the title of account was changed to that of Qasim Khan
Muhammad Azam Khan.

Further facts are that M/s. Tammer-e-Nau Engineers and Contractors

(hereinafter referred to as the Principal Debtor”) were awarded a contract by Lahore
Page No. 1 of 9
Development Authority for the work “Development of Sabzazar Housing Scheme Phase-
II” on 27th May, i F’95. As per terms and conditions, pzincipal debtors furnished a
perfornuin, > guarantee to L.D.A. on 1st December, 1994, issued by the respondent-
Bank. Record reflects that due to alleged default by principal debtor, LDA vide their
letter dated 14th September, 1995 made a request through their bank for encashment of
performance guarantee. It is the case of respondent-bank that they had to own the
commitment and made payment. In the circumstances, principal debtor approached to
respondent-bank vide their application dated 26th November, 1995 and requested that the
amount paid to LDA be converted into ninning finance, after adjustment of 10% cash
margin. In order to secure such finance, in addition to securities already given by them
at the time of issuance of guarantee, Qasim Khan allegedly stood guarantor and executed
a document (Ex: D/13). The request was entertained and running finance was allowed.
Qasim Khan died on 28th June, 1996.

Record reveals that Mir Alam and Muhammad Azam are running their business
in the name and style of M/s. Qasim Khan and Company. And that Account No. 251
was being maintained by them. It also appears from record that appellants (Qasim
Khan and Co.) received a sum of Rs. 55,00,000/-from National Highway Authority,
Islamabad and remitted the same through telegraphic transfer in their aforementioned
account. The appellants produced memorandum issued by Islamabad Branch of
respondent-bank about the telegraphic transfer, commission and cost charged to the
appellants for the aforesaid transfer. The amount was actually credited in their account
with Bolan Bank Jinnah Road, Quetta, but when the appellants issued cheques, the
same were referred to drawer, although some of the cheques were honored. When
appellants approached the respondent-bank, they were informed that sum of Rs.
38,88,721.65 have been deducted from their account to adjust the liability of principal
debtor, as their predecessor stood guarantor.

In the events of the background, the appellants instituted a suit on 4th June,
1998 seeking recovery of Rs. 38,88,721.65 alongwith interest at the prevailing State
Bank rate with effect from 18th March, 1998 till the realization of decreetal amount. It
was the case of appellants that bank had no authority to debit their account in the
manner done by them. They also disputed the correctness of guarantee allegedly
executed by their predecessor or later father Qasim Khan. The defendant-bank
contested the suit and it was mainly contended that the bank had a lien or more
appropriately a right to set off against all money of the customer in its hand and bank
was at liberty to transfer the deposit to set off and liquidate debts due from principal
debtor.

The trial Court framed following issues on the pleadings of the parties:—

“1. Whether the suit of plaintiffs is not maintainable in view of preliminary

objections raised in the written statement?

2. Whether late Qasim Khan stood guarantor for M/s. Tammer-e-Nau

Engineers and contractors, for the construction work of Sabzazar
Housing Scheme, Phase-II, Lahore who did not complete the work in
time?

3. Whether transfer of Rs. 38,88,721.65 from the account of late Qasim

Khan to another account is according to the banking procedure?

4. Whether the plaintiffs are entitled for relief claimed for?”

Both the parties led evidence in support of their respective contentions. The trial Court
held that Qasim Khan had executed the guarantee (Ex: D/13) in his life time. Also that
he was holder of Account No. 251, which was being operated by the appellants in his life
time and even now, after his death. On the issue, whether the amount could be
transferred, the trial Court while deciding the issue in affirmative, simply relied upon a
letter (Ex: D/15) addressed to appellants, in reply to their complaint filed with the State
Bank of Pakistan.

Syed Ayaz Zahoor, learned counsel for the appellants vehemently argued that;

Page No. 2 of 9
 (i) the respondents-bank was not competent to make payment to Lahore1
Development Authority on the basis of guarantee (Ex-D/7) and since it was
an illegal act on the part of the respondent-bank, therefore, it alone was
responsible.

(ii) the guarantee was issued after obtaining security of hypothecation of

stock of construction material and equitable mortgage of bungalow worth
million of rupees but no action was taken by the bank either against
principal debtor or their guarantor,

(iii) that no lien was marked in the account of the appellants, and therefore,
adjustment/deduction by the bank was illegal,

(iv) no security was furnished by late Qasim Khan whereof bank could claim
lien,

(v) the alleged guarantee (Ex-D/3) was forged documents and it was for such
reason that it was never enforced in the life time of Qasim Khan,

(vi) the trial Court was under legal obligation to compare admitted
signature of Qasim Khan on record with his

disputed signatures and in absence of such exercise, it could not be

validly held by the trial Court that guarantee was

executed by late Qasim Kban.

(vii) the amount could not be recovered from the appellants without
instituting a suit for recovery against the principal debtor and the
guarantors, who had furnished security at the time of issuance of bank
guarantee or sanction of running finance,

(viii) the judgment of trial Court is result of mis-reading of

evidence.

Support was sought from-judgments reported in PLD 1982 Karachi page 200,
PLD 1980 Karachi page 115 and PLD 1967 Karachi 829.

On the other hand, Mr. H. Shakeel Ahmed, learned Counsel for the respondent-
bank contended that;

(i) appellants cannot challenge the action of the bank in making payment to
LDA, in that, Qasim Khan stood guarantor after making payment to LDA
and at the time of sanction of running finance;

(ii) the signature of Qasim Khan has been proved on record, in as much as, the
Bank Manager posted at the relevant time has appeared in Court and
deposed that Qasim Khan signed in his presence and further that even the
trend of cross-examination suggest that execution of guarantee by late
Qasim Khan has not been disputed by the appellants;

(iii) and that action of respondent-bank is protected by Section 171 of the

Contract Act, in that, it had a lien over it. He referred • PLD 1982 Karachi,
200, PLD 1980 Karachi 115, AIR 1960.

Although, lengthy arguments were addressed from both the sides, it appears to
us that the real pint involved in the controversy has been ignored not only by the learned
Counsel for the parties but also over-looked by the Court below. The real point for
controversy is whether in the facts and circumstances of the case, bank could claim a set
off in the amount lying in appellants’ account and it is important to point out that both
the parties advanced lengthy arguments on the matter not relevant including question
of Bank’s line, although bank in its written statement filed before the trial Court
actually claimed a set off. The other point for determination is whether Qasim Khan
executed alleged guarantee in his personal capacity or otherwise. In case, it was executed
Page No. 3 of 9
in personal capacity, whether bank could at all adjust the account of principal debtor on
the basis of its right of set off and to what extent against his successors. As there is
sufficient evidence on record to decide the points of determination, therefore, we proceed
to finally decide the controversy on the basis of available record, particularly when no
body requested for leading any additional evidence and otherwise there is sufficient
evidence on record (Refer 1997 SCMR 1849). It may not be irrelevant to point out
that admitted appellants were running and maintaining an account and the amount in
dispute was deducted from their account, to adjust the liability of principal debtor but
without any notice. So, every heavy burden was upon respondent-bank to defend their
action, particularly when they themselves produced documentary evidence to show the
nature of account being maintained by the appellants.

However, since Mr. H. Shakeel Ahmed, learned Counsel for the respondent-bank
while defending the action of bank, heavily relied upon Section 171 of the Contract
Act, therefore, it would be appropriate to reproduce Section 171 of the Contract Act
and to consider the judgments cited at the bar by learned Counsel for the parties. The
others we noted at our own to highlight the difference between Banker’s right of lien and
set off and the circumstances in which bank can claim such right and against whom:-

171. General lien of bankers, factors, wharfingers, attorneys and policy-brokers.

Bankers, factors, wharfingers, attorneys of a High Court and policy-brokers may,
in the absence of a contract to the contrary, retain, as a security for a general
balance of account, any goods bailed to them; but no other persons have a right
to retain, as a security for such balance, goods bailed to the, unless there is an
express contract to that effect.”

In simple words, a lien is a right in one man to retain that, which is in his
possession, but belongs to another, till certain demands of the person in possession are
satisfied.

(i) Fancy Investment Ltd. Karachi V. United Bank Ltd. and 2 others (PLD 1982
Karachi 200). Although both the learned Counsel have relied upon this judgment, but in
our view the same is not relevant in the facts and circumstances of the case. In context of
banker’s line, it was held in the said case that:

“Where security is delivered to a banker for a specific purpose it is inconsistent

with right of lien and impliedly there is an agreement to contrary and therefore a
banker cannot exercise lien over such property. Before lien is exercised by a
banker he has to establish that he has taken possession of security as a banker and
secondly there is no contract to contrary.”

Also, for determining the nature of lien, following passage was quoted from
Bran-doa Vs. Barnett (1846) 12 CI & Fin. 787, which is being consistently followed:-

“Banker most undoubtedly have a general lien on all securities deposited with
them as bankers by a customer, unless there be an express contract, or
circumstances that show an implied contract inconsistent with lien.”

(ii) Farooq Vs. M/s. Eastern Banking Corporation Ltd. Karachi (PLD 1980
Karachi 115)

Incidentally this judgment has also been relied upon by both the learned
Counsel but not relevant. In this case, the claim of a banker for lien under Section 171
of the Contract Act was repelled on the ground that the* bank had not proved that there
was any general balance outstanding against the customer in his account, and secondly
that no goods were pledged to the banker over which he could exercise lien.

(iii) Hussain Khan vs. Barkat Ali and others (PLD 1967 Karachi 829)

The judgment is also not relevant as in this case it was held that a building
contractor has no lien on constructions made by him for the payments of his bills.
This kind of lien is not recognized by Section 171 of the Contract Act. No lien can arise
from building contract, whether by operation of law or under the terms of the contract.
The rule is that property in materials built into a building ceases to be the property of
Page No. 4 of 9
the contractor and becomes that of the owner. The contractor, in the circumstance,
could not lay any claim to the property and was not entitled to proceed against the
same in execution of the decree which he had obtained against the owner.

(iv) Punjab National Bank Ltd. Vs. Arura Mai Durga Das (AIR 1960 Punjab
632).

It was held in this case that a bank has no lien upon the deposit of a partnership
for a balance due by one of the partners. Although this judgment has been cited by
learned Counsel for the respondent-bank, it appears to us that same goes against him
but since it is relevant, therefore, we found it appropriate to reproduce relevant portion
of the judgment: -

“(14). The rule of English law that the Bank has a line or more appropriately, a
right to set off against all monies of his customers in his hands has been accepted
as the rule in India. According to this rule when monies are held by the Bank in
one account and the depositor owes the Bank on another account, the Banker by
virtue of his lien has a charge on all monies of the depositor in his hands and is
at liberty to transfer the monies to whatever account the banker may like with a
view to set off or liquidate the debts.---------------------

15. In order to create Banker’s lien on several accounts it is

necessary that they must belong to the paver in one and in the same
capacity. Where the person has two accounts, one a trustee account
and another private account at a Bank, deposits in the two accounts
cannot be set off, the one against the other.----

16. Bankers have a right to combine one or more accounts of the

same customer. But it cannot combine the account belonging to another or to
himself alone with another account which is the joint
account with another and third person.

17. Similarly, the Banks have no lien on the deposits of a partner, on his
separate account for a balance due to the Bank from the firm. Therefore the
banker is entitled to combine all accounts kept in the same right by the
customer. It does not matter whether the accounts are current or deposit or
whether they are in the same or different branches. It is of essence to the
validity of a banker’s lien, that there should be a mutuality of claim
between the Bank and the depositor. In order that it should be
permissible to set off one demand against another both must mutually
exist between the same parties.

On this reasoning the joint and several accounts operated by two or

more persons cannot be adjusted against the individual deposit of one of
them. It is not open to the bank to claim the deposit of one partner made on
his separate account in order to utilize other deposit against the debt due
from the firm. In other words partnership deposits cannot be applied
to the individual indebtedness of one of the partners. Courts in England
do not allow a lien to the banker on the deposit of a partner on separate
account for a balance due to the Bank from partnership firm.”

(v) N. Muhammad Hussain Sahib Vs. The Chartered Bank and another
(AIR 1965 Madras 266).

It was held in the said case that :--

“The general lien of bankers over any goods bailed to them is embodied in
Section 171 of the Contract Act. The question is whether any such lien may
be over money deposited by the customers. Where moneys are deposited in a
bank the ownership of the moneys passes to the bank and the right of the bank
over the moneys lodged with it would not be really a lien at all and it would be
more correct to speak of it as a right of set off or adjustment. Whether the right
of the bank is called a lien or set off, the said right can be exercised only by the
bank by getting the funds deposited in its branch by the customer transferred to
Page No. 5 of 9
 it with the consent of the customer. It is not open to the customer to call upon
the bank to exercise any such lien or set off.”

(vi) It would also be advantageous to refer the judgment reported in AIR 1956
Madras 570, as in the said judgment their lordships were pleased to highlight distinction
between lien and right to set off or justification by banker:-

“The lien under Section 171 can be exercised only over property of some one else
and not his own property. Thus when goods are deposited with or securities are
placed in the custody of a bank it would be correct to speak of the rights of the
bank over the security or the goods as a lien because the ownership of the
goods or securities would continue to remain in the customer. But, when
moneys are deposited in a bank as a fixed deposit, the ownership of the moneys
passes to the bank and the right of the bank over the moneys lodged with it
would not be really a line at all. It would be more correct to speak of it as a right
of set off or adjustment.”

(vii) In another judgment reported in AIR 1928 Lahore 316. It was held that
general lien held by the bank does not entitle it to appropriate the fixed deposit in either
or survivor” account towards the debt due by one of them alone. Following observations
were made after giving brief background of the case, which is reproduced here under:-

“A bank issued a fixed deposit receipt for Rs. 500 in favour of B and R, the
amount being payable to either or survivor. R obtained an overdraft form the
bank. The bank credited the amount due under the fixed deposit receipt to this
overdraft and on B demanding payment informed him of the action taken on it
and refused to pay. B thereupon brought an action against the bank for the
recovery of the amount due under the fixed deposit receipt.

Held that the bank could not appropriate the money towards the debt due by R
alone.”

(viii) Similarly in other case reported in AIR 1945 Madras 447. Bankers lien and
bankers right of set off were explained in the following words:-

“Banker’s lien is the right of retaining things delivered into his possession as a
banker if and so long as the customer to whom they belonged or who had the
power of disposing of them when so delivered is indebted to the banker on the
balance of the account between them provided the circumstances in which the
banker obtained possession do no imply that he has agreed that this right shall
be excluded. Banker’s lien can properly be said to arise only in respect of any
securities held by the bank. If the customer deposits certain securities and
ultimately there is a sum due to the bank, the bank has lien over these securities
and it could hold them against the amount due by the customer. In the case of
money of the customer paid into the bank into his current account or deposit
account the amount ceases to be the property of the customer and becomes the
property of the banker and the banker is thereafter under a contractual
obligation to repay or give credit to the customer for the amount. In such a case,
there is no property of the customer of which the banker has possession, the
possession of the banker co-existing with his own ownership of the money.
Accordingly, the essential conditions necessary to the existence of the lien are lacking.

Under his right of set off the banker can take into account any item in his own
favour as against any payment in by his customer before arriving at the balance subsisting
between them.”

(ix) Mercantile Bank of India Ltd. Vs. Rochaldas Gidumal and Co.

(AIR 1926 Sind 225).

It was held that lien of a bank over the money of its customer does not extend
to amounts, which have been handed over for a specific purpose. The relevant
portion is reproduced hereunder:

Page No. 6 of 9
 “Where a person hands over certain money to a bank to be transmitted to
another place and to be paid to the payee there and the bank issues a bill of
exchange or a demand draft, the money is held by the bank under a special contract
which excludes the general lien of banker’s on goods bailed. The fact that the remitter
and payee are the same person or that the money is to be transmitted by telegraphic
order makes no difference.”

It may also be seen that contract between the bank and its customer is a contract
between a debtor and a creditor. In Sheldon and Fidler’s Practice and Law of Banking,
Eleventh Edition, at Page No. 31, following observation has been made:-

“As we have seen, the contract between the banker and his customer is a contract
between a debtor and a creditor. The contract contains an implied promise by the
banker to repay the money lent to him by the customer. Where, however, a customer
has an account which is in credit but owes money to the banker in respect of
another account, the banker may have the right to reduce his liability to repay the
customer by the amount which the customer owes to him, or, if that is the case, to
reduce the amount which the customer owes to him, by the credit balance in the
customer’s account. This is known as the banker’s right of set-off or of combining
accounts. The banker may exercise the right of set-off only when the money owed to
him is a sum certain, which is due, and where there is no agreement, express or
implied, to the contrary.”

So, it is clear that bank can exercising right of set off only when the money owed by
it is a sum certain, which is due, against his same customer, and whether there is no
agreement, expressed or implied, to the contrary. The banker should, therefore, always be
guided by his knowledge of circumstances, and should be conscious in exercising right of set
off in such cases. Applying these principles, simple facts are that Qasim Khan had opened
an account in his name, but subsequent documents produced by bank itself (Ex: D/4 and
D/6) reflect that either the title of account was changed and/or the same was being
operated by Muhammad Azam Khan and Mir Alam Khan, even in the life time of Qasim
Khan. Qasim Khan allegedly executed guarantee (Ex: D/13) but in his personal
capacity.

Admittedly Qasim Khan died on 28th June, 1996. There is no denying of the fact that
appellants continue operating the said account, but this cannot be ignored that persons can
do business in any name and they might be running it in the name of their late father out
of love, respect etc. The firm, name is merely a convenient mode of describing and it is not
very important, in that, bank has not disputed that after the death of Qasim Khan they are
running and maintaining the account. Also that T.T. was purchased by M/s. Qasim Khan
and Co. (Ex. P/3-A) and credited in their account, at Quetta. The case of
appellants/plaintiffs is very simple and brief. They say that on 21st February, 1998, an
amount of Rs. 5.5 million was remitted from Islamabad in their account, which was duly
credited but the bank without any lawful authority transferred a sum of Rs. 38,88,721.65 in
the account of principal debtor. Azam Khan when appeared in witness box specifically
stated that he had received a bill from the National Highway Authority and sum of Rs. 5.5
million was sent through telegraphic transfer from Islamabad Branch to respondent-bank.
The amount was duly credited in their account. This admittedly happened after about one
year and eight months of the death of Qasim Khan. There is also no denial of the fact that
an amount of Rs. 38,88,721.65 was transferred from the account of appellants to adjust the
liability of principal debtor (and alleged liability of Qasim Khan as guarantor, in his personal
capacity). It is also not disputed that neither the transfer was made with the consent or
authority of the appellants nor any prior notice was given to them. In such circumstances,
the burden was upon the bank to justify the transfer. Respondent-bank, in its written
statement set up the plea that they had a lien or more appropriately a right to set off against
all money belonging to alleged guarantor to liquidate debts due, in what ever account, the
amount may be. But it is not that simple as appellants were maintaining and operating A/C
No. 251 with the respondent Bank in their own right, amount of Rs. 5.5 million was
received by the appellants in their own right from LDA, nothing to the contrary has been
proved or even alleged by the bank and statement of Azam Khan went unchallenged, in as
much as, the same was remitted by appellants themselves to the credit of their account. The
question of banker’s lien over the amount in dispute did not arise and respondent bank
could not possibly claim it as a set-off as the amount did not belong to Qasim Khan and that
Page No. 7 of 9
mutuality is essential to the validity of a set-off but the same was lacking. And learned
counsel for the respondent also failed to satisfy us, as to how so called amount of alleged
guarantor could be claimed as set-off, to adjust the liability of a principal debtor. Also that
the appellants or their partners were not guarantors of principal debtor. Further that resort
could only be made to a Court of law, in the peculiar circumstances of the case So,
appellants were not liable for the alleged guarantee of their predecessor or late father, unless
it could be established in a Court of law and to the extent of the estate of the deceased
coming to their hands. But from the evidence produced on record, it is clear that account
was being maintained by Muhammad Azam Khan and Mir lam Khan even in the life
time of their father Qasim Khan. Although, initially he had opened the account in his
personal capacity but subsequently it under went a change. It is also admitted feature of
the case that after the death of Qasim Khan, they were operating and maintaining the
account in their own right. Needless to add that documents were produced by bank
itself to establish these facts. The alleged guarantee executed by Qasim Khan was
personal in nature. Although clause 9 of the guarantee provides that in the event of his
death, it shall continue to be binding and operating against his successors. However ,,
the settle principle of law is that a pecuniary obligation arising out of the contract by a
deceased party will bind his legal representative to the extent of the estate of the
deceased coming to his hands. Refer ADBP vs. Sanallah Khan (PLD 1988 SC 67).
However, the extent to which contractual obligation is binding on the legal
representative of a party to such contract has been elucidated in the following extract by
Keith in his book on Elements of Law of Contract, which has been quoted with approval
by the Hon’ble Supreme Court in the afore mentioned cited case:-

“Generally a contractual obligation unSertaken by deceased promisor would be

binding on his legal representatives to the extent of the estate of the deceased
promisor in their hands as this obligation of the legal representative is not
personal. However, there is one exception to this rule in case of contracts which
involve personal elements, and if personal skill is the essence of the contract, the
obligation under the contract can be discharged only by that party whose
personal skill is involved. The legal representatives of the deceased promisor
cannot be required to perform, nor can they render performance of contract
involving personal skill and action. On the death of a person, on principle, the
benefits and burdens of his contracts pass to the legal representatives as part of
his estate.”

It was also observed that:-

“From this a general principle has arisen that a pecuniary obligation arising out of
the contract by a deceased party will bind his legal representative to the extent of
the estate of the deceased coming to his hands. This principle has been statutorily
recognized in Section 50 of the Civil Procedure Code which lays down the extent
to which a decree passed against a judgment-debtor who dies before the decree
ha»been fully satisfied, against his legal representative.”

Finally it was held that:-

“Similarly in case of money decree the liability of the legal representative of a

party who has died after the passing of the decree extends under Section 52 of the
C.P.C. to such property of the deceased as is proved to have come into their
possession or to the extent of the property of the deceased in respect of which such
legal representatives have failed to satisfy the Court that they have duly applied
such property of the deceased which came to their possession. In this context
of the law, without proving that any property has come into the hands of the son
and to what extent in value compared with the pecuniary liability of the deceased
father, it cannot be recovered form the son. This aspect was completely overlooked
by the trial Court and the First Appellate Court and no such inquiry was made or
any proof furnished by the appellant-bank so as to make Respondent No. 1 liable
for the debts of his deceased father.”

It may also be seen that the learned trial Court while deciding Issue N o. 3 in
favour of bank has simply relied upon a letter (Ex: D/15) issued by the State Bank of
Pakistan, in reply to complaint filed by the appellants against ‘the respondent. The

Page No. 8 of 9
approach of learned trial Court was totally illegal as Civil Court was under a legal
obligation to decide the validity of action of the respondent with reference to law and not
to base its decision, on the opinion expressed in the letter by some official of State
Bank, particularly when no law was referred and more particularly when the
appellants have specifically alleged that Manager of State Bank of Pakistan and Manager
of Bolan Bank were relative interse. We may add that we have intentionally with held
our views about genuineness of the guarantee allegedly executed by late Qasim Khan,
as it was not found necessary in order to resolve the real controversy and lest it may
prejudice the case of either party, in case appropriate proceedings are filed.

In view of our findings, we declare the action of respondent-bank as patently

illegal and held that the appellants are entitled to the amount claimed and transferred
from their account. Also that Section-34 CPC authorizes a Court to award interest from
the time of the institution of the suit upto the date of decree and further till the
realization of the amount. Although the act of respondent bank in with-holding the
amount of appellants or making deduction from their account and adjustment in the
account of principal debtor was wholly illegal and appellants have also claimed
interest from the date of deduction, the learned Counsel for appellants has not
addressed any argument, whether we can grant such interest or the same is governed
by some substantive law. Further neither any damages have been claimed against the
bank nor any evidence was led to justify the same. Accordingly, we set aside the
judgment and decree dated 25th September, 1999 passed by learned Additional District
Judge-II, Quetta and decree the suit of appellants against the bank iii the sum
of Rs. 38,88,721.65 with interest at the rate of 10% per anrium from the date of
institution of suit till the date of decree and from the date of decree till its realization,
with cost through out. Decree sheet be drawn.

(A.A) Appeal accepted.

Page No. 9 of 9
P L D 2004 Karachi 407

Before Mushir Alam, J

TRADING CORPORATION OF PAKISTAN (PVT) LTD. SHAHRAH-E-FAISAL,

KARACHI---Plaintiff

Versus

MURSHED ENTERPRISES and 2 others---Defendants

Suit No. 1056 of 1991, decided on 23rd December, 2003.

(a) Contract Act (IX of 1872)--

----Ss. 151 & 152---Imposing liability on bailee for loss of goods bailed---Essentials---
Before imposing such liability, existence of contract of bailment between parties, loss of
goods bailed, and failure of bailee to take reasonable care must be shown---Principles.

It is apparent from sections 151 and 152 of Contract Act, 1872 that the moment goods are
delivered to the bailee, he assumes duty to take as much care of the goods bailed to him,
as a man of ordinary prudence would have taken of his own goods. Unless, it is provided
otherwise by way of any special contract, a bailee cannot be held responsible for the loss,
destruction or deterioration of the goods bailed. If the bailee is able to demonstrate that he
has taken as much care of the goods bailed to him as a man of ordinary prudence would
have taken, then even if the loss, destruction or deterioration has taken place, he gets,
statutory exoneration from any such liability by virtue, of section 152 of the Contract Act.

To foist the responsibility and impose liability as a bailee; it is to be shown that there was
a contract of bailment either express or implied between the parties, that a loss,
destruction, or deterioration of the goods bailed had occasioned; and lastly, the bailee had
not taken as much care of the goods bailed to him as a man of ordinary prudence would
have taken under a given circumstances.

When loss, destruction or deterioration has occurred initial burden is on the bailee who is
custodian of warehoused goods to prove that he had taken such care as was expected
from a person of ordinary prudence in similar circumstances. Once such burden is
discharged, then the burden shifts on the owner of the goods to prove that the custodian
of the goods was negligent in discharge of his statutory duty to take care, of the goods
entrusted to him.

Burden of proof in. terms of section 151 of the Contract Act initially is on the bailee to
show that he had taken proper steps and measures as may be expected from a person of
ordinary prudence under the similar eventuality as was confronted by the bailee.

(b) Contract Act (IX of 1872)---

----S. 151---Degree of care to be taken by bailee of goods bailed--Extent---Degree of

such care would be that of a man of ordinary prudence, which may vary from case to
case---Principles.

In terms of section 151 of the Contract Act, the degree of care, which a bailee assumes is
that of a man of ordinary prudence. No hard and fast rules could be outlined for fixing of
such degree of care. It may vary from case to case. The degree of care is also dependent
on the nature, description, quality, and quantity of goods and so also nature of bailment
contract.

Ordinarily a bailee is required to ensure that, (i) all reasonable precautions has been taken
to avoid a risk, which reasonably could be foreseen. (ii) in case where a contingency has
arisen then, it is to be seen that with what diligence and promptitude the bailee has acted
to avert or minimize the loss. (iii) the promptitude he showed to apprise the bailor of the
contingency encountered by him, to seek his opinion as to further course of action, (iv).

Page No. 1 of 18
To what extent bailee complied with the directions of the bailor after the bailee notified
the contingency encountered by him.

(c) Contract Act (IX of 1872)---

----Ss. 73, 151 & 152---Bailment contract, breach of---Suit for damages by bailor
---Sugar stocked in godown hired, by bailor in low-lying area--Loss/shortage of sugar
due to rains alleged to be due to negligence of bailee---Plea of bailee was that rain water
had entered through broken ventilators and joint of ceiling, for which he could not be
held responsible---Validity---Evidence on record showed that bailee had earlier pointed to
bailor the condition of godown and its missing window panes ---Bailee had notified
bailor on very next day of rain and its adverse effect on sugar stored, over which bailor
had asked Godown Owner to carry out necessary repairs ---Bailor in his letter addressed
to Godown Owner and Insurance Company had acknowledged that all possible steps had
been taken to sweep out water to minimize loss/damage---Report of Surveyor not
challenged by bailor had given detail account of efforts made and measures taken by
bailee to avert loss---Such report had confirmed such plea of bailee---Bailee had, thus,
discharged initial burden imposed under S.151, Contract Act, 1872--Burden had shifted
to bailor to show that measures and steps taken by bailee were not reasonable or not
expected from a man of ordinary prudence in order to avoid loss ---Bailor had not placed
on record any material to show that bailee had failed to discharge his duty in terms of
contract---Location of godown in low-lying area had contributed and aided in
aggravating loss---Evidence on record showed that bailee had taken all reasonable
precautions to protect sugar bailed with him--Bailee, thus, could not be held responsible
for loss occasioned on account of rain---Neither bailee had hired godown nor he was
responsible to carrying out its repairs---Rain water had forced into godown for being
situated below road level---Terms of contract had envisaged spillage, tearing of bags, re-
stuffing or re-filling shifting from one godown to another---Sugar by nature was
dissoluble---All such factors had contributed to loss and shortage in quality and quantity
to certain degree, which was inevitable and inherent ---Bailor had failed to discharge his
duty in mitigating loss as was required from a person of ordinary prudence by not
carrying out repairs as notified by bailor and for failing to claim loss on account of rain in
terms of Insurance Policy, Bailor had failed to show any special contract, whereby bailee
could have been held responsible for such loss under all circumstances---Suit was
dismissed in circumstances.

Messrs Mastersons through Partner v. Messrs Ebrahim Enter prizes and another 1988
CLC 1381; QBE Insurance Ltd.

Trustees of the Port of Karachi 1992 CLC, 904; Marine Cargo Claims by William Tetley,
2nd Edn., p.119 and Rice Export Corporation v. A.H. Corporation 2002 CLC 609 ref.

(d) Contract Act (IX of 1872)-----

----Chap. IX [Ss. 148---181]---Bailment---Obligations of bailor not defined in Chap. IX

of Contract Act, 1872---Effect---Such obligations could be inferred.

(e) Contract Act (IX of 1872)-----

----S. 73---Breach of contract---Party claiming compensation or damages on account of

such breach was bound to take steps to avert or mitigate loss---Principles.

Where a person claims some compensation or damages on account of breach of contract,

then it is incumbent on him to take such appropriate measures and do all what is within
his power to do in order to lessen, avert or mitigate such damages or loss.

PLD 1990 Kar. 395; 1999 CLC 483 and 1993 SCMR 441 rel.

S. Mamnoon Hassan for Petitioner.

Hamza I Ali for Respondents.

Date of hearing: 28th October, 2003.

Page No. 2 of 18
JUDGMENT

Instant suit has been filed by the plaintiff for the recovery of Rs.41,22,000 from the
defendant No.1, a Partnership Firm and its partners i.e. defendants Nos.2 and 3
respectively. Facts relevant for the disposal of this suit are as follows:--

The plaintiff appointed the defendant No.1 as Custodian to store the Sugar imported by
the plaintiff. It is claimed that, from February, 1988 to July, 1988, plaintiffs imported and
entrusted High Quality 26,735 metric tons of Sugar, to the defendant No.1 for storage and
deliveries to the plaintiffs or their nominees against the Delivery Orders. According to the
plaintiff out of the total quantity entrusted to the defendant 432.200 Metric Tons of, Sugar
was short delivered. The Surveyors of the plaintiff and their Insurance Company
confirmed such short delivery. Plaintiff averred that, the defendants did not dispute the
short delivery but, attributed short delivery, damages or loss due to flood and rain.
According to the plaintiffs, in terms of Clause 10 of the Agreement dated 13-7-1987, the
defendants are liable to make good the losses. It was further pleaded that, such losses
could be set-off against the pending bills and/or bank guarantees in terms of Clause 10 of
the Agreement. It is the case of the plaintiffs that, defendant No.1, being bailee of the
goods, had not taken good care of the entrusted goods, as required under law. According
to the plaintiffs, the defendants, to avoid the liability have asserted loss on account of
heavy rainfall. It is further the case of the plaintiff that, the shortage was not covered
under the Insurance Policy, as such, difference for the short delivery could not be claimed
from National Insurance Corporation. Plaintiffs also refuted the assertion of the
defendants that, actual weight difference are minimal or that it occurred owing to
piecemeal handling of the consignment and the quantity of shortage, falls within the
permissible limit of tolerance allowed by the plaintiff. The plaintiffs have claimed the
value of short delivery in para 10 of the plaint as follows:-

“That the plaintiff is entitled for the loss/shortages suffered by it and to collect and
recover from the defendants the market value/price of the aforesaid quantity of sugar
short delivered to the plaintiff. The plaintiff is, therefore; entitled to recover and receive
from the defendants the following amounts.

Total shortage 432.200

M/Tons @ Rs.10,000

Per M/Tons. Rs.43,22,00,000

Less the bank guarantee. Rs.02,00,000,00

Amount recoverable. Rs.41,22,000

Defendants filed joint written statement and so also made Counter claim for
Rs.3,38,162,00.

Defendants denied that, they were appointed ‘Custodian’ in terms of Agreement dated 13-
7-1987. It was asserted that, the defendants were awarded custodianship in respect of
sugar stored at Rashid Godown, vide letter dated 20-1-1998, and in two other godowns of
(i) Usman Textile Mills and (ii) Dost Muhammad Cotton Mills, through another letter
dated 4-7-1988.

Defendant asserted that, the plaintiffs without consulting the defendants hired the above
godowns. It was pleaded that, the choice of the godowns was not proper, more
particularly, Rashid Godown beside situated in low-lying area was unprotected against
floodwater. It was asserted that, the quantity entrusted to the defendants was short. It is
the case of the defendants that, shortage in Rashid Godown was negligible i.e. 1.6% of
the total quantity stored. As regard Dost Muhammad Godown, shortage was barely .
017%, which percentage, according to defence is permissible limit of tolerance. It was
further pleaded that, the sugar stored in the Rashid Godown was affected by rain and
flood and the negligible shortage was on account of frequent handling, bursting and re-
stitching of bags with the resultant spillage which loss is unavoidable and accepted as per
Page No. 3 of 18
trade usage. It was further claimed that the plaintiffs though entered into an agreement to
engage the defendant as Clearing & Forwarding Agent but his service as a Clearing Agent
were not availed. Instead, suit consignment was got cleared and forwarded for storage by
plaintiff through other Clearing and Forwarding Agents. It was pleaded that, damage/loss
to the bulk of goods stored, occurred due to act of God. According to the defendants, they
took all precaution and care as a person of ordinary prudence would have taken, of his
own goods under the given circumstances.

In Paragraph 4(i) to (viii), of their joint written statement, defendants outlined the
measure and steps taken by them to avert and mitigate the loss. It was pleaded that,
damage was caused due to heavy rainfall with hailstorm and overflow of drain water at
the entrance gate. Nearly 3 to 4 lower layers of stacks of sugar bags were damaged due to
floodwater and the top layers of sugar bags were damaged by the leakage of rainwater
from the ceiling and broken ventilators. Defendant without loss of time on the following
date i.e. 18-7-1988 reported the situation to the plaintiffs.

Resultantly, National Insurance Corporation (“NIC”), on the instruction of the plaintiff,

appointed their Surveyors to assess the loss. At the same time, plaintiffs also directed the
godown owners to repair the godown. It is further pleaded that, the Insurance Surveyors,
to assess the damage separately, desired for separation of the bags damaged by
floodwater and rainwater but, the plaintiff declined such exercise. Instead, the plaintiffs
settled the claim with the Insurance Company, on or about 31/8/1989.

Further defence of the defendants was that, in fact, no actual weighing was done at the
time when the goods were received in defendant’s custody. It was asserted that, the
plaintiff had alleged negligence after almost one and a half years from the date of actual
loss. It is also asserted that loss, if any were to be made good by the Insurance Company
and since the plaintiff had already settled whatever loss they suffered from the Insurance
Company therefore, there appears to be no justification to claim any further loss from the
defendants.

As regard counter-claim it was asserted that the plaintiffs have illegally en cashed the
Bank Guarantee, which were not given in respect of subject contract. Secondly, the
defendant No. 1 have not been paid rental for three (3) months amounting to Rs.75.000 at
rate of Rs.25,000 per month. Defendants also claimed mark-a on counter-claim amount
from the date of suit till payment.

Following consent issues were adopted on 4-4-1993:--

(1) Whether defendant No.1’s appointment by the plaintiffs as “Custodian’ of

plaintiffs’ goods was made under Agency Agreement dated 13-7-1987 and letter
dated 20-1-1988?

(2) Whether letter dated 20-1-1988 is independent of Agency Agreement dated 13-7-
1989 and whether the said letter alone determines rights and obligations of parties
to suit?

(3) Whether damage/loss to goods occurred due to negligence of the defendant No.1
as alleged?

(4) Whether damage/loss to goods stored in Rashid Godown occurred due to alleged
heavy rains and leaking roof and due to its location in low-lying area in the
circumstances alleged in para.4 of the written statement?

(5) Whether loss in goods stored in 4 Godown of Dost Muhammad and Usman was
caused due to alleged frequent handling and bursting and re-stitching of bags and
was allegedly negligible and acceptable by trade usage as alleged in para.7 of the
Written statement?

(6) Whether the plaintiff failed to take alleged steps as stated in para 6 of the written
statement?

(7) Whether plaintiffs settlement with insurer was premature and collusive?
Page No. 4 of 18
(8) Whether the plaintiffs unlawfully encashed bank guarantee of Rs.2 lac as alleged?

(9) Whether the plaintiffs failed to pad custodianship charges for the months of
January, February, and March, 1990 to the defendant No. 1 as alleged?

(10) To what amounts, if any are the plaintiffs entitled against the defendants?

(11) To what amount, if any are the defendants entitled against the plaintiffs in respect
of their counter-claim

(12) What should the decree be?

Plaintiff in support of its claim examined its Manager OSD, Mr. Manzar Saleem The
defendant examined Muhammad Sami-ul-Haq one of the partners of defendant No.1
firm.

Findings on the aforementioned issue ad-seriatim are recorded as follows:-

Issues Nos. 1 and 2:-

Both the issues being inter-related are decided together.

It is the case of the plaintiffs that defendant No.1 was appointed under an Agreement
dated 13-7-1987 (Exh. No.P5/1) Mr. Mamnoon Hassan, learned counsel for the plaintiff,
contended that in terms of the Agreement (Exh. No.P 5/1) the defendant No.1 was
appointed as a Clearing Agent and under the terms of the agreement defendant ssssNo.1
was also responsible to provide storage facility for the imported consignment and give
delivery to the plaintiffs’ Representative.

It was asserted by Mr. Mamnoon Hassan that, when the consignment arrived at Karachi,
it was entrusted to the defendant under separate letter dated 20-1-1988 (Exh. No.P 5/1).
According to him, such entrustment was in continuation of the agreement Exh. P 5/1.

Mr. Hamza I. Ali, learned counsel for the defendants controvert the stance of the
plaintiffs. It was urged that, the appointment as a Clearing Agent is entirely different from
the appointment as a custodian of the subject goods. He contends that, the plaintiff did
not engage the services of the defendant No.1 as Clearing Agent. Subject consignment
was got cleared through other Clearing Agents. He therefore argued that terms and
conditions of the Exh.P 5/1 cannot be invoked. Mr. Hamaza, stressed that defendant’s
services were availed only as custodian of sugar, in terms of Exh.P.5/2. The plaintiffs
hired the godowns of their own choice, without consulting the defendants. He, therefore,
argued that, had the appointment as a custodian been in terms of the Agreement dated 13-
7-1989 (Exh.No.P5/1) then subsequent appointment through (Exh.No.P5/17) would have
referred to the above Agreement. Whereas, in Exh.No.P 5/17 reference is made to a letter
dated 20-1-1988 i.e. Exh.No.P 5/2. It was therefore, asserted that, the defendant was
appointed and acted as custodian in terms of Exh.No.P 5/2 dated 20/1/1988 and Exh. No.
P 5/ 17 dated 4-7-1988.

Heard the arguments and perused the record.

In order to appreciate the arguments of both the learned counsel, examination of

Agreement dated 13-7-1987 (Exh. No.P 5/1) would be beneficial. The recital reads as
“WHEREAS the TCP has decided to award its contract in connection with the clearance
of the imported goods to the Clearing Agents named above”. In Clause (1) it was required
that the “Clearing Agents should be in lawful possession of Godown space of not less
than 10,000 square feet’. It was further provided in clause (2) that, Godown for storage
space shall be in conformity given in annexure I. Specification As per Annexure ‘I’ gives
standard specifications for various categories of goods. For the category of sugar the
specifications were ‘covered space ensuring complete protection against sun and rain’.

Under clause 4, thereof, it is provided that the Clearing Agent shall remove the goods to
Godown or KPT warehouse…………….. for storage as and when required by TCP’s
Page No. 5 of 18
…………….. and give delivery to the nominee……………. Other terms and condition
required Clearing Agent to maintain Avery Weigh scales, fire-fighting equipment obtain
bonded warehouse. Obtain insurance cover for the risk of damage to the Godown
acquired by him. Clause 10 reads “The Clearing Agent shall be liable to indemnify the
TCP against all damages/shortage/losses occurring in his Godown for any reason
whatsoever shall be assessed by TCP .... ... …

It has come on record that, the plaintiffs did not engage the defendant No.1 as their
Clearing Agent in respect of subject goods, nor the goods were stored in the warehouse of
the defendant No. 1. In cross examination, witness of the plaintiffs had stated that,

“I see Exh.P 5/2 and say that this was a bonded warehouse. It is correct that the
defendants were appointed custodian in respect of sugar cargo only. “ The witness
further admitted,

“We appointed Shadab Corporation, as our clearing and forwarding agents. It is

correct to suggest that two other vessels had subsequently arrived at the Karachi
Port with sugar cargo, which was imported by us. Those were M.V Belley and
M.V. Bahia. The clearing agent of former was Mobco and of the later was
Shahdab Corporation.”

The witness, further deposed that;

“it is correct to suggest that, initially we appointed defendants as custodian of the

sugar cargo which was to be stored in the Godown of Rashid Texitle Mills
limited. I see Exh.P5/17 and admit its contents”.

Recital in the Agreement, Exh.P5/1, specifically provided that, the agreement relates to
the appointment of defendant No.1 is as clearing agent only clause (2) of the said
Agreement prescribes the specifications for the godowns. Clause (10) encompasses the
indemnity clause against all damages/shortages/losses occurring in his godowns, for any
reasons whatsoever and recovery of such damages/shortage/loss against the Bank
Guarantee and pending bills.

It has come on record that, the plaintiff acquired all the Godowns themselves. It is,
therefore, not the case of the plaintiffs that, the Godowns were not of the Specification, as
provided in the Agreement (i.e Exh.P-5/1). Since, the plaintiff did not engage the services
of the defendant No.1 as Clearing Agent (Recital). Nor the defendant removed the goods
to the Godown (Clause-4). Nor the defendant No.1 (clause 9) obtained the insurance
cover. Nor the damages/shortages/losses occurred in his godowns (Clause 10) as provided
for under Agreement Exh.P-5/1.

As noted above, plaintiffs witness admitted that, the defendant No.1 was appointed as
custodian in terms of Exh.P-5/2 dated 20-1-1988 for Rashid Textile Mills SITE. In
respect of Godowns of Usman Textile Mills and Dost Muhammad Cotton Mills Limited,
as per Exh.P-5/17 dated 4-7-1988.

Examination of last mentioned appointment of custodian i.e, Exh.P-5/17 shows that, it

makes a reference to the letter-dated 20-1-1988 (Exh.P-5/2). Such fact fortifies the
contention of Mr. Hamza that, had the appointment of custodian been made in terms of
Exh.P-5/1 then, in subsequent appointment as custodian, reference should have been
made to the Agreement (Exh.P-5/1) and not to Exh.P-5/2.

In view of the foregoing, I have no doubt in my mind that, the plaintiff appointed the
defendant No. 1 as ‘Custodian’ of the subject consignment in terms of letter dated 20-1-
1988 (Exh.P-5/2 and letter dated 4-7-1988 Exh.P-5/17. The appointment as custodian was
not in terms of the Agreement dated 13-7-1987 (Exh.P-5/1). Issue No.1 and 2 are
answered accordingly.

Issue No.3.

Admittedly, damage to the sugar was caused due to rainwater and hailstorm. Short
delivery is also not disputed.
Page No. 6 of 18
In order to ascertain as to whether the damage/loss to goods occurred due to the
negligence of the defendant No.1. It will be beneficial to examine what were the duties
and obligations of the defendant No.1 under the contract of bailment.

In order to ascertain, whether the defendant No.1 caused the loss. It would be beneficial
to appreciate the degree of care that a bailee is required to take. Degree of care, a bailee is
required to take, is provided for, in terms of sections 151 and 152 of the Contract Act,
which reads as follows:

“Section 151. Care to be taken by bailee.--In all cases of bailment the bailee is
bound to take as much care of the goods bailed to him as a man of ordinary
prudence would, under similar circumstances, take his own goods of the same
bulk, quality and value as the goods bailed.

Section 152. Bailee when not liable for loss etc. of thing bailed.--The bailee, in
the absence of any special contract, is not responsible for the loss, destruction or
deterioration of the thing bailed if he has taken the amount of care of it described
in section 151.’

From a bare perusal of above provisions, it is apparent that, the moment goods are
delivered to the bailee, he assumes duty to take as much care of the goods bailed to him,
as a man of ordinary prudence would have taken of his own goods. Unless, it is provided
otherwise, by way of any special contract, a bailee cannot be held responsible for the loss,
destruction or deterioration of the goods bailed. If the bailee is able to demonstrate that,
he had taken as much care of the goods bailed to him as a man of ordinary prudence
would have taken. Then even if the loss, destruction or deterioration has taken place, he
gets statutory exoneration from any such liability by virtue of section 152 of the Contract
Act.

To foist the responsibility and impose liability as a bailee, it is to be shown that, there was
a contract of bailment either express or implied between the parties. That a loss,
destruction or deterioration of the goods bailed has occasioned and lastly, the bailee had
not taken as much care of the goods bailed to him as a man of ordinary prudence would
have taken under a given circumstances.

As held above, the relationship between the parties was that of bailor and bailee. The
contact of bailment was expressed i.e. in writing (Exh.P-5/2 and Exh. P-5/17). It is
admitted position that loss had occasioned on account of rain and flood water.

Admittedly the plaintiffs themselves acquired the godowns, where the subject sugar was
stored. The specifications of the godown as were considered suitable for the purpose of
storage of the sugar are specified by the plaintiffs themselves in the Annexure ‘1’ to the
Agreement (Exhibit No.P-5/1) i.e., covered space ensuring complete protection against
sun and rain. In all fairness, since the plaintiffs hired the godowns, it is but legitimate to
presume that, the plaintiffs acquired the godowns as per their own specification. In terms
of section 151 of the Contract Act, the degree of care, which a bailee assumes is that of a
C man of ordinary prudence. No hard and fast rules could be outlined for fixing of such
degree of care. It may vary from case to case. The degree of care is also dependent on the
nature, description, quality, and quantity of goods and so also nature of bailment contract.

Terms and conditions of bailment are recorded in Exh.P-5/2, Which inter alia provide for
receipt of the consignment. Proper stacking, keeping account, storage of damage bags
and sweeping. Re-stitching, and re-filling torn and damaged sugar bags. Liaison with
customs, submission of periodical reports, arrange security, notify any repairs etc
required in the Godwon. To follow other direction as may be given by the TCP from time
to time and remuneration for the services.

Since the terms and conditions of bailment were reduced in writing, the responsibility and
or liability of the bailee would be governed under the terms set out in Exh.P-5/2. No
special terms and condition, as regard the consequences for the loss if any, were
stipulated that may foist the liability for loss, destruction or deterioration on the bailee as
required under section 152 ibid.
Page No. 7 of 18
Ordinarily a bailee is required to ensure that, (i) all reasonable precaution has been taken
to avoid a risk, which-reasonably could be foreseen. (ii) in case where a contingency has
arisen then, it is to be seen that with what diligence and promptitude the bailee has acted
to avert or minimize the loss. (iii) the promptitude he showed to apprise the bailor of the
contingency encountered by him, to seek his opinion as to further course of action, (iv).
To what extent bailee complied with the directions of the bailor after the bailee notified
the contingency encountered by him.

When loss, destruction or deterioration has occurred initial burden is on the bailee who is
custodian of warehoused goods to prove that he had taken such care as was expected
from a person of ordinary prudence in similar circumstances. Once such burden is
discharged, then the burden shifts on the owner of the goods to prove that the custodian
of the goods was negligent in discharge of his statutory duty to take care of the goods
entrusted to him.

Before examining the degree of care and precaution taken by the bailee. It is to be seen as
to what was the contingency or situation to which the bailee was required to act, and then
to see whether under such contingency he acted in a manner expected from a man of
ordinary prudence.

It has also come on record that, on 17-7-1988, there was heavy rainfall in Karachi. The
defendant No.1 on the very next day through letter dated 18-7-1988 (Exh.P-5/18)
notified, the plaintiff of damage caused by the rain and floodwater.

Now it is to be seen as to with what promptitude and prudence the defendants

encountered and faced the contingency and how they acted to avert the loss and damage.

In this case, the bailee, defendant No. 1 asserted that on the fateful day, on account of
heavy rainfall and gushing of water they acted as a person of ordinary prudence would
have acted under the given situation. Defendants categorically stated in para-4 of the
written statement that the damage/loss to the bulk of goods stored occurred due to the Act
of God and elements of nature namely rain and floodwater. Against which, the defective
Rashid Godown provided wholly inadequate protection. It was asserted that, defendant
No.1 having complied with ail its obligations under the letter/contract of 20-1-1988
particularly are generally having taken as much care of the goods bailed as a person of
ordinary prudence would under similar circumstances taken care of his own goods,
defendants detailed the steps taken by them in subparagraph (i) to (viii) of Para-4 of the
written statement.

One of the obligations of the bailee in terms of the Exh. P-5/2 as referred to above was
‘to intimate the bailor about any repair etc, required in the Godown for proper
storage/safety of TCP cargo.

Defendants caused the production of letter dated 11 February, 1988 (Exh.No.P5/16)

through the plaintiffs, own witness, Exh.P-5/16 recounts the telephonic conversation that
the defendants had with the plaintiff who were informed (1) the Godown has not properly
been cleaned, (2) the floor of Godown is damaged at 12 places, (3) 14 (Fourteen)
windows panes are missing, and (4) service toilets are out of commission.

There is nothing on record to show that the plaintiff paid any heed to the defects pointed
out by the defendants, in the Godown or that, the plaintiff took any remedial measure to
carry out the repairs or remedy the defects pointed out by the defendant No. 1.

On the very next day of natural calamity, the defendants through letter dated 18-7-1988
(Exh.P-5/18) intimated the plaintiffs:-

“that as a result of heavy. downpour yesterday afternoon during deliveries the

rainwater entered into Rashid Godown through main gate damaging bottom layers
of sugar bags. The roof of the Godown also leaked at various places.

Further, following the conditions prevailing in Hyderabad and the situation in

some of the areas of Karachi including S.I.T.E grew tense disrupting the normal
Page No. 8 of 18
 activities, nevertheless, all possible steps were taken to sweep out the water as far
as and as quicker as possible to minimize the loss/damage.

In response of such intimation, plaintiffs directed the Godown owners through letter
dated 20 July, 1988 (Exhibit No. P-5/19) to carry out the necessary repairs to avoid any
further loss to the Government Cargo. Through letter of same date (as per Exhibit No.P-
5/20), the plaintiffs directed their insurer (NIC) as under:--

“It has been brought to our notice by the custodian of the Godown M/s. Murshid
Enterprises, Karachi that as result of recent heavy rains in Karachi, the rainwater
entered through main gate into Rashid Textile Mills Godown, and damaged
bottom layer of sugar bags. The roof of the Godown also leaked at the various
places. However, all possible steps were taken to sweep out the water to minimize
the loss/damage.

In the light of the above circumstances, you are requested to carry out survey,
assess the loss sustained to the consignment through your surveyor and make
payment of the loss so sustained to TCP as per the above stated Godown
insurance cover.

Plaintiffs accordingly appointed the Surveyors to carry out the survey and assess the loss.
The Report of Surveyor dated 24 September, 1989 (Exhibit No.P-5/38) is relevant for the
purpose of determining the degree of care taken by the defendant No.1 as bailee. Report
reads as follows:--

“On 17th July 1988 a very intensive rain with hailstorm hit SITE area Karachi
around 0900 hours. It rained whole day almost non-stop until next day. The
Meteorological report as of 17th and 18 July, 1988 is attached to this report as
Annexure ‘ A’ .

According to the eye-witnesses, the water from the roadside rushed into the
Godown through the main gate. Due to the heavy rainfall the drain, which runs
between the boundary wall of the godown and road also over flew and its,
contents also joined the water from the roadside and entered into the Godown.
The situation soon turned into a flood due to the fact that the level of the floor of
the Godown was lower than the roadside. Further there was neither any
obstruction being constructed nor, any precautionary speed breaker type slope was
built at the Godown entrance. Hence the water easily penetrated until the far ends
of the Godown. There were approximately 431,000 bags stored at the Godwon at
the time of flood and almost last three to four bags of each row of stacking was in
the water. Besides floodwater the rainwater also caused the damage to the bags
through the broken ventilators, joints and the ceiling. So much so that the top two
or three bags of all the rows at the rear ends were fully soaked with the rain water.

IMMEDIATE PRECAUTIONARY MEASURES TAKEN.

The flow of water into the Godown was so sudden and intense that the Custodian
representatives and the labourers present inside the Godown became panicky and did
whatever they could do to prevent further damage to the cargo:

The representative of the custodian immediately erected some sort of temporary

barrier with bricks and sand and whatever else they find at the entrance of the
Godown: Whereas some labourers when could not find any other thing, stuffed and
stacked sugar bags over the flood water at the entrance as well as all along the drive
way. While this measure did prevent more water from entering other parts of the
Godown, but it also caused loss of contents of those bags which were placed at the
entrance and the drive way of the Godown, as the water washed away not only the
sugar contents but also in some cases the plastic bags as well.

As soon as the rain stopped the Custodian representatives started pumping out the
water from Godown but those bags which were soaked continue loosing their sear
contents due to the change of atmospheric conditions of the cargo.

Page No. 9 of 18
 Value at the Risk ....…………….

Delivery of sugar as sound bags after rains and flood………………

Stocks in hand as on 21-9-1989 .....................

Laboratory Test…………………..

Joint Survey

The undersigned surveyors representing TCP had attended various joint surveys
held with the Underwriters i.e., NIC’s surveyors M/s. Republican Surveyors and
Khalid & Associates. On 31st August, 1989 a final joint survey was held and NIC
surveyors and officials agrees to compensate TCP to the tune of about Rs.900,000
covering a loss of about 90,000 M. Tons of cargo due to flood which in our
opinion was a fair and just settlement.

However, since damage caused due to rain was not covered in the policy hence no
compensation was considered on those bags damaged due to rainwater.

ASSESSMENT OF LOSS.

After very careful inspection and checking the cargo was found damaged and lost
due to flood and rain in four categories as per details mentioned in Annexure ‘ B’
which become an in integral part of this report.

This report comprises of four pages including one Annexure duly stamped and
signed. Any page, which does not bear the stamp of this office and under noted
initial/signature, is considered invalid.

The above survey represents our findings at the times of inspection only in
accordance with the relevant date, information available at the time of survey and
is issued without prejudice to the Rights of Whomsoever Concerned.”

It may be noted that till submissions of the Report dated 24-9-1989 (Exh.P-5/38),
settlement of the claim, the plaintiffs did not raise any demand. Plaintiffs for the first time
through Exh.P-5/3, P-5/4, P-5/5, called upon the defendant No.1 “to explain the reasons
with evidence for the shortage and why recovery should not be made from you for the
quantity of Godown shortage in terms of Clause 2(c) of our agreement with you.”

In the first place, there is no Clause 2(c) either in Agreement (P-5/1) or in Appointment of
Custodian letter (Ex P-5/2). In said communication no negligence was attributed on the
part of the plaintiffs Negligence for the first time was alleged in the plaint.

As noted above, burden, of proof in terms of section 151 of the Contract Act initially is
on the bailee to show that he had taken proper steps and measures as may be expected
from a person of ordinary prudence under the similar eventuality as was confronted by
the bailee.

In this case, the defendant No.1 had caused the production of letter through the plaintiffs
own witness (Exhibit P-5/16) as already discussed above, wherein, defendant No.1 had
pointed out the condition of the Godown, more particularly missing of the windows
panes. It may be noted that the defendant No.1 promptly notified the plaintiff on the very
next day of the rain and its adverse effect on the goods stored through letter dated 18-7-
1988 (Exh.No.P-5/18). In response thereto, the plaintiff for the first time asked the
Godown owners i.e, Rashid Textile Mills through letter dated 20 July, 1988 (Exh. No.P-
5/19) to carry out the necessary repairs. On the same date (Exh. No.P-5/20) they directed
the Insurance Company to carry out the survey and assess the loss. The plaintiff also
pointed out that “however all possible steps were taken to sweep out the water to
minimize the loss/damage”.

From the evidence, discussed above, more particularly Exhs.P-5/18, P-5/20, in both the
letters addressed to the Godown owner and the Insurer, it was acknowledged by the
Page No. 10 of 18
plaintiff. “However, all possible steps were taken to sweep out the water to minimize the
loss/damage. Even the Survey Report dated 24-9-1989 (Exh.P-5/38), referred to above,
more particularly the underlined portion, also gave detail account of efforts made and
measure taken by the defendants to l avert the loss.

From the evidence discussed above, it is evident that, the defendants have discharged
initial burden imposed under section 151 of the Contract Act. Defendants successfully
‘demonstrated that they have taken all steps and measure to avert and minimize the loss
to the goods bailed and had taken as much care which a person of ordinary prudence
would have taken to protect his own goods in the given circumstances.

After the defendants have discharged their burden to show that I they had taken as much
care as a person of ordinary prudence would have taken. The burden had shifted on the
plaintiffs in the present case to show that the measures, and steps taken by the defendants
were not reasonable or not expected from a man of ordinary prudence in order to avoid
the loss. (For reference one may see, Messrs Master sons through its Partner v. Messrs
Ebrahim Enterprises and another (1988 CLC 1381) and the case of QBE-Insurance Ltd.,
v. Trustees of the Port of Karachi (1992 CLC 904).

No material or evidence was bought on record by the plaintiff to show that the defendant
failed to discharge their duty in terms of bailment contract. On the contrary, it was the
plaintiff who was responsible to hire the Godown in low-lying area. The location of the
Godown on low-lying area also contributed and aided in aggravating the loss. It has also
come on record that despite notification of fault in godown (as per (Exh.P-5/88 dated 11-
2-1988), plaintiff took no steps nor directed the Godown owners to carry out the repairs
or restore the broken windows. From the plaintiffs own surveyor report, it is apparent that
the defendant No.1 did whatever they could do to prevent further g damage to the cargo.
Ample evidence has come on record that the bailee had taken all reasonable precautions
to protect the sugar, which was on bailment with him. Therefore; he cannot be held
responsible for the loss that occasioned on account of rain and resultant overflow of water
and flood like situation. Plaintiff was not able, to show that there was any special
contract, whereby the bailee could have been held responsible for loss, damage or
destruction under all circumstances. The issue No.3 is accordingly, answered in negative.

Issue No.4: This issue relates to the damage/loss to the sugar stored in Rashid Godown It
has come on record that most badly affected godown was Rashid Godown. Defendant
No. 1 in the para.2 and 4 of the written statement had stated the reasons for such loss as
(i) the Godown was situated in the low-lying area i.e., below the road level. (ii) Godown
was damaged and windows were broken (Exhibit No.P-5/16), (iii) Leaky, insecure roofs
and joints of ceiling (iv) Unprotected against floodwater. Total sugar that was stored in
Rashid Mills Godown is reflected from the statement of the quantity of sugar vessel-wise,
given in letter of the defendant No.1 dated 17-1-1990 (Exh.No.P-5/40), ^addressed to the
plaintiffs, which reads as follows:-

“This is to inform you that deliveries of the flood affected consignments of sugar arrived
by the following vessels have since been completed and the final summarized position is
as under: --

Vessel Stored Qty. Delivered Delivered Total Loss

sound Qty. Damaged Delivered Ascedaft
Qty. Final
Delivery
Silver 240270 208440 32034 Bags 240474 Bags 2
Athens Bags Bags - 1374985 Bags Excess WT-
-12005 51 -1042 M/Tribunal - 11796.9 2 Short
5M/T 2 M/T. 85
Subicevac 257000 245513 - 1433 2 Bags 259845 Bags-2
Bags Bags -366.1 Bags excess
-12850 M/T - 12275.650 87M/Tribunal -12641.837 WT.20
short.
Belle 32000 Bags 29145 Bags 2855 Bags 32000 Bags Bags -
-1600 M/T - 1457.250 191.881 -1589.131 Wt.-I

Page No. 11 of 18
 M/Tribunal
Bahia 5600 Bags- 4980 Bags 620 Bags 5600 Bags Bags
280 M/T - 249 M/T - 28500 - 277.500 WT. 2 M/T
M/Tribunal
534870 488078 49841 Bags: 3379.19 Excess
Bags Bags - 1901553 Bags -3049
-26735.51 - 24403.900 M/Tribunal -26305.4 Short
5M/T 5M/T 53M/T Weight 2
M/T

The consignment accounts are in course of preparation and will be sent within a
week’s times. Kindly file a final claim on the insurance Corporation for the above
loss of 430.062 Metric tons.

The surveyors of the plaintiffs through their Survey Report dated 23rd April, 1990
(Exh.P-5/55) certified the vessel-wise position, which report in verbatim reads as
follows:

“This addendum is issued to the Survey Report No.512/TCP-6/89 dated 24th

September, 1989 regarding the loss of sugar consigned to Trading Corporation of
Pakistan at Rashid Textile Godown SITE Karachi on 17th & 18th July, 1988.

While in the Annexure ‘ B’ attached to the above report a quantity of 636.700 M

Tons was classified by us as ‘damaged with contents partially lost’ and 88.750 M.
Tons of sugar was estimated as washed away due to flood and rain, we now
certify and reproduce below the exact quantity of sugar lost after completion of all
the deliveries to the successful tenderers:

S Name of Vessel Value at Risk No. of Net Delivery Net Shortage

No. Bags M.Tons (Book M .Tons M.Tons.
Balance)
1 M.V. “Silver 136.349 6.817.450 6.608.920 208.530
Athens”
2 M.V. “Subicevak” 257.000 12.850.000 12.641.837. 208.163
3 M.V. “Belie” 32.000 1,600.000 1,589.131 10.869
4 M.V. “Bahia DF 5.600 280.000 277.500 2.500
cienfuegos”
430.949 21.547.450 21.117.388 430.062.

SUMMARY

Total cargo in the Godown at the time of flood as per 21,547.450 M.Tons
book balance.
Cargo delivered as sound between 19th July, 1988 & 19,263.335. M.Tons
23rd September, 1989.
Cargo delivered as salvage after 24th September, 1989. 1,854.053.M. Tons
Net shortage due to flood and Rain. 430.062. M.Tons
Volume of loss admitted by NIC on 31st August, 1989 90.000 M. Tons
vide Policy No. NIC/KF/01-0223-2/88 under ,
perils Atmospheric Disturbance, flood (Copy
attached) As Annexure ‘A”.
Volume of loss apparently caused due to rain for which 340.062 M.Tons
no compensation has yet been considered by NIC vide
above policy.

The above information represents our findings at the times of inspection only in
accordance with the relevant data available at the time of survey and is Issued Without
Prejudice to the rights of whomsoever concerned.

The said report of the Surveyors was never questioned of challenged by the plaintiffs.
Such reports confirmed the stance taken by the defendant No.1 that the level of the floor,
of Godown was lower than the roadside. The rainwater entered through broken ventilator
Page No. 12 of 18
and joints of ceiling for which the defendant No.1 cannot be held responsible. As neither
the defendants hired the godown nor, they were responsible to carry out the repairs. The
water that forced into the Rashid Godown as was situated below the road level as pointed
out by the Surveyors of the plaintiffs themselves. Under the circumstances, there are
compelling reasons to decide the Issue No.4 in negative. The defendant No.1 was
successful in establishing the reason for the loss as narrated in para.4 of his written
statement and as confirmed by the Surveyors Reports.

Issues No.5:

This issue relates to the loss that occasioned in four godowns of Dost Muhammad and.
Usman Textile. The alleged loss only reflects to be 2.2 % of the total quantity of the sugar
stored therein. Case of the defendant as regard such loss is contained in para. 3 of the
written statement as 2.138 M.T. The reason for “such negligible loss” was attributed to
frequent handling and bursting and re-stitching of bags with the resultant spillage and
loss of contents. It was claimed that such negligible loss is wholly unavoidable and is
accepted as such by trade usage. Said facts were reiterated in Paragraphs 24 and 25 of the
Affidavit-in-Evidence. Such assertion on oath made by the defendant’s witness was not
challenged by the plaintiffs in cross-examination and had gone unrebutted. Learned
counsel for the defendant No.1 in support of his contention that, such loss in handling
contracts is usual and inherent. Mr. Hamza has placed reliance on the principle enshrined
to freinte de route i.e., a normal minor loss during the voyage. He has referred to Marine
Cargo Claims by William Tetley, Second Edition at page 119.

In order to decide the issue examining the evidence that has come on record would be
beneficial.

It has come on record through various stock reports i.e., Exh.Nos. P-5/6, Exh. P-5/7, Exh.
P-5/8 and Exh. P-5/9, relating to sugar arrived through (i) M.V. Belle and (ii) M.V. Bahia
De Cienfuegos, and stored in Usman Godown Hall No. 1. & 2. Dost Muhammad
Godown Hall No.1 & 2. Usman Godown No.2 and Dost Mohammad Godown,
respectively. Summery in seriatum in above Exhibits is as follows:

Quantity Stored Quantity delivered Difference between Remarks

A&B
103106 Bags - 103995 Bags - Bags 889 delivered Residual stock of
5152.650 M/Tons 5152.230 M/Tons in excess, consignment were
Weight 0.420 subject to double
shifting.
M/Tribunal out
turned short.
39600 Bags - 39640 Bags- Bags - 40 delivered Residual stock
1980.000. M/Tons 1978.930 M/Tons in excess consignment was to
Weight- 1.070 double shifting
M/Tribunal out
turned short
53000 Bags- 53110 Bags - Bags - 110
2650.000 M/Tons 2649.352 M/Tons delivered in excess
Weight 0.648 M/T. -------------
in short
56800 Bags - 57020 Bags- Bags - 220
2840.000 M/T. 2840.000 M/T delivered in excess -------------
Weight - Nil;

Total loss on such head of account is also reflected in respect of Dost Muhammad and
Usman Textile Godown in letter of the defendant, addressed to the plaintiff Exh.P-5/12
dated 6-2-1990 which reads as follows:-

“We hope prompt action has been taken in this regard at your end.

The detailed position of portion of this consignment stored elsewhere and not
affected by flood is as under:

Page No. 13 of 18
S. Name of Godown Qty. Stored Qty. delivered Difference
No. Ex Godown, between A & B
(1) Dost Muhammad 39600 Bags 39640 Bags Bags = + 40 E
= 1980.000 M/T = 1978.930 M/T Weight=- 1.071
(2) Usman Textile 103106 Bags 103995 Bags Bags = + 889
=5152.650 = 5152,230 M/T Weight = - 0.42
M/Tribunal

The weight difference under serial No (i) and (ii) above are minimal occurred owing to
piecemeal handling of the consignment and falls within the permissible limit of tolerance
allowed by T.C.P.”

The plaintiffs never challenged such stock reports or the claim of the plaintiffs as has
come on record. Therefore, I am of the view that in handling contract for (1980 M.T +
5152.65 M.T=) 7132.65 M.T loss of 1.490 Metric.

He has referred to Marine Cargo Claims by William Tetley, Second edition at page 119 it
reads as follows:

“Minor Inevitable loss or damage

Wine in bulk always has a minor inevitable loss or freinte de route but Courts at
first were reluctant to entertain the proposition. One of the earliest decisions was
by the Cour d’ Appel de Montpellier. Wine in bottles, on the other hand, has no
such loss and no freinte de route is allowed. Flour suffers a minor loss. in bulk
with time and travel, as does cement.

Certain commodities packed in cartons and bags will usually suffer a small
amount of damage through normal handling. In the Canadian trade, approximately
half of one per cent. of the bags of a shipment of cement will be expected to be
torn, although this will not result in a loss of half of one per cent. of the total
shipment, because the cement can be re-bagged. In France, where the packing
would appear to be different, and not five or seven-ply bags, the freinte de route
for cement has been higher, even up to 4 % and 5 % of the bags carried.

Coffee in bags has a certain freinte de route.

Where inferior packing is used, a higher freinte de route is to be expected. Thus

where inferior plastic bags were used for a cargo of engrais (chemical feed) and
the shipper attached 600 empty bags to a shipment of 60,000, a frainte de route of
0.25 % was not considered excessive.

The Court D’Appel de Paris observed that rice packed in single thickness jute
bags will escape and that the carrier is not responsible for the loss in virtue of 4(2)
(m) of the Hague Rules:

`Wastage in bulk or weight or any other loss or damage arising from inherent
defect, quality or vice of the goods.’

In the same tradition Mc. Nair, J. held that a cargo of potatoes:

“ .. ... Will inevitably suffer some minor damage by way of condensation, staining
or wasting of a few bags .... “ and consequently the carrier was not responsible.”

The U.S. Court of Appeals noted that fully mature garlic is perishable in nature
and as-such its shipment is likely to involve a degree of deterioration.

Unpacked automobiles suffer minor scratches and carrier is not responsible for
these. The leading case for years has been The Southern Cross, where it was held
that carriers are responsible for all but “slight dents and scratches”. A number of
French Courts have held carriers responsible for damage to unboxed automobiles,

Page No. 14 of 18
 but not for minor inevitable damage. Carriers must use the most modern methods
to load, stow carry and discharge unboxed automobiles, nevertheless, a certain
allowance is made for minor damage. A Canadian case, however, allowed nothing
for minor damages to unpacked automobiles on the ground that careful handling
and stowage could have prevented even minor dents and scratches.

Tallow seems to have a normal one quarter of one per cent loss because of tallow
sticking to tanks, pipes, etc.”

This Court had occasion to examine the loss on account of Mercantile Usage in respect of
Cargo Handling Contract in the case of Rice Export Corporation v. A.H. Corporation
2002 CLC 609. In said case shortfall to the extent of 1.6% that occurred in rice handling
contract was held to be within the permissible limits and inherent in grain handling
contract.

In order to determine whether the loss was minimal, nominal and that it was inherent or
otherwise. Nature and terms and conditions of bailment, handling, or warehousing
contract, nature of goods, quantity of goods, duration of the contract, storage conditions,
peril or vices inherent in the goods subject-matter of contract are some of the relevant and
pertinent considerations.

Terms and conditions of Custodian Ship Agreement are recorded in Letter of appointment
as Custodian Exh.P-5/17 read with Exh.P-5/2 relevant clauses 4 and 5 reads as:

4. to store damaged bags and sweeping in the Godown separately free from sound
stocks after proper weighment etc. To be done in presence of the TCP’s surveyor.

5. To make arrangement for re-stitching and refilling of, torn/damaged sugar bags
in Godown in presence of TCP’s surveyor and to, keep proper account thereto.

In terms of above conditions, it is apparent that the contract envisaged spillage of sugar
from torn and damaged bags, sweeping and collection of spilled sugar, filling and
stitching of torn and re-filled bags. In carrying out all such exercise certain degree of loss
is but inevitable and inherent. Rain and floodwater caused the damage. The goods
warehoused was sugar. By nature sugar is dissoluble. Terms of contract envisaged,
spillage, tearing of bags, re-stuffing or re-filling, shifting from one Godown to another
are the factors that contribute to loss and destruction in quality and quantity to certain
degree.

Looking at total quantity, the loss that occasioned and complained of in respect of
Godown of Dost Muhammad and Usman, appears to be but nominal and inherent in such
nature of contract and the defendants cannot be called upon to account for the same.

Issue No.6.

Issue No.6, it is in respect of the responsibilities of the plaintiffs as a bailor. Though in

Chapter IX of the Contract Act dealing with bailment responsibilities and obligations of
bailee are outlined in detail but it does not in so many words defines the obligations
duties of the bailor. Such obligations could be inferred. From Chapter VI of the Contract
Act, which deals with consequence in case of breach of contract. Where a person claims
some compensation or damages on account of breach of contract then it is incumbent on
such person to take such appropriate measures and do all what is within its power to do in
order to lessen, avert or mitigate such damages or loss. (See PLD 1990 Karachi 395, 1999
CLC 483 and 1993 SCMR 441).

In case in hands in para. 6 of the written statement, the defendant had asserted that, the
loss/damage had occurred on account of rain. It was next asserted that; the goods were
insured against the rain and floodwater therefore the plaintiffs should have recovered the
entire amount from the Insurance Company for the loss and not for merely a part of loss.
In the instant case, it has come on record that subject goods were duly insured. Mr.
Mamnoon Hassan, learned counsel for the plaintiffs asserted that, the loss recovered from
the Insurance Company only related to the loss that had occasional on account of

Page No. 15 of 18
depreciation in quality and not on account of the quality. In order, to appreciate the
contention raised by Mr. Mamnoon, it will be proper to examine the insurance policies.

Such Policies have been produced alongwith the covering letter Exhibit No.P-5/63.
Originally it appears that that the Policy No.01.0099-3/88 was for the fire. Risk covered
was No.(i) FIRE, (ii) FLOOD, RAIN. The policy was of Rs.10,80,00,000 in respect of
the goods stored in the godowns. The policy was subject to Flood Endorsement as per
clause -attached hereto. The Endorsement attached to the policy reads as follows:--

(A) Hail, Snow, Wind, Hurricane, Cyclone, Tornado or Typhoon; and/or,

(B) Rain, provided the building(s) in respect of which the claim made or containing
the property in respect of which the claim is made is so damaged by any of the
perils specified in a supra as to admit rain water to the interior of the said
building(s); and/or

(C) Flood, which shall mean:

(1) the overflowing or deviation from their normal channels of either natural or
artificial water courses.

And

(2) Any flow or accumulation of water on the grounds except when such flow or
accumulation be of water emitted from any water supply main tap, pipe, value or
the like.

All the insurance policies provided similar coverage i.e. against rain, hail flood, fire,
burglary and theft. Therefore, it cannot be asserted that, such policies were only confined
to the loss that occasioned on account of the loss in quality of the sugar that occurred on
account of rain and floodwater as suggested by Mr. Mamnoon Hassan.

It may be observed that, in all the Surveyors Reports the loss had been attributed on
account of rain and flood water. National insurance Corporation (“NIC”) even requested
the plaintiffs to segregate the rain affected sugar with that of flood affected sugar in order
to ascertain the loss on each account but the plaintiffs declined to incur the expenses to
segregate such bags that were effected. Reference may be made to letter of NIC dated 18-
5-1989 (Exh.No.P-5/31) and reply of plaintiffs dated 4-6-1989 (Exh.No.P-5/32). Even the
Surveyors of the plaintiffs recommended that “if NIC still insist that their surveyors”
conditions be fulfilled, then we have no choice but to arrange and segregate the damaged
bags to their entire satisfaction. There is nothing on record to show that, the plaintiffs
took any measures to meet the demand of the Insurance Company. Though the report
dated 24 September, 1989 of surveyor (Exh.No.P-5/38) show that, NIC agreed to
compensate the plaintiffs to the tune of about Rs.900,000.00 covering a loss of about
90.00 M. Tons of cargo due to flood. However, they were of the opinion coat the damage
caused due to rain was not covered in the policy hence no compensation was considered
on those bags damaged due to rain water. Such opinion of the surveyor in view of the
coverage provided by the Insurance policy as reproduced above was not in consonance of
the policy. From bare perusal of the Insurance Policies as reproduced above, it is apparent
that; damage on account of rain was also covered.

The defendant No.1 since from the beginning when the demand was raised insisted that
the shortage, which occurred on account of damage to the tune 430.06, should be claimed
from the Insurance. Reference can be made to the letter dated 17-1-1990 (Exh.No.P-
5/40). It appears that, the plaintiffs have failed to take and invoke the insurance policies
in respect of the loss that has occasioned on account of rain anti flood in terms of the
surveyor report. Even the plaintiffs have not deducted the amount of Rs.900,000 out of
the, total loss attributable to the defendant No.1 nor they have shown or disclosed the
amount they have recovered by disposing off salvaged sugar. The witness of the plaintiffs
admitted “that insurance claim and salvage are deducted from the total amount but in this
case he is not aware why such adjustment has not been given”.

Page No. 16 of 18
Therefore, in view of the foregoing, the plaintiffs have failed to discharge its duties to
mitigate the loss as was required from a person of ordinary prudence firstly, the plaintiff
failed to carry out the repairs as notified by the defendant No. 1 (Exh.P-5/16). Secondly,
they failed to claim loss on account of rain and flood water in terms of Insurance Policies
(Produced alongwith Exh.P/63) pursuant to notice of the defendant under Order XII, Rule
8, C.P.C. issue is accordingly answered in affirmative.

Issue No.7:

Learned counsel for the defendants does not press this issue. No finding is recorded in
this regard.

Issue No. 8:

This issue relates to the encashment of the Bank Guarantee by the plaintiffs. It was
contended by the learned counsel for the defendants that no Bank guarantees were
furnished to the plaintiffs in respect of contract of Bailment. It was urged that the Bank
Guarantees were only in respect of an agreement (Exh.No.P-5/1) in relation to the
Clearing Agent. Since the defendant No.1 was not awarded Contract of clearance of the
consignment in issue, therefore, such Guarantees could not have been enchased in respect
of the alleged breach of custodian Agreement (Exh.No.P-5/2).

Mr. Mamnoon Hassan, learned counsel for the plaintiff, countered that, the Guarantees
were furnished in terms of the agreement dated 13-7-1987 (Exh.P-5/1) appointing the
plaintiffs both as a Clearing Agent as well as Custodian.

While deciding issues Nos. 1 and 2 above, it was held that, the plaintiffs appointed the.
defendant as custodian for the subject sugar under letters dated 20-1-1988 and 4-7-1988
(Exh.P-2/5 and Exh.P-5/17 respectively) which were an independent Contract. Therefore,
it is to be examined whether under the terms of the Contract (Exh.No.P-5/2) Defendant
had furnished any Bank Guarantee.

Copies of the Bank Guarantees are produced as Exhs.Nos.P-5/13 and P-5/14 respectively.
From the reading of Bank Guarantee, it will clarify as to for what purpose and under what
Contract such Guarantees were furnished. The opening recital of the Guarantee reads as
follows:

“Whereas Messrs Murshid Enterprises have entered into an agreement with you
and hereby you have hired their services as your Cleaning Agent on condition that
we guarantee to pay in the sum of Rs.100,000 only”.

Admittedly, the plaintiffs secured the clearance of subject sugar from the other Clearing
Agents. Defendants’ services were hired as a Custodian through letter dated 20-1-1988
and 4-7-1989. First Guarantee was issued on 25-1-1987 and the-other on 30-5-1987.
Expiry of both the Guarantees were on 31-12-1987. The custodian agreement was entered
into on 20-1-1988, therefore, it cannot be said that the Bank Guarantees could have been
issued earlier than the date of appointment as a Custodian. Prima facie, under the
Agreement for a Clearing Agent dated 13-7-1987, Clause (10) reads as follows:--

“the clearing agent shall be liable to indemnify the TCP against all
damages/shortages/losses occurring in his Godown for any reason whatsoever.
The amount of such damage/shortages/loss shall be determined by TCP at its sole
discretion and recovered from the Clearing Agent’s Bank Guarantee, pending or
current bills and or any other assets owned by the clearing agents, without
prejudice to the exercise of other rights or legal action.”

The defendant No.1 was not held responsible for the loss. Secondly as already held while
deciding issue No.1 that the services of the defendant No.1 was not hired as Clearing
Agent and last the Godowns were not hired by the defendant No.1 as the liability, even
for the loss if any under Exh.P-5/1 was in respect of his Godown.

Rights and obligations contained in one agreement, that was never acted upon cannot be
invoked, unless such terms and conditions by necessary implication made part of other
Page No. 17 of 18
agreement that was acted upon. As held above, agreement Exh.P-5/ I was never acted.
upon nor its terms and conditions were made part and parcel of export 5/2 and Exh.P-5/7.
`Relationship between the parties was regulated under terms as setout in Exh.P-5/2 and
Exh.P-5/17 and no Bank guarantees were furnished thereunder. Therefore the plaintiffs
were wholly unjustified to encash the Bank guarantee furnished under a different
agreement i.e. Exh.P-5/1. Accordingly in my opinion, the plaintiffs unlawfully encashed
the Bank guarantees of Rs.100,000 each. The issue is answered in affirmative.

Issue No.9:

There is no dispute on the issue. It was a6initted by Mr. Mamnoon Hassan, learned
counsel for the plaintiffs that, custodial charges were not paid. According to him,
plaintiffs were justified to adjust such charges against the loss suffered by the plaintiff for
the fault of the defendant No.1. In terms of Agreement P-5/1 plaintiffs are entitled to set
off such claim.

While deciding other issues, it was held that the relationship between the plaintiffs and
the defendant No.1 was not governed under Exh.P-5/1. Therefore, the plaintiff cannot be
allowed to invoke clause 10 of the agreement (export 5/1) to set of the losses. Even
otherwise the defendants were not held liable for the loss.

In view of the foregoing discussion, this issue is answered in affirmative. It is held that
the plaintiffs have failed to pay the custodial charges for the months of January, February
and March, 1990 in the sum of Rs.25,000 per month:

Issue No.10.

While deciding Issues Nos. 4, 5 and 6, it was held that the loss to the sugar was not
caused on account of failure of the defendant to take care of the subject goods bailed to
him, as a man of ordinary prudence would have taken care of his goods. Such loss
occasioned on account of rain and flood. Defendant No. 1, it was held had taken care of
goods as a man of ordinary prudence would have taken of his goods under similar
circumstances. Therefore, in my opinion, plaintiffs to recover any amount from the
defendants for the loss caused to the sugar under bailment with the defendant on account
of rain and floodwater.

Issue No. 11:

As held, while deciding Issue No.8 that the Bank guarantees in the sum of Rs.100,000
were unlawfully encashed by the plaintiffs against a Contract (Exh.P-5/1) which was
never, awarded to the defendant No.1 plaintiffs are liable to refund the amount
Rs.200,000 (i.e. Rs.100,000 for each guarantee) of the two Bank guarantees so encashed.
As regards Custodian Charges, while deciding Issue No.9, it was held that the plaintiffs
have not paid the same for three (3) months, at the rate of Rs.25,000 per month.
Accordingly, the defendants are entitled for recovery of said amount from the plaintiffs as
well.

Issue No. 12.

Resultantly, in view of the foregoing discussion, the suit of the plaintiffs is dismissed
with cost. Whereas, counter-claim of the defendant is decreed as prayed.

The suit and counter-claim through this common Judgment stand disposed of in terms
above.

S.A.K./T-3/K Suit dismissed.

Page No. 18 of 18
2003 C L D 1352

[Karachi]

Before Shabbir Ahmad, J

ALLIED BANK OF PAKISTAN LIMITED---Plaintiff

Versus

Messrs MODERN METALLIC SERVICES through Proprietor and 6 others---

Defendants

Suit No.B-73 of 2000, decided on 8th October, 2002.

(a) Financial Institutions (Recovery of Finances) Ordinance (XLVI of 2001)----

----S.10---BCD Circular No. 13 dated 20-6-1984---Leave to defend suit, application for---

Defendant’s plea was that price and buy-back price were mentioned in agreement, but its
column of mark-up was blank, thus, in absence of agreement for payment of mark-up,
plaintiff-Bank was not entitled to charge mark-up---Validity---Agreement showed that
transaction was Marahaba (Bai’ Muajjal) or sale on deferred payment basis or agreement
for sale on credit--One of the modes of Trade Related Financing detailed in Annexure-I of
BCD Circular 13, dated 20-6-1984 was purchase of goods by banks and their sale to
clients at, appropriate mark-up in price on deferred payment basis--Defendant had agreed
to pay mark-up in price of goods on or before date specified in agreement---Plaintiff in
absence of percentage was entitled for mark-up in price i.e. difference between sale and
buy-back price.

(b) Contract Act (IX of 1872)---

----Ss.170 & 171---Lien of bankers---Bank has right to exercise lien, when its customer
has breached agreement by not making payment as agreed.

(c) Financial Institutions (Recovery of Finances) Ordinance (XLVI of 2001)---

----S.10---Leave to defend suit, application for--Availing of facility, execution of

documents and liability to pay was not disputed by defendant---Defendant had failed to
make out a case for leave to defend by raising substantial questions of law and fact
requiring evidence---High Court dismissed application in circumstances.

(d) Financial Institutions (Recovery of Finances) Ordinance (XLVI of 2001)---

----Ss.9 & 10---Insurance and Muqadam charges claimed by Bank in terms of letter of
pledge---Pledged goods were to be insured against fire, theft and other risks by customer
(pawner) and in case of its failure by pawnee (bank)--Customer’s case was not that goods
were insured, rather Bank had insured the same---Bank (pawnee) was thus, entitled for
extraordinary expenses incurred by them in shape of insurance as well as by appointment
of Muqadam.

Waqar Muhammad Khan Lodhi for Plaintiff.

Rasheed A. Rizvi for Defendant No. 1.

K.A. Wahab for Defendant No.5.

Iqbal Ahmed for Defendant No.7.

Date of hearing: 29th August, 2002.

JUDGMENT

Page No. 1 of 8
I intend to dispose of the applications (C.M.As. Nos.7676 of 2001, 7854 of 2001 and
7855 of 2001), under section 10 of the Financial Institutions (Recovery of Finances)
Ordinance, 2001 (the Ordinance for short) for leave to defend the suit filed by the
defendants Nos.1, 5 and 7 as the facts and law applicable are common.

The background of the present suit are as follows:--

The plaintiff is a Banking Company and the defendant No. 1 (customer) has been
maintaining a current account with the plaintiff branch known as Shahrah-e-Faisal,
Karachi since 13-9-1995. The plaintiff at the request of the defendant No. 1 allowed
financial facility under letter of credit for a sum of Rs.78 million through sanction letter
dated 23-10-1996 on the 180 days D.A. basis for import of m.v. ‘AMALTHEMA’ for
scraping. The aforesaid facility was availed by the defendant No. 1. In order to secure
repayment of the aforesaid finance, the defendant No. 1 executed the following security
documents:--

(1) Promissory note in the sum of Rs.94.380 million.

(2) Agreement of Finances dated 23-10-1996 on purchase price of Rs.78 million,

with buys, back price of Rs.94.380 million with deferred payment by 31-12-1998.

(3) Letter of pledge dated 23-10-1996.

(4) Letter of hypothecation dated 23-10-1996.

In order to further secure repayment’ of the aforesaid finance facility provided to the
defendant No. 1, the defendants Nos. 2, 3 and 5 to 7, defendant No. 7 through defendant
No.4, mortgaged their properties detailed below, by depositing the original title deeds
under separate Memorandums of Deposit of Title Deed, accompanied by Power of
Attorneys in favour of the plaintiff:--

(i) Defendant No.2

(i) Flat No.A/ 15 on Plot No.ST-4, Al-Azam Square, F.B. Area, Karachi. (ii) C-61,
Block-4, Gulshan-e-Iqbal, Karachi measuring about 600 sq.yds. with construction
standing thereon.

(ii) Defendant No.3

Flat No.A/ 13 on Plot No.St-4, Al-Azam Square, F.B. Area, Karachi.

(iii) Defendant No.5

Plot bearing No.B-29, Block S, North Nazimabad, Karachi measuring 400 sq.
yds. with construction standing thereon.

(iv) Defendant No.6

Flat No.304, IIIrd Floor, Reema Palace on Plot No.26/3, Jinnah Cooperative
Housing Society, Karachi.

(v) Defendant No.7

Plot No.L-C-44, Landhi Industrial Area, Karachi measuring 23200 sq. yds. (4.793
acres).

The defendants Nos.2 to 7 also executed letters of guarantee for repayment of finance to
the defendant No.1, who failed and/or neglected to adjust the amount within time
stipulated in the sanction letter or thereafter. A sum of Rs.7,08,51,085 is due and payable
by the defendants. The break-up has been detailed as follows:--

(i) Principal amount Rs.5,37,03,714.

Page No. 2 of 8
(ii) Muqadum and insurance charges at Rs.18,74,295.

(iii) Mark-up from 24-1-1998 to 31-12-1998 Rs.1,52,73,076

In addition to above amounts, the plaintiff also claimed liquidated damages at the rate of
20% per annum from the date of the expiry of the limit. Thus plaintiff claimed decree
against the defendants in the following terms:--

(a) A judgment and decree jointly and severally against the defendants in the sum of
Rs.7,08,51,085 with future mark-up at the maximum rate from the date of the
institution of suit until the realization of the decretal amount.

(b) A judgment and decree for the sale of mortgaged properties belonging to the
defendants Nos.2, 3 and 5 to 7, as mentioned in paras. 8 and 9 of above plaint.

(c) Liquidated damages at the rate and period as this Honourable Court may deem
appropriate in the circumstances of the case from the date of expiry of limit until
the institution of the suit.

(d) Costs of the suit.

(e) Any further and better relief which this Honourable Court may deem appropriate
in the circumstances of the case.

After service of summons in accordance with section 9 of the Ordinance; the defendants
referred to above filed application under section 10 for leave to defend the suit. The
defendant No. 1 in their application for leave to defend the suit took several pleas,
whereas, the common plea of the defendants Nos.5 and 7 is in denial of being mortgagors
or guarantors, by executing memorandum, power of attorney and guarantees as security
for repayment of loan to defendant No.1. The defendant No-5 further plea is that he after
taking permission from the K.D.A., he has mortgaged the property with Citibank much
before the alleged date of memorandum of deposit of title deed and obtained loan for
house building. The original document is with the Citibank and he is regularly making
payment in connection of his housing loan, whereas, the plea of the defendant No.7 is
that plot in question is a leased plot by K.D.A. to the defendant No.7 as limited company.
The original lease deed is in its possession. The defendant No.4 as Special Attorney on
behalf of the defendant No.7 had signed the lease deed, who expired in the year 1992
much before the alleged date of Memorandum. The defendants Nos.5 and 7 common plea
is that the Memorandum of Deposit of Title Deed, Power of Attorneys and Lease Deeds
in possession of the plaintiff pertaining to their properties are fake and fabricated
documents.

During the hearing of the application plaintiffs letter dated 26-6-1999 addressed to
defendant No.1 was referred, whereby the defendant No.1 was informed that the
documents pertaining to three properties were found to be fake as reported by the
Registration Authorities. These properties are, (1) Plot No.B-29, Block S, North
Nazimabad, Karachi, (2) Plot No.L-C-44, Landhi Industrial Area, Karachi, (3) Power of
Attorney in. respect of the property Flat No.304, IIIrd Floor, Reema Palace, Jinnah.
Cooperative Housing Society, Karachi. The defendant No. 1 was asked by the plaintiff to
arrange acceptable replacement of above securities. Amongst above, the properties at
Serial Nos.1 and 2 belong to defendants Nos.5 and 7.

Mr. Waqar Muhammad Khan Lodhi, learned counsel for the plaintiff, when confronted
with such situation, sought time to have the instructions in view of the admission by the
Bank and in pursuance thereof, has submitted a statement on behalf of the plaintiff,
signed by the Manager of the Bank as well as by the counsel, whereby the Bank has not
pressed its claim against the defendants Nos.4, 5 and 7.

In view of such, statement, the suit of the plaintiff is dismissed as withdrawn against the
defendants Nos.4, 5 and 7, with no order as to costs.

The plaintiff has also admitted in letter dated 26-6-1999 that the power of attorney in
respect of the Flat No.304, 3rd Floor, Reema Palace, Jinnah Cooperative Housing
Page No. 3 of 8
Society, Karachi is also fake as reported by Registration Authorities. Such being the
position, the case of the plaintiff against the defendant No.6 is similar to the defendants
Nos.4, 5 and 7 against whom the plaintiff has not pressed the suit. This being the
position, the suit of the plaintiff is also liable to be dismissed against the defendant No.6.

Mr. Rasheed A. Rizvi, learned counsel for the defendant No. 1, inter alia, urged the
following points in support of the application:--

(1) That the plaintiff is not entitled to charge the mark up, nor mark-up on mark-up.

(2) Still 5,222 Tons of iron scrap is lying at the site worth Rs.50 million and due to
the criminal and negligent act of the Bank and the Custom Authorities, it is
rusting and causing loss.

(3) The defendant No.1 has suffered loss due to act, of the officer of the plaintiff, of
misappropriation and fraud.

(4) The amount outstanding against the sanction letter has been maliciously
manipulated and falsely shown as Rs.96,653.

(5) The plaintiff has breached the conditions of the L/C that an amount equivalent to
10% of the L/C amount was kept in Foreign Currency in the shape of F.D.R., such
F.D.R. was to remain under lien with the Bank till issuance, of final delivery
order.

(6) The amount in US $ 25,000 deposited in foreign currency account A/C 02-240-
0018-3 in the name of defendant No.2 has been misappropriated by Mr. Iqbal
Kundi, with profits by obtaining cheque for transfer of the amount against liability
of defendant No. 1.

The availment of the facility and execution of the document are not disputed. The
defendant No. 1 also obtained various extensions in L/C time limit by 90 days each.

Adverting to the first contention, Mr. Rasheed A. Rizvi contended that the plaintiff is not
entitled to charge the mark-up or mark-up on mark-up and referred Annexure ‘C’, the
agreement for financing dated 3-10-1996 and contended that no doubt the price and buy-
back price are mentioned in the agreement but the column of markup is blank, therefore,
in absence of an agreement for payment of mark-up, the plaintiff cannot charge the mark-
up.

The bare perusal of the agreement dated 23-10-1996 shows that the transaction is
Marahaba (Bai Mujjal) or sale on deferred payment basis, which is also termed as
agreement of sale on credit. One of the modes of Trade Related Financing, detailed in
Annexure ‘1’ of B.C.D. Circular 13, dated 20-6-1984, (i) purchase of goods by banks and
their sale to clients at appropriate mark-up in price on deferred payment basis, wherein
the defendant agreed to pay the mark-up in price of goods on or before 31-12-1998,
therefore, in my view, in absence of percentage, the plaintiff-Bank is entitled for mark-up
in price i.e. the difference between the sale and buy-back price.

Mr. Rasheed A. Rizvi with vehemence has also contended that approximately 5,222 Tons
of Iron scrap is lying on the site worth Rs.50 million but due to criminal and negligent act
of the plaintiff-Bank and the Customs Authorities, it is rusting and causing loss.

Mr. Waqar Muhammad Khan Lodhi has disputed the negligence on the part of the
plaintiff and maintained that the defendant himself was negligent as he failed to pay the
customs duty as such left over scrap is in custody of the Customs Authorities. He also
disputed the tonnage and the value of the scrap. The defendant has taken such plea that
approximately 5,222 Tons of Iron scrap is lying at site worth Rs.50 million but has not
produced any material to substantiate the tonnage of the scrap and its value. The
defendant has admitted that the scrap is rusting due to negligence on the part of the
customs, where the defendant himself is in default in payment of customs duties. On
store, he can’t attribute for such loss towards the plaintiff. The liability for payment of
such duty is on the defendant.
Page No. 4 of 8
Mr. Rasheed A. Rizvi’s submission, with regard to the loss suffered by defendant No. 1
due to act of misappropriation and fraud by officers of the Bank was that Muhammad
Iqbal Kundi, Manager has been dismissed from the Bank in early period of 1999 on
charges of fraud and misrepresentation, that Manager illegally and with ulterior motives
included three immovable properties in the sanction letter, which are cited at Sl. Nos. b, c
and d. He also pleaded that in the last mentioned property viz. Flat No.304, Reema
Palace, Karachi was in his occupation and the said Manager alongwith Mahmood A.
Khan, Zonal Chief used to manipulate the accounts of the defendants as well as account
of the L/C limit, therefore, the claim of the plaintiff and the documents are based on fraud
and malpractice.

Mr. Waqar Muhammad Khan Lodhi has pointed out that no doubt in sanction letter three
properties were shown for collateral security by equitable mortgage and pointed out that
these properties were offered by the defendant No.1 through his own letter dated 5-9-
1996, whereby a request for establishment of letter of credit for Rs.78 million was made.
The perusal of the Annexure ‘A-2’ reflects that the defendant No.1 offered these
properties as security against this facility, which were already furnished as security
against earlier facility. The first property is the property of defendant No. 1’s wife,
whereas, the documents of rest of properties on verification were found to be fabricated,
such intention was communicated to defendant No.1, by letter dated 26-6-1999,
(Annexure ‘B-1’ to C.M.A. No.7676 of 2001 of the defendant No. 1) and he addressed a
letter to the plaintiff on 4-1-2002, whereby he provided photocopies of property
documents of Liaquatabad with a request that three mortgaged properties be released and
the property sought to be released are none other than those properties whose documents
were found to be fake. Therefore, the defendant can take blame on himself for such act
and not to blame the plaintiff-Bank.

The second limb of arguments of Mr. Rasheed A. Rizvi regarding fraud and
misrepresentation or deceit, is reflected in Annexure ‘B-2’, a letter addressed to I.A.
Usmani, complaint by the defendant that he was not dealt with fairly by the Manager and
Zonal Chief, who misled and misguided him despite receiving benefits out of record,
details of such monetary and material benefits were mentioned. The defendant was also
aggrieved by unnecessary extensions in time limit of L/C, whereby he was burdened with
discounting charges without any justification. So far the extensions in L/C period is
concerned, the defendant through Annexures ‘P-3’, ‘P-4’, ‘P-6’ and ‘P-7’ dated 16-4-
1997, 17-7-1997 obtained the extensions and lastly by letter dated 27-10-1997 and agreed
for payment of discounting charges, therefore, these pleas are not tenable.

Mr. Rasheed A. Rizvi canvassing the breach of the condition has maintained that the lien
with the Bank over the F.D.R. receipt was not to be exercised till the issuance of- final
delivery order. The defendant also deposited Rs.66,93,000 as cash margin. Said amount
has not been shown correctly and the adjustment is breach of the agreement.

Mr. Waqar Muhammad Khan Lodhi met this contention by referring para.7 of the
replication, which is reply of para.6, wherein the plaintiff have admitted that defendant
No.1 did deposit cash margin equivalent to 10% of the letter of credit Rs.76.16 million,
which comes to Rs.7.69 million and not Rs.76,16,7000 as mentioned in para.6 of the
reply. It was also maintained by him `that said amount is included in the credit entry of
21,205,011 dated 28-1-1998, whereas, US$ 25,000 were encashed by Cheque No.254231
dated 18-9-1997 for US$ 26,000 inclusive of profit by the defendant No.2 as per
statement of account of Mrs. Nighat Aslam, Annexure ‘P 1/3’. The defendant No.1 plea is
that Mr. Iqbal Kundi obtained cheque of defendant No.2 account with promise that
proceed of the said cheque would be utilized against the outstanding of defendant No.1.
The cheque has been encashed. The defendant No.2 has chosen not to contest the plaintiff
suit. To claim adjustment of amount of cheque, it should be in favour of the plaintiff,
during the course of the argument, it was pleaded that only it was signed by account
holder and was given in blank. In such situation, the defendant No.2 has to blame herself
but adjustment cannot be claimed against the plaintiff.

The defendant No.1 has admitted his outstanding liability of Rs.70.700 million through
his letter dated 16-4-1998 and assured to clear the liability on resolving the sales tax
refund from the Government Department by selling the stock. So far the exercise of lien
Page No. 5 of 8
is concerned the Bank has right to exercise the lien when the defendant has breached the
agreement by not making payment as agreed, he cannot be allowed to contend that the
exercise of lien or adjustment of margin amount is against the breach. So far as the
statement of accounts is concerned, it has to be examined while determination of the
liability of the defendant No. 1.

Mr. Rasheed A. Rizvi, learned counsel for the defendant No.1 has also maintained that in
modern banking, the Banks are maintaining the computerized accounts including the
plaintiff-Bank, whereas, the statement of account filed with the plaint is manual, as such,
he maintained that’ a presumption has to be drawn that the entries mentioned therein are
manipulated one and does not reflect the correct figure.

Mr. Waqar Muhammad Khan Lodhi contended that the Bank has prepared the statement
of account manually though conceded that the Bank is maintaining computerized
statement ‘of accounts of the respective parties but pleaded that there is no bar in
preparing the statement of account manually. It has to, be examined whether the entries
reflect correct position of transactions.

In the light of the above discussion, I am of the view that no substantial questions of law
or fact have been raised on behalf of the defendant No. 1 for the grant of leave to defend,
as the availing of the facility, execution of documents, liability to pay have not been
disputed as such. I am of the view that the defendant has failed to make out a case for
leave to defend by raising questions of law and fact which require evidence, therefore, the
application is dismissed.

This brings me to the question of determination of the liability of the defendant.

I have examined the statement of account with assistance of the learned counsel for the
plaintiff and defendants and under the direction the break-up of the statement of account
has been filed by the plaintiff. The L/C was for US Dollar 2,047,949.20 at the rate of
Rs.37.19 per US $ Dollar. It is not disputed that the defendant No. 1 got extensions in the
L/C period and due to increase in exchange rate, the L/C was negotiated at Rs.45.63 per
Dollar. The defendant has agreed for the amount at exchange rate up to maturity i.e. 26-1-
1998. Thus the amount of L/C comes to Rs.93,425,138 less the amount of margin paid at
the time of opening in the sum of Rs.7,618,000 leaving L/C amount in the sum of
Rs.85,834,138. According to agreement, the sale price was Rs.78.000 million and
repurchase price Rs-.94.380 million. Thus the mark-up amount comes to Rs.16.380
million but has been charged only Rs.14,089,032. The Bank is entitled for the L/C
discount charges and commission. The insurance and Muqadam charges have also been
claimed in terms of clause 6 of the letter of pledge. The pledge goods were to be insured
against fire, theft and other risk by the customer (pawner) and in case of their default by
the pawnee. It is not a case of defendant No. 1 that the pledge goods were insured. It has
been insured by the pawnee, as such, the Bank in terms of section 175 of the Contract Act
is entitled for extraordinary expenses incurred by them in the shape of insurance as well
as by appointment of Muqadam. The Bank has also charged miscellaneous
documentation and advertisement charges and mark-up on discounted amount in absence
of any agreement as well as mark-up on previous transaction. These amounts cannot be
claimed by the Bank. In addition to 10% margin in the sum of Rs.7,618,000. The
defendant No. 1 from time to time also has deposited a sum of Rs.35,332,011 in all
Rs.42950011. The break-up of the account is detailed as follows:--

Sr. No PARTICULARS DEBIT CREDIT BALANCE

01 L/C amount in Pak. 93,452,138 DR 93,452,138
Rs.76,163,231. negotiated
@ 37.19 per us Dollar for
2,047,949.20 US $,
remitted to Foreign
---
Exporter after 9 months
extension in time required
by the defendant due to
increase in rate @ 45.63
per Dollar.

Page No. 6 of 8
02 Less . 10% margin of 7,618,000 DR 85,834,138
original L/C amount
----------
deposited by the
defendant.
03 Difference of mark-up As 14,089,032 DR 99,923,170
per agreement between
sale and repurchase price
i.e. 94.380. million (-) ----
78.000 (M) Rs.16.380
million but actually
charged (Less)
04 L/C discounting charges 3,201,587 --- DR 103124757
05 L/C commission, 1,571,365 DR 104696122
insurance and ---
Muqadmage charges
06 Miscellaneous, docu- 34,670 DR 104730792
ments and advertisement ---
charges
07 Minus total repayment 35,332,011 DR 69,398,781
Rs.42950011, less 10%
---
margin already deducted
at 2 above
08 Mark-up on discounted 273,000 DR 69671781
---
amount
09 Mark-up on previous 1,179,304 DR 70,851,085
transaction up to 25-6- ---
1997

The plaintiff-Bank is not entitled for amount claimed at Sl. Nos.6, 8 and 9. On exclusion
of these amounts, the following position emerged:--
Sr. No PARTICULARS DEBIT CREDIT BALANCE
01 L/C amount in Pak. 93,452,138 DR 93,452,138
Rs.76,163,231. negotiated
@ 37.19 per us Dollar for
2,047,949.20 US $,
remitted to Foreign
---
Exporter after 9 months
extension in time required
by the defendant due to
increase in rate @ 45.63
per Dollar.
02 Less . 10% margin of 7,618,000 DR 85,834,138
original L/C amount
----------
deposited by the
defendant.
03 Difference of mark-up As 14,089,032 DR 99,923,170
per agreement between
sale and repurchase price
i.e. 94.380. million (-) ----
78.000 (M) Rs.16.380
million but actually
charged (Less)
04 L/C discounting charges 3,201,587 --- DR 103124757
05 L/C commission, 1,571,365 DR 104696122
insurance and ---
Muqadmage charges
06 Miscellaneous, docu- 34,670 DR 104730792
ments and advertisement ---
charges
07 Minus total repayment --- 35,332,011 DR 69,398,781
Rs.42950011, less 10%
margin already deducted
Page No. 7 of 8
 at 2 above

DR 104696122
35,332,011

Unpaid amount 6,93,64,111

Therefore, the plaintiffs suit is decreed for a sum of Rs.6,93,64,111 with mark-up 2%
above the Bank rate from the date of institution of the suit till the realization of. The
decretal amount against defendants Nos.1 to 3 jointly and severally with decree for sale
of mortgaged properties belonging to defendants Nos.2 and 3 only with costs, whereas,
the suit is dismissed against defendants Nos.4 to 7, with no order as to costs.

S.A.K./A-422/K Suit decreed.

Page No. 8 of 8
2002 Y L R 1061

[Lahore]

Before Mansoor Ahmad, J

Mrs. SHAMIM JAVAID ZAR and 3 others---Petitioners

Versus

Mst. WAZIR BEGUM and 5 others---Respondents

Civil Revision No.58/D of 1997, decided on 28th December, 2001.

(a) Interpretation of document---

---- Statement contained in document--Interpretation---Document is to be read as a whole

to differentiate between general statement and the particular statement contained therein,
attempt be made to save document rather than destroy or nullify the same.

Allah Bakhsh and others v. Muhammad Ishaque and others PLD 1984 SC 47; A.R. Khan
v. P.N. Boga through Legal Heirs PLD 1987 SC 107 ref.

(b) Contract Act (IX of 1872)---

---S.171---Lien in execution---Scope---Lien in execution is an encumbrance that attaches

to the property of judgment-debtor by operation of law.

(c) Contract Act (IX of 1872)---

----S.2(b)---Expression “absolute promise”--Connotation---Expression “absolute

promise” is one which is not inchoate but the completed promise is a completed contract
which is capable of implementation and execution.

(d) Words and phrases---

-----”Actionable claim “---Meaning--Actionable claim is one which is constituent fact

which leads to the perfection of the right.

(e) Words and Phrases---

----”Completed conveyance”---Meaning--Completed conveyance is one which

permanently and absolutely transfers a title and right in the immovable property.

(f) Specific Relief Act (I of 1877)---

----S.42---Registration Act (XVI of 1908), Ss. 17(1) & 49---Document, interpretation of--
Unregistered document--- Claiming right on the basis .of such document---Sale-deed in
favour of the predecessor-in-interest of the defendants was assailed on the ground that the
document in favour of the mother of the plaintiffs was executed by their father prior to
the execution of sale-deed-and on the basis of such document the sale deed executed in
favour of defendants was illegal and liable to be set aside---Both the Courts below
concurrently dismissed the suit as well as the appeal of the plaintiffs---Document subject-
matter of the suit was simply an undertaking containing a promise to take certain steps in
future for the perfection of right of the mother of the plaintiffs in respect of property
mentioned in the undertaking--Neither sale-deed as stated in the document was registered
nor the payment of the money was alleged to have been made to the mother of the
plaintiffs---Contention of the plaintiffs was that the property was held in lien by their
mother as the same was given in the document---Validity---From the, construction of the
document it could not be concluded that it had conveyed the ownership or the title in
favour of the mother of the plaintiffs--Document was merely an undertaking which
contained the promise to transfer the property in favour of the mother of the plaintiffs---
Where the promise so mentioned was not acted upon by the executant, the document per
Page No. 1 of 4
se did not convey any right and title in favour of the mother of the plaintiff and the
executant was not divested of ownership/title in property---Even if the document was
taken as non-testamentary document conveying the right and title then it was
compulsorily registrable under S.17(1) of the Registration Act, 1908 and effect of non-
registration as described in S.49 of the Registration Act, 1908, was that the document did
not operate to create or recover any right in or in respect of immovable property---
Document (undertaking) in the present case did not convey any right in favour of the
mother of the plaintiffs and the executant was not divested of title and ownership of the
property and the sale-deed executed by him in favour of the predecessor-in-interest of the
defendants with competence and within his right---Both the Courts below did not commit
any material irregularity in construing the documents and High Court declined to
interfere with the judgments and decrees passed by the Courts below in circumstances.

Malik Qamar Afzal for Petitioners.

Mujeeb-ur-Rehman for Respondents

Date of hearing 12th December, 2001.

JUDGMENT

Being dissatisfied from the judgment and decree dated 5-12-1996 passed by the
Additional District Judge, Rawalpindi, the petitioners filed the present revision petition.

2. The appellate Court vide its impugned judgment and decree dismissed the appeal of the
petitioners and upheld the judgment and decree dated 10-7-1996 awarded by the trial
Court.

3. The petitioners filed a suit for declaration to the effect that sale-deed dated 5-9-1973
executed by one Muhammad Akbar in respect of Shop No.T.114 Kasera Bazar
Rawalpindi was illegal, void, inoperative and ineffective qua the rights of the plaintiffs.
As consequential relief the plaintiffs also sought a decree for permanent injunction.

4. The plaintiff/petitioners are daughters and -son of late Malik Muhammad Akbar who
was the owner of Shop No. T-114 situated in Kasera Bazar Rawalpindi. Their father
executed a sale-deed on 5-9-1973 whereby the shop in question was sold in favour of
Fazal Muhammad the predecessor-in-interest of the present respondents.

5. The case set up by the plaintiff was that vide document dated 15-6-1970, which is
described an undertaking, of late father of the plaintiff transferred the suit property in
favour of Mst. Ashraf Jan, his wife and the mother of the present plaintiff. Therefore, late
Muhammad Akbar was divested of title and ownership in relation to the shop and he
could not alienate through sale in favour of Fazal Muhammad on 5-9-1973.

6. The undertaking was produced by the plaintiff as Exh.P.1. The only question convassed
and urged by the petitioners relate to the interpretation of this document.

7. Both the Courts below held that the undertaking relied by the plaintiffs did not convey
any right or title in favour of their mother Mst. Ashraf Jan. The petitioners were
aggrieved of the treatment meted out to them by the two Courts below in interpreting the
document. Therefore, the only question raised in the present revision petition relate to the
interpretation and construction of Exh.P.1. The contents of the document Exh.P.1 are
reproduced hereunder for ready reference.

Undertaking

This indenture of Undertaking entered into and executed by Malik Muhammad Akbar,
son of Bahadur Ali, caste Kakeyzai aged about 70 years, resident of House No. P/1644,
Eidgah Raod, Rawalpindi City, hereinafter referred to as the executant of the one part,
which term shall include his legal heirs, nominees, assigns administrators and others and
Mst. Asraf Jan, wife of Malik Muhammad Akbar (daughter of Babu Din), housewife, also
resident of P/1644 Eidgah Road hereinafter referred as No.2, which terms shall include as
far as possible her legal heirs, nominees executors and administrators;
Page No. 2 of 4
Whereas the executant entered into marital contract with party No.2 several years ago,
and ever since the latter has been living with the executant as his legally wedded wife and
has been continuously discharging her obligation diligently, obediently and faithful.

And whereas the executant now intends to settle upon her certain property, comprising of
house and shop in lieu of her dower, which remains as debt on the person and property of
the executant and which has not been settled upon her hence to forth.

The executant now, therefore, do hereby settle the following property upon Mst. Ashraf
Jan, the second party:-

(1) House No.P/1644, Eidgah Road, Rawalpindi.

(2) Shop No. T/14, Kasera Bazar, (Sarafa Bazar), Rawalpindi.

The executant also undertakes to cause a registration of sale-deed in respect of afore-cited

house and shop in favour of Mst. Ashraf Jan, party No.2 within a period of two years
from the date of execution of the present undertaking. However in case of executant’s
failure to do so a sum of Rs.20,000 (Rupees twenty thousand only), shall be paid by the
executant to Mst. Ashraf Jan at the expiry of two years.

Provided that if the Registration of sale-deed as mentioned above is not effected and the
amount of Rs.20,000 is also not tendered for payment; then Mst. Ashraf Jan, party No.2
shall be considered to have a permanent lien and hold upon the house and shop referred
to above and the same property will be considered as to her own. The executant has
voluntarily handed over the possession of the House No.P/1644, and Shop No.T/114, to
Mst. Ashraf Jan his wife and daughter of Babu Feroz Din with all the affixtures rights and
easements appurtenant thereto.

Made, signed and delivered at Rawalpindi this 15th day of June, 1970, in the presence of
witnesses.

DB;SPR:

Executant
15-6-1970

8. It was argued on behalf of the petitioners that the documents did not require
registration as it conveyed the property in favour of Mst. Ashraf Jan in lieu of dower.
Secondly the proper construction of the document clearly shows that the suit Property
bearing No.T/114 stood transferred in favour of the mother of the petitioners. The learned
counsel arguing on behalf of the petitioners given various description to the document.
He defined it as a lien in execution. He also described the document containing an
actionable claim. He also denominated it as an absolute promise conveying complete
title.

9. On the other hand it was maintained by the counsel for the respondents that the
document is not a conveyance deed. It was submitted on behalf of the respondents that
the executant died in 1983. He remained alive for 13 years after execution of the
undertaking. The petitioners or their mother never claimed any right in respect of the
property. Its alientation through sale in favour of the predecessor of the respondents was
in the knowledge of the petitioners but during lifetime of their father they never
challenged it.

10. I have examined the arguments advance from both the sides and perused the record in
the process of construction of a document it is by now a well-settled principle that the
document is to be read as a whole to differentiate between general statement and the
particular statement contained therein and attempt be made to save document rather than
destroy or nullify it. Reference is made to a case of Allah Baksh and others v. Muhammad
Ishaque and others (PLD 1984 SC 47). A.R Khan v. P.N. Boga through legal heir (PLD
1987 SC 107).

Page No. 3 of 4
11. In the light of this principle the analysis of the documents show that it was described
as undertaking and executant displayed his intention to settle upon his wife certain
property in lieu of her dower which included Shop No.T/114 Kasera Bazar, Rawalpindi.
The executant also undertook to execute sale-deed in respect of shop within a period of
two years from the date of execution of the undertaking and in case he failed to execute
the sale-deed he was required to pay sum of Rs.20,000 to his wife within a period of two
years. Further it was provided in the undertaking that if the registration of the sale-deed is
not affected and the amount of Rs.20,000 is also not `tendered for payment then the wife
shall be considered to have a permanent lieu and hold the property as of her own.
Admittedly subsequent to the undertaking, the executant did not execute any sale-deed. It
is also alleged by the petitioners that Rs.20,000 were not paid to their mother in the
alternative. It was argued that in such a situation the undertaking has conveyed a
complete title of the property in favour of Mst. Ashraf Jan, mother of the petitioners.

12. The different expression used by the learned counsel to describe the document were
merely high sounding expressions. The document could not be defined as a lien in
execution. For the reason that a lien in execution is an encumbrance that attaches to the
property of judgment debtor by operation of law. Similarly the expressions of absolute
promise is of no help to the petitioners because an absolute promise is one which is not
inchoate but the completed promise is a competed contract which is capable of
implementation and execution. It was for this reason that learned counsel lastly argued
that the documents contained an actionable claim. Again the argument of the learned
counsel is self defeating because an actionable claim is a one which is constituent fact
which lead to the perfection of the right. On the other hand a completed conveyance is
the one which permanently and absolutely transfers a title and right in the immovable
property. In the present case the document was simply an undertaking containing a
promise to take certain steps in future for the perfection or right of Mst. Ashraf Jan in
respect or property mentioned in the undertaking. Later neither the sale-deed was
registered for the payment of Rs.20,000 was alleged to have been made. Resultantly the
third incident as given in the document would follow which was that the property - was
held in lien by Mst. Ashraf Jan. From the construction of the document it cannot be
concluded that it has conveyed the ownership or the title in favour of Mst. Ashraf Jan.
The executant remained alive for 13 years after the execution of the document. He has
also alienated the property through a registered sale-deed in favour of predecessor-in-
interest of the respondents during the lifetime of the executant nor any proceedings were
taken to seek the perfection of right in the immovable property nor any claim of title or
ownership was extended by the petitioners during the life time of their farther. There is no
evidence to show that Rs.20,000 were not paid by the executant to his wife. All these
attending circumstances provide clue to the interpretation of the document. Keeping in
view all the facts it is safely concluded that it was merely and undertaking which
contained the promise to transfer the property in favour of Mst. Ashraf Jan. This promise
was not acted upon by the executant, therefore, the document per se did not convey any
right and title in favour of Mst. Ashraf Jan and late Muhammad Akbar (executant) was
not divested of ownership/title in the property. Even if the document is taken as a non--
testamentary document conveying the right and title then it becomes compulsorily
registerable under section 17(1) of the Registration Act and effect of non-registration as
described in section 49 of the Act is that it does not operate to create or convey any right
in or in respect of immovable property.

For the reason given hereinbefore find it difficult to agree with the petitioners and hold
that the document Exh.P.’ (undertaking) did not convey any right in favour of Mst. Ashraf
Jan and the executant. Malik Muhammad Akbar was not divested to title and ownership
of the property and the sale-deed dated 5-9-1973 was executed by him in favour of Fazal
Muhammad with competence and within his right. Consequently I hold that there in no
merit in the revision petition and two Courts below did not commit any material
irregularity in construing the documents. According this revision petition is dismissed.

Q.M.H./M.A.K./S-354/L Revision dismissed.

Page No. 4 of 4
2001 M L D 1351

[Karachi]

Before Anwar Mansoor Khan, J

HABIB BANK---Plaintiff

versus

Messrs QAYYUM SPINNING LTD. ---Defendants

Suit No. 1812 of 1999 and Civil Miscellaneous Applications Nos. 1356 and 1357 of
2000, decided on 23rd February, 2001.

(a) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No.13, dated 20-6-1984---BCD Circular No.32, dated 26-
11-1984---Introduction of Circulars by the State Bank of Pakistan---Object and scope-
--Circulars required the shifting of the then banking system based or. ‘Interest’ into
banking based on Islamic mode of financing---Concept of BCD Circular No.13, dated 20-
6-1984 was that the same was for the purpose of Islamisation of Banks which was part of
the global change in Pakistan for Islamisation of the economy in generality--BCD
Circular No. 13, thus, came into existence to place the Banks in line for their
transformation.

(b) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No. 13, dated 20-6-1984---Introduction of the Circulars
by State Bank of Pakistan---Islamisation of Banking System in Pakistan---
Commencement of transitional period---Judgment by Supreme Court in case of Dr. M.
Aslam Khaki reported as PLD 2000 SC 225--Applicability---Laws by which the Banking
business was to be conducted was set moving from the year, 1962, and a concrete law
was enforced from 1-1-1985---BCD Circular No. 13, dated 20-6-1984, had stated the
transitional period given to the Banks for the purpose of transition from old system of
banking into the Islamic System of Banking---Contention that the judgment by the
Supreme Court in case of Dr. M. Aslam Khaki would be operative from the date
mentioned in it as regards the banking transition was repelled.

Dr. M. Aslam Khaki,v. Syed Muhammad Hashim PLD 2000 SC 225 ref.

(c) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No.13, dated 20-6-1984---BCD Circular No.32, dated 26-
11-1984---Islanusation of banking system---Constitution of Shariat Board---Object and
purpose ---Shariat Board was to arrange for exchange of information for the evaluation of
the practice and for providing guidance of successfully managing the Islamic economy---
Islamic economy is in its totality the economy of the country and laws in respect of, not
only the banking but also in other aspects which included interest being charged by other
institutions, payment to various Banks and other, such-like transformation---Supreme
Court in its judgment in the case of Dr. M. Aslam Khaki PLD 2000 SC 225 had given
period of transformation.

Dr. M. Aslam Khaki v. Syed Muhammad Hashim PLD 2000 SC 225 ref.

(d) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No.13, dated 20-6-1984---BCD Circular No.32, dated 26-
11-1984---Islamisation of economy---Judgment by Supreme Court in case of Dr. M.
Aslam Khaki reported as PLD 2000 SC 225---Effect of the judgment on BCD Circular
No. 13, dated 20-6-1984 and BCD Circular No.32, dated 26-11-1984---Supreme Court in
the judgment gave various aspects of law for transformation and for that purpose specific

Page No. 1 of 52
time had beer given---Circulars Nos.13 & 32 which were in force since 1-1-1985, were
valid legislation and continued to remain in force.

Dr. M. Aslam Khaki v. Syed Muhammad Hashim PLD 2000 SC 225 ref.

(e) Constitution of Pakistan (1973)---

----Arts.227 & 230---BCD Circular No. 13, dated 20-6-1984---BCD Circular No.32,
dated 26-11-1984---Islamisation of laws---Council of Islamic Ideology---
Recommendations of---Circulars Nos.13 & 32 were introduced upon the
recommendations of the Council of Islamic Ideology for bringing the existing laws into
conformity with the injunctions of Islam---Both the circulars were the consequence bf the
reports of the Council provided for the furtherance of Islamic financing where mark-up
on mark-up had been stated to be un-Islamic and usurious---Riba was disallowed and
because of such disallowance the Circulars were in line with the arguments put forward
for the purposes of Islamic financing.

Commissioner Income-tax, Peshawar Zone v. Simen A.G. PLD 1991 SC 368; Kaneez
Fatima v. Wali Muhammad PLD 1993 SC 901; Maple Leaf Cement Factory Limited v.
Collector of Excise and Sales Tax 1993 MLD 1645 and Pakistan v. Public-at-Large PLD
1986 SC 240 ref.

(f) Constitution of Pakistan (1973)---

----Art. 2A---Expression ‘Injunctions of Islam’ in Art.2A of the Constitution---Scope---

Expression ‘Injunctions of Islam’ has not been left to the discretion of the Courts and
notions of the individuals but the same has been clearly spelt out, as only those
Injunctions which have been laid down by the Holy Quran and the Sunnah of the Prophet
(p.b.u.h.)---Under the Injunctions of Islam no such act of violating the Injunctions will be
permissible which does not pay attention to the text of the Holy Quran and the Sunnah
and its interpretation together with its ‘Khamir’ and ‘Zamir’.

Dr. M. Aslam Khaki v.Syed Muhammad Hashim PLD 2000 SC 225 ref.

(g) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No.13, dated 20-6-1984---BCD Circular No.32, dated 26-
11-1984---Constitution of Pakistan (1973), Art. 230--Islamisation of banking system---
Issuance of BCD Circular No.13, dated 20-6-1984 and BCD Circular No.32, dated 26-11-
1984---Issuance of Circular by the State Bank of Pakistan---Scope---Council of Islamic
Ideology had proposed and Federal Government and State Bank of Pakistan by acting on
that proposal had given direction to the Banks to finance under the mode prescribed
which was confirmed by Federal Shariat Court and eventually approved by the Shariat
Appellate Bench of Supreme Court -in the case of Dr. M. Aslam Khaki.

Dr. M. Aslam Khaki v. Syed Muhammad Hashim PLD 2000 SC 225 and Dr. Mehmoodur
Rehman Faisal and others v. The Secretary, Ministry of Law, Justice and Parliamentary
Affairs, Government PLD 1992 FSC 1 ref.

(h) Banking Companies Ordinance (LVII of 1962)---

--Ss.41 & 42---BCD Circular No. 13, dated 20-6-1984---Islamisation of banking

system---Introduction of Islamic Financing---State Bank of Pakistan and all others were
duly connected and were party in the transformation of the Banks by the introduction of
the Islamic Financing to be governed by BCD Circular No.13, dated 20-6-1984---
Circular provided the ‘Modes of Transaction’ which were categorically mentioned
wherefore the whole system commenced.

(i) Islamic Jurisprudence---

---- Riba--- Concept---Riba in its every form is forbidden and the increase or decrease of
the rate of interest does not affect the same being otherwise.

Page No. 2 of 52
Dr. Mehmoodur Rehman Faisal and others v. The Secretary, Ministry of Law, Justice and
Parliamentary Affairs, Government of Pakistan PLD 1992 FSC 1 ref.

(j) Islamic Jurisprudence-

---- Financing in Islam---Interest (Riba) free economy---Effect on general public---

Attitudes are changing gradually and in the last few years value neutral conventional
banking has begun to trouble the conscience of an increasing number of people---
Reluctance is seen to hand over the funds to Banks and financial institutions that invest in
companies engaged in unethical and socially harmful activities---Emerging Islamic
banking scene has succeeded in achieving general acceptance.

Islamic Finance: A Euromoney Publication, 1997 ref.

(k) Islamic Jurisprudence---

---- Financing in Islam---Interest (Riba) free banking---Salient features--Islamic banking

is an instrument for the development of an Islamic economic order---Islamic financial
system employs the concept of participation in the enterprise, utilising the funds at risk
on a profit and loss sharing basis which by no means implies that investments with
financial institutions are necessarily speculative---Such system can be excluded by
careful investment policy, diversification of risk and prudent management by Islamic
financial institutions---Investment in Islamic financial institutions can provide potential
profit in proportion to the risk assumed to satisfy the differing demands of participants on
the contemporary environment and within the guidelines of the Shariah---Concept of
profit and loss sharing, as a basis of financial transactions is a progressive one as it
distinguishes good performance from the bad and the mediocre---Said concept, therefore,
encourages better resource management---Islamic Banks are structured to retain a clearly
differentiated status between shareholder’s capital and client’s deposits in order to ensure
correct profit sharing according to-Islamic Law--Some of the salient features of the order
summed up.

Following are the few salient features of Islamic Economic Order:--

(1) While permitting the individual the right to seek his economic well being, Islam
makes a clear distinction between what is Halal (lawful) and what is Harram (forbidden)
in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic
activity, which are morally or socially injurious.

(2) While acknowledging the individual’s right to ownership of wealth legitimately

acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and
not to hoard it, keep it idle or to squander it.

(3) While allowing, an individual to retain any surplus wealth, Islam seeks to reduce the
margin of the surplus for the well-being of the community as a whole, in particular and
destitute and deprived sections of society by participation in the process of Zakat.

(4) While making allowance for the ways of human nature and yet not yielding to the
consequences of its worst propensities, Islam seeks to prevent the accumulation of wealth
in a few hands to the detriment of society as a whole, by its laws of inheritance.

(5) Viewed as a whole, the economic system envisaged by Islam aims at social justice
without inhibiting individual enterprise beyond the point where it becomes not only
collectively injurious but also individually self-destructive.

(l) Islamic Jurisprudence---

---- Riba An-Nasee’a---Explained.

(m) Islamic Jurisprudence-

---- Riba Al-Fadhl---Explained.

Page No. 3 of 52
(n) Islamic Jurisprudence-

---- Loan---Concept---Loans is not a business transaction but is a form of ‘ Sadaqa’ or

charitable transaction and the money returned must be the same as the money given.

(o) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No.13, dated 20-6-1984---BCD Circular No.32, dated 26-
11-1984---Islamisation of Banking System---BCD Circular No.13 dated-6-1984 and BCD
Circular No32, dated 26-11-1984--Effect---While issuing the circulars complete
conscious effort was put in by the Government which included the bankers, to bring
about the transformation in the existing system in the banks for shifting to the Islamic
modes of financing.

(p) Banking Companies Ordinance (LVII of 1962)---

----Ss. 41 & 42---BCD Circular No.13, dated 20-6-1984, Annex-I--Islamisation of

Banking system---Forms of transaction allowed by BCD Circular No.13, dated 20-6-
1984---Annexure I to BCD Circular No.13, dated 20-6-1984, had provided three basic
forms of transactions which were allowed viz. the first being, ‘Financing by Lending’,
from the title it was clear that though, otherwise in the usual parlance ‘financing’ and
‘lending’ would have in fact meant the same, but when ‘financing’ was used with
‘lending’ saying, that there was lending `which would mean that there was a ‘loan’ given
to finance some person---Word ‘finance’ will have to be given a separate meaning and
was to be treated to be ‘lending’ simpliciter--‘Lending’ were loans i.e. the delivery of
money to another person---Money, therefore, being a ‘debt’ created by way of Mending,
question would arise whether such debt created by lending could attract a levy of further
sums on elapse of time for re-payment as would be done under the normal banking
system on any money lent which would carry interest---Under BCD Circular No. 13
categorically stipulated, that, where there was a ‘lending’ the ‘debt’ so created by giving
‘money’ to another person or financing to other person by way of lending, the Banks
under Cl. A(i) to Annex. I, to BCD Circular No. 13, dated 20-6-1984, were only allowed
to recover ‘Service Charges’ which were not to exceed the proportionate costs of
operation and as such the Circular had forbidden interest or mark-up on loans.

(q) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No.13, dated 20-6-1981, Annex. I--Islamisation of

Banking System---Restrictions imposed by BCD Circular No. 13, dated 20-6-1984,
Annex. Y’--Financing in modern world---Practice and procedure---Service charges,
extent of---Money, in the modern world is obtained from various sources, which involve
cost---If such cost is taken into account, and if that money which is lent, the usual course
is that the bankers charge interest, which carries its own spread alongwith the cost of
funding and provision of bad and doubtful debt, to arrive at a rate of interest that, till such
time the money is repaid, the debtor continues to pay an additional sum for utilising the
money---Such practice has categorically been restricted by Annex.I of the BCD Circular
No.13, dated 20-6-1984--Judgment by Supreme Court in case of Dr. M. Aslam Khaki
PLD 2000 SC 225 only reaffirms the same and categorically states that nothing can be
added for the purposes of utilisation of ‘money’---BCD Circular No. 13, dated 20-6-
1984, has prohibited the Banks to charge, except for the service charges, any other
amount on a debt, to the extent that the cost of obtaining funds by the lending agency and
provisions by such lender of his bad debt and charging interest has categorically been
done away with---Service charges are only the cost of the actual Banks operation and the
maximum of which was to be determined by the State Bank of Pakistan from time to time
as such the same has shown the importance that has been attached to the fact that no
‘increase’ or ‘addition’ by elapse of time can be made on a ‘debt’ or ‘loan’ i.e. ‘on money
lent’.

Dr. M. Aslam Khaki v. Syed Muhammad Hashim PLD 2000 SC 225 ref.

(r) Islamic Jurisprudence---

Page No. 4 of 52
----Qard-i-Hasana--- Meaning---Qard-i-Hasana is a loan given on compassionate ground,
free from ‘interest’, ‘mark-up’ or ‘service charges’ and re-payable, ‘if’ and ‘when’ the
borrower is able to pay.

(s) Constitution of Pakistan (1973)---

----Arts. 227 & 230---BCD Circular No.13, dated 20-6-1984---Mode of financing dealt
with, in BCD Circular No.13, dated 20-6-1984---Money whether goods or commodity---
Trade Related Modes of Financing ---Scope--Various modes have been provided, one of
which is, purchase of goods by Banks and their sale to the clients at an appropriate mark-
up in price for deferred payment and same is the most utilised manner of ‘financing’---
Term ‘loan’ or ‘lending’ is missing in such type of mode of financing and it is ‘financing’
that is being used---’Financing’ is not ‘lending’ it is a form of business activity, which has
been termed in the title as ‘Trading’, thus, the finance earned by trading, cannot be
termed as a ‘loan’ of money--Permissible mode allows purchase of ‘goods’ or various
commodities by Banks as such the ‘purchase’ never means purchase of ‘money’ and the
same amounts to ‘lending money’ which is not allowed by the BCD Circular No.13,
dated 20-6-1984, and even if allowed, no addition can be made to it---Money is not
‘goods’ or ‘commodity’ that has to be purchased---’Money’ under the provisions of Cl.
B(i) of Annex. I of BCD Circular No. 13, dated 20-6-1984 is neither ‘goods’ nor
‘commodity’---Banks are allowed to sell goods that are required by their clients and it is
the ‘sale price’ of such ‘goods’ that is the financing.

(t) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No. 13, dated 20-6-1984---Mark-up on mark-up, charging
of---Judgment by Supreme Court in case titled Dr. M. Aslam Khaki reported as PLD
2000 SC 225---Effect---Permissible mode of financing by sale and purchase cannot carry
any mark-up on mark-up and the same is not allowed even in the event of default --BCD
Circular No.13, dated 20-6-1984, and the judgment of Supreme Court provide the same
end result---Practice of keeping mark-up in a separate account and principal in a separate
account and charging mark-up on the principal and not on the markup is not
contemplated by the BCD Circular No.13, dated 20-6-1984---Once the principal debt is
determined, the debt becomes finance by lending and no mark-up, by whatever name
called, can be charged---If one were to presume that such mark-up on the mark-up cannot
be charged, but can be charged on the principal money lent, the outcome would in fact be
the same.

(u) Interpretation of statutes---

----Bypassing existing law---No one can circumvent the law, no one can be allowed to act
otherwise than what is provided by law---If a thing has to be done in a specific manner, it
has to be done in that manner alone and none else---No one can be allowed in the name
of their own profitability to cause the existing law to be bypassed, avoided or interpreted,
or usage or customs to be developed which are contrary to an existing unequivocal and
exact law.

Mian Muhammad Nawaz Sharif v. The President of Pakistan PLD 1993 SC 473; Banque
Indosuez v. Banking Tribunal for Sindh and Balochistan and others 1994 CLC 2272; Mst.
Aisan v. Manager, Agricultural Development Bank of Pakistan, Chunian 2001 CLC 57
and Muhammad Ramzan v. Citibank N.A. 2001 CLC 158 ref.

(v) Words and phrases---

---- Interest (as in financing)---Defined---Interest is an increase on money by elapse of

time i.e. that a sum that is continued to be paid till such time the debt remains in place at
a certain rate and for utilisation of monies that may have been given to another person.

(w) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No.13, dated 20-6-1984---BCD Circular No.32, dated 26-
11-1984---Distinction---Only thing that para. 4, Cl. (3), of BCD Circular No. 32, dated
26-11-1984, changes is in C1.3 of BCD Circular No.13, dated 20-6-1984, which gives the
Page No. 5 of 52
date of 1-4-1985, to be a cut off date for financing to individual, whereas such date has
been modified to 1-1-1985 in para. 4, Cl. 4 of Circular No.32.

(x) Interpretation of statutes---

---- Provisions of statute, understanding of---Entire clause has to be read for the purpose
of understanding the provision of statute.

(y) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No.13, dated 20-6-1984---BCD Circular No.32, dated 26-
11-1984---Contract Act (IX of 1872), Ss.23 & 62--Islamisation of economy ---Riba---
Contract against public policy ---Novation of contract---Renewal of contract of debt by
addition of mark-up---Charging mark-up on mark-up---BCD- Circular No. 13, dated 20-
6-1984 and BCD Circular No.32, dated 26-11-1984---Effect---Subsequent agreement
whereby there is a settlement of previous debt or is renewal thereof, amounts to defeating
the provisions of the specific law available, and thus, same would not be the novation but
an independent agreement contemplating an actual sale and purchase which is entered
only for renewing the previous debt and shall be a void agreement---Such renewal of the
contract is window dressing and all profits shown are nothing but added mark-up---Mark-
up cannot be allowed to be added to an ‘existing debt’, as there can be no agreement
between the parties in respect of that ‘specific debt’ except that there can be enlargement
of time and that too without increase in the debt payable---No one can be allowed to play
a fraud on the existing law by trying to avert the existence of such law that prescribes that
mark-up on mark-up cannot be charged---Act of entering into a future transaction
admittedly is in respect of renewal of financing and does not contain any aspect of actual
disbursement or payment---Such contracts are contracts that are against the public
policy--Effect of BCD Circular No. 13, dated 20-6-1984, and BCD Circular No. 32, dated
26-11-1984, is that where a default has been made the Bank was required to take legal
steps ---Co-relation has been developed between not charging mark-up and proceeding to
recover money instead---Mark-up cannot be added for the renewal of debt---Taking
additional amount on the debt in Riba which is prohibited.

E.A. Evans v. Muhammad Ashraf PLD 1964 SC 536; Sardar Ali v. Muhammad Ali PLD
1988 SC 287; Bank of Oman Limited v. East Trading Company PLD 1987 Kar 404;
Habib Bank Limited v. Muhammad Hussain PLD 1987 Kar. 612; Muhammad Bachal
Memon v. Government of Sindh PLD 1987 Kar. 296; Aijaz Haroon v. Inam Durrani PLD
1989 Kar. 304; Habib Bank Limited v. Messrs Farooq Comport Fertiliser Corporation
Limited and 4 others 1993 MLD 1571; United Bank Limited v. Ch. Ghulam Hussain
1998 CLC 816; United Bank Limited v. Central Cotton Mills Limited 2001 MLD 78 and
Banque Indosuez v. Banking Tribunal for Sindh and Balochistan and others 1994 CLC
2272 ref.

(z) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---SBP Circular No. BID(Gen)2470/601-04-90 & BID Circular No.3, dated
20-2-1989---Reschedule or restructure of financial obligations--Guidelines to Banks---
Nowhere in the Circulars has it been stated that an additional mark-up can be charged on
a debt for extending the time for payment, it is the mark-up that has already been charged
for the purposes of arriving at marked up price which is allowed to be capitalised---
Capitalisation only brings it in the line of the accounting system---Such was advised
through the circulars to the Banks only for their accounting purposes and nothing else.

(aa) Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act
(XV of 1997)---

----S. 9---Contract Act (IX of 1872), Ss.23 & 62---Void agreement---Suit for recovery of
Bank loan---Charging of mark-up on mark-up ---Novation of contract---Contract against
public policy---Entering into new contract including the amount of mark-up--Validity-
Subsequent agreements do not change the previous agreements, there-is no mention or
reference of the previous agreement---Only document shown is a sanction advice which
is an internal document of the Bank---Document could be seen only to what was
approved by the Bank---Agreement overrides all arrangements---Sanction advice, in the
Page No. 6 of 52
presence of the agreement, vis-a-vis the customer cannot be construed to the
disadvantage to the customer---Agreement is the document signed by both parties the
contents of which have to be seen---Banks have been restrained from adopting any
measures or practice whereby they; either artificially or temporarily show an ostensibly
improved position of the Bank account---Addition of mark-up is added towards the assets
of the Bank which gives an ostensibly improved position of the Bank accounts and the
same cannot be allowed---What cannot be done directly cannot be done indirectly and
any contract which is of such nature that if permitted would defeat the provisions of any
law or which is contrary to public policy is avoid agreement---Where mark-up is
capitalised and added to the principal amount (principal means the sale price) and having
arrived at the re-purchase price, any increase by way of renewal, capitalisation, booking
on accrual basis or by any means will be nothing but addition of mark-up on mark-up---
Bank can only seek recovery of the marked up price under the first agreement---If,
however, the batik is able to establish the fact that the amount has been actually disbursed
under the subsequent agreement and it is not for the purpose of adjustment of the
previous debts and that there has been a de facto sale and purchase in commodity, in that
situation all agreements that may have been entered into for such purposes and
independent of the previous agreements, can be looked into and money is recoverable
there against.

Dr. M. Aslam Khaki v. Syed Muhammad Hashim PLD 2000 SC 225; Hashwani Hotels
Limited v. Federation of Pakistan PLD 1997 SC 315; Mian Muhammad Nawaz Sharif v.
The President of Pakistan PLD 1993 SC 473; United Bank Limited v. Central Cotton
Mills Limited 2001 MLD 78; PLD 1962 Kar. 334; AIR 1943 PC 147; 1994 CLC 2272;
2000 CLC 1602; PLD 1964 SC 337; PLD 1983 Kar. 176; Moudood Ahmed Farooqui v.
Ameen Fabrics PLD 1983 Kar. 176 and Al-Quran (2:280) ref.

(bb) Contract Act (IX of 1872)---

----S. 23---Expression ‘public policy’---Concept---Scope.

(cc) Contract Act (IX of 1872)---

----S. 171---Lien---Provisions of S.171 of Contract Act, 1872--Applicability---Lien can

only be exercised on a credit in the account of Bank to set off a liability and not by
additional credit to set off previous debt--Debit is not a credit of a customer and where it
is not a credit of the customer, provisions of S.171 of the Contract Act, 1872, are not
applicable.

(dd) Sale of Goods Act (III of 1930)---

----S.4(4)---’Agreement to sell’ becoming a ‘sale’---Conditions to be fulfilled---Transfer

of property in the goods which is the principal element of sale was a condition to be
fulfilled.

Wafaq-i-Pakistan v. Awamun Nas 1988 SCMR 2041 and Pakistan v. Public at Large PLD
1986 SC 240 ref.

(ee) Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act
(XV of 1997)---

----S.9---Sale of Goods Act (III of 1930), S.4---Recovery of Bank loan--Rescheduling of

finance agreement---Inclusion of mark-up in principal amount---Validity---Sale only
accrues when conunodity is transferred to the purchaser or consideration thereof has been
paid---Agreement which is a subsequent one does not have the ingredients of a sale and
at the best can be treated an ‘ agreement to sell’, such agreement can possibly be
specifically enforced whereby, the purchaser may seek direction against the seller upon
payment of actual consideration to sell his property, but if not so done re-purchase price
mentioned in the subsequent agreement cannot be taken to be a debt payable by the
purchaser---Agreements made subsequently with an aim to avoid and defeat the
provisions of law of not charging of mark-up on mark-up is void.

Page No. 7 of 52
Dr. M. Aslam Khaki v. Syed Muhammad Hashim PLD 2000 SC. 225 and Moudood
Ahmed Farooqui v. Ameen Fabrics PLD 1983 Kai. 176 ref.

(ff) Contract Act (IX of 1872)---

--S. 23---Contract out of law---Scope---Parties cannot contract out of the provisions of

Act.

Waman Shriniwas Kim v. Ratilal Bhagwandas & Co. AIR 1959 SC 689 and Anayat Ali
Shah v. Anwar Hussain 1995 MLD 1714 ref.

(gg) Constitution of Pakistan (1973)---

---Arts. 189, 203-D, 203-F & 203-GG ---Decisions of Supreme Court and Federal Shariat
Court---Effect---Decision of Supreme Court is binding on High Courts under the
provisions of Art. 189 of the Constitution, whereas the order of Federal Shariat Court is
also binding under Art. 203-GG subject to Arts. 203-D & 203-F of the Constitution.

(hh) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No.13, dated 20-6-1984---BCD Circular No.32, dated 26-
11-1984---Banking system---Effect on---BCD Circular No.13, dated 20-6-1984 and BCD
Circular No.32, dated 26-11-1984, changed the entire law, its perspective and modes and
methods of banking, converting them into trade related modes---Loans were only treated
to be given without any mark-up and increase except for service charges.

(ii) Interpretation of statutes---

---- Law declared ultra vires---Effect---Where a law has been declared to be ultra vires,
such declaration acts prospectively and not retrospectively.

(jj) Interpretation of statutes---

---- Law declared intra vires---Effect---Where a law has been declared to be intra vires, it
is only the interpretation of the specified law that has to be taken into account---Present
judgment cannot be said to act prospectively.

(kk) Interpretation of statutes---

---- Vacuum left in a law---Where vacuum in law is left by statutory silence, the
prevailing mode having full Constitutional support would be for the application of
Islamic Common Law.

Muhammad Bashir v. The State PLD 1982 SC 139 and Fazal Ghafoor v. Chairman,
Tribunal Land Disputes 1993 SCMR 1073 ref.

(ll) Islamic Jurisprudence---

---- Islamic Financing System---’Bai Muajjal’ and ‘Murabaha’ transaction--Concept---

Such transaction is that the Bank having purchased as re-sold the commodity at a higher
price to the customer and at such a point the customer is not required to pay the sale
consideration but what is required of him to do so within the specified period at an agreed
re-purchase---Consideration for the sale of the commodity by the Bank to the seller
cannot be adjusted against this re-purchase price, as it is Bai Muajjal the payment is
deferred--Consideration for the re-sale by the Bank to the customer is a contract between
the two and such becomes a debt---Such debt is, therefore, only liable to be paid by the
customer---No question of revolving facility would arise as it is the amount that is
available with the customer being ‘the sale consideration of the sale made to the Bank.

(mm) Islamic Jurisprudence-

---- Riba---Concept---Any increase or difference in the value thereof is usurious and

comes within the definition of ‘Ribs’.
Page No. 8 of 52
Sahih Muslim, Book 9, No.3795 by Abdullah ibn Abu Qatadah; Sahih Muslim, Book 8,
No.3849 by Uthman ibn Affan; Sahih Muslim, Book 9, No.3854 by Abu Sa’id Al Khudi
and Sahih Muslim, Book 9, No. 3856 by Abu Hurayrah ref.

(nn) Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act
(XV of 1997)---

----S.10---Leave to defend the suit, grant of---Bona fide dispute---Charging mark-up on

mark-up---Judgment by Supreme Court in case titled Dr. M. Aslam Khaki reported as
PLD 2000 SC 225---Effect---Where the Bank had changed mark-up on mark-up from the
defendant, such was genuine and a fide dispute---Leave to defend the suit was granted in
circumstances.

Hamza I. Ali for Plaintiff.

Ghulam Mustafa Lakho for Defendants Nos. 1 to 8.

Afzal Siddiqui for Defendants Nos.9 to 15.

Munir A. Malik: Amicus curiae.

Ejaz Ahmed: Amicus curiae.

Azizur Rehman: Amicus curiae.

Dates of hearing: 10th November, 2000; 17th and 25th January, 2001.

ORDER

These are two applications, namely C.M.A. 1356 of 2000 filed on behalf of the
defendants Nos. 1 to 8 and C.M.A. 1357 of 2000 filed on behalf of the defendants Nos:9
to 15. These were initially listed on 31-10-2000, when Mr. Asif Javed, holding4 brief for
Mr. -Afzal Siddiqui Advocate representing the defendants Nos.9 to 15, requested for
adjournment on the ground of latter’s personal engagements. Mr. Ghulam Mustafa Lakho
representing the defendants Nos. 1 to 8 was also not present. It was, at that time that it
was categorically stated that no further adjournment would be granted and the case was
adjourned to 10-11-2000, when it was to proceed.

2. The case came up on 10-11-2000 as was ordered. On that date Mr. Ghulam Mustafa
Lakho stated that in view of the case of Dr. M. Aslam Kakhi v. Syed Muhammad Hashim
reported as PLD 2000 SC 225 and on account of the law being BCD Circular No.13
dated 20-6-1984 and BCD Circular No.32 dated 26-11-1984 issued by the State Bank of
Pakistan, the entire accounts form the date when the finance was granted, shall have to be
Looked into so as to determine, whether any mark-up on mark-up has been charged to
arrive at a figure as claimed by the plaintiff. He said that if the same is seen in light of the
ratio of the case of Dr. M. Aslam Khaki v. Syed Muhammad Hashim, PLD 2000 SC 225
in fact the entire debt thus, claimed by the plaintiff, on account of the various agreements
filed would be seen to have been paid off, and that, it is only the mark-up on the debt that
is now being claimed.

3. In the application, C.M.A. No.1356 of 2000 for leave to defend tiled by the defendants
Nos. 1 to 8, it is categorically stated that, mark-up on the mark-up is the only amount that
is being claimed. Similar application has also been made, (C.M.A. No. 1357 of 2000) by
the defendants Nos.9 to 15. Mr. Afzal Siddiqui is not present today, however, the
application filed by him, notwithstanding his absence shall be taken into consideration
whilst passing the order.

4. I had, therefore, asked Mr. Hamza I. Ali, that in view of the above, he should address
this Court on the issue, especially when, by the order dated 10-10-2000, this Court had
directed the plaintiff to file a summary of account verified on oath giving details of the
principal amount of loan/credit facility provided to the defendant under the Agreement of
Financing with its period, the buyback price, the rate of mark-up to arrive at the buyback
Page No. 9 of 52
price, prompt payment bonus, rebate if allowed, mark-up charged for the cushion period,
mark-up charged beyond the period of the Agreement of financing, mark-up on mark-up
charged, if any and any other amounts that may have been debited. The purpose being to
arrive at an amount under the concept of Islamic Banking System. Mr. Hamza gave some
facts, he stated that, to understand the whole case, the background has to be understood.
He said that at the point of time when the agreement was first entered into in 1990
between the plaintiff and the defendants, the company was known as ‘Raja Textiles
Mills’, which was changed to ‘Schon Spinning Mills Ltd.’ in July, 1990. Subsequently,
the name of ‘Schon Spinning Mills Ltd.’ was changed to ‘Qayyum Spinning Ltd.’ He said
that the financing had commenced in 1990, and the various sums that were payable were
Rs.120.00 million. However, in the year 1993, the same finance overdue to the extent of
Rs.120.00 million was reduced to Rs.90.00 million, as such another agreement dated 22-
2-1993 was entered into, whereby a sum of Rs.90 million was stated to be given, which
was in fact a continuation of the previous finance. However, the defendants had agreed to
pay back a sum of Rs.114,222,000 stated to be the re-purchase price. This being the
position I asked Mr. Hamza whether the buyback/re-purchase price mentioned in the
agreement contained in it any component of mark-up, and was this amount actually and
physically disbursed to the account of the defendant No. 1. Mr. Hamza stated that, actual
disbursements were in the nature of restructured. previous finance and in fact, such
restructured payments were outstanding and continued to be the liability of the
defendants, notwithstanding the fact that ;said agreement of 1993, did not refer to any
previous agreement. I had also asked Mr. Hamza, that in the presence of Islamic
financing system made applicable and binding on all banks, financing institutions and
Development Financing Institutions could such a transaction be entered into, when BCD
Circular No. 13 dated 20-6-1984 and BCD Circular No.32 dated 26-11-1984
contemplate, that the entire banking system shall be converted into the Islamic mode of
financing from the first day of January, 1985. No overdue/penal interest or mark-up on
mark-up could be charged on account of the customers delayed payment and if there was
any overdue, the State Bank had directed the banks to proceed to recover the same by
taking legal steps to do the same. I had expressed in Court, that, if the bank chose not to
take steps to recover the proceeds or overdue, the bank has to suffer. There is no doubt,
that such was in the absolute discretion of the bank, but such could not be taken to be the
excuse to add any amount to an existing debt. I had, therefore, asked Mr. Hamza that
once the re-purchase price has been stated to be the debt of the customer, how and under
what law, the bank had the power or authority to increase the debt. I had also observed
that such question seems to have been decided finally in the case of Dr. Aslam Khaki
(supra). At this stage Mr. Hamza stated that he was unaware of the judgment and that, he
sought time, therefore, so that he would be able to address this Court.

5. At this stage, as this is’ the question of law and an interpretation of the Islamic system
and mode of finance, I had initially, therefore, on the said date appointed Mr. Muneer A.
Malik Advocate to act as amicus curiae and to dilate on the question keeping in view the
said Circulars being BCD Circulars Nos. 13 and 32, and the effect of the judgment of Dr.
Aslam Khaki (supra). The case was adjourned on that date and came up for hearing on
17-1-2001. Mr. Hamza was present alongwith Mr. Ghulam Mustafa Lakho and Cliaudhry
Muhammad Iqbal, Advocates, however, Mr. Afzal Siddiqui was not present despite the
case having been adjourned on 31-10-2000 in the presence of Asif Javed who was
holding his brief to 10-11-2000. I, therefore, proceeded with the case, notwithstanding his
absence, he living on due notice. Mr. Hamza stated that as Mr. Muneer A. Malik was
ready on the question, the case should first be put up by the amicus curiae. Mr. Muneer A.
Malik agreed and has, therefore, argued the case. Mr. Muneer was short, brief and to the
point. According to him, the judgment that was passed and BCD Circular No. 13 dated
20-6-1984 and BCD Circular No.32 dated 26-11-1984 were slightly different in that, the
said BCD Circular No. 13 dated 20-6-1984 and BCD Circular No.32 dated 26-11-1984
have not been discussed in the judgment of Dr. Aslani Khaki (supra). He stated that in
view of categorical assertion in the circulars itself and notwithstanding the judgment in
Dr. Aslam Khaki in view of the sections 41 and 42 of the Banking Companies Ordinance,
1962 giving State Bank of Pakistan (SBP) the power to give direction to the Banks of
NBFI as to the system of banking. This power included any advice or otherwise, and the
said circulars were binding on the banks. He stated that the direction could be general or
to any specific banking company. According to him the said circulars were therefore,
valid and proper and would continue to remain binding on the barks. He has referred to
the case of Hasbwani Hotels Limited v. Federation of Pakistan reported in PLD 1997 SC
Page No. 10 of 52
315 in which it has been held that the circulars or instructions of the State Bank of
Pakistan shall remain and continue to remain binding till such time they are withdrawn.
He, however, said that the circular shall act prospectively and not retrospectively and
such has been held by the Supreme Court in the aforesaid judgment. Mr. Muneer A.
Malik stated, therefore, that a careful perusal of the BCD Circular No. 13 dated 20-6-
1984 has to be made. It was argued by Mr. Muneer Malik that under Article 2 of the
Constitution of the Islamic Republic of Pakistan, it has been categorically provided that
Islam shall be the State religion of Pakistan. He stated that the Objectives Resolution
through, in 1984 was not a part of the Constitution, but steps had been taken and such
was in serious consideration: He stated that the Objectives Resolution was inserted and
became an integral part of the Constitution by a Presidential Order No. 14 of 1985 with
effect from the 2nd March, 1985. He referred to Articles 31, 38(f) and 227 of the
Constitution which categorically provided that steps were to be taken to enable the
Muslims of Pakistan, individually and collectively to live. in accordance with the
fundamental principles and basic concepts of Islam and ‘Ribs’ was to be eliminated as
early as possible. Further that all laws existing were to be brought in conformity, with the
‘Injunctions of Islam’ as laid down by the Holy Quran and Sunnah and that no laws were
to be enacted, which were repugnant to such injunctions. He said that in view of the
provisions of the Constitution, serious steps were being taken for Islamisation of the
financial system of the country. The Islamisation of the financing system being required
to be changed, the Finance Minister also showed his intention to Islamise the banking
system from 1985. The banking system being a major part of the entire structure of the
country’s financial system. It was in this light, that BCD Circular No, 13 dated QO-6-
1984 and BCD Circular No.32 dated 26-11-1984 were introduced in which, the intention
of the Government was very clear. The Circulars clearly required the shifting of the then
banking system based on ‘Interest’ into the banking based on the Islamic mode of
financing and such was stated categorically. A transactional period was also provided in
the said Notification/Circular of 20th June, 1984. He said that it was categorically
provided that from the 1st of January, 1985 all financing provided by the banking
companies to the Federal Government and the Provincial Governments, public sector
corporations, public or private joint stock exchange companies will be in the mode as
indicated in the Annexure-I to the said circular. He said that the said circular was
complete in itself, that it was published on the recommendation of the Council of Islamic
Ideology, a Council created by the Constitution.

The recommendations thus, given were after long drawn proceeding and research and
attended by bankers, economist and religious scholars. The modes prescribed were that
had been allowed by the Council and that such were thus, the permissible modes of
financing. The permissible modes, according to him are categorised in three specific
heads. These were, (i) Financing by Lending, (ii) Trade Related Modes of Financing in
relation to purchase of commodities and (iii) being in respect of Masharka and
participation. Mr. Muneer A. Malik readout permissible modes of financing in Annexure-
1 of the said circular in which it was categorically mentioned that on loans, at best;
service charges could be allowed. He, therefore stated that under the Financing by
Lending i.e. the actual transaction of lending of money by the bank was allowed, but they
were not allowed to charge any interest mark-up thereon. The only amounts thus, allowed
were ‘Service Charges’ which was not to exceed the proportionate cost of operation and
excluded from it, the costs of funds and provision of bad debts. The said BCD Circular
No.32 provided that while deregulating house remittance a direction was also given that,
the mark-up on import bills and mark down in the case of documentary bills (both being
modes of Islamic Financing). Further he said, it has been clarified by the said Circular
that “Interest wherever charged by banking company/Development Finance Institution, in
any items of the bank charges shall be replaced by non-interest mode considered
appropriate by it. “ He said that the bank charges included any amount being charged to
the account of the customer. Thus, the direction was clear that such charges could be the
one’s that where allowed by Annexure-I and BCD Circular No. 13. He said that in the
Circular No.32 it is stated that “overdue/penal interest or mark-up, mark-up on mark-up
shall not be charged by a banking company/DFIs as from the date. Instead, it may take
legal steps to recover the overdue finance.” .By this he said it is amply clear that there
would be no carry forward or roll over, rescheduling or restructuring as would involve the
additions of mark-up on a debt due on account of the initial agreement. He said that law
is explicit and in fact in the clear words there was no need of any clarification. He said if
the banks chose to give time such could be given, but without any increase. Mr. Muneer
Page No. 11 of 52
A. Malik from Annexure-I of BCD Circular No. 13 said that, there was a categorical
assertion that such would be only in relation to the purchase of goods by banks and their
sale to the clients at an appropriate marked up price on deferred payment basis. In case of
default, however, according to him and as stipulated in the said Annexure, no mark-up on
mark-up could be charged. The third reference was made to the various provisions
relating to Masharka, equity participation, participation term certificate and Modaraba
and rent sharing. He said it was provided that in the event of loss, in the other case the
same the loss was to be proportionately shared by the banks also. Mr. Muneer A. Malik
referred to Annexure-II to BCD Circular No. 13, dated 20-6-1984 in which various
modes of transactions and their basis of financing had been dealt with. In the nature of
business, which involved trade and commerce, he stated it was to be a fixed investment
by mark-up in price in export bills etc. The financing by lending or trade related modes
could be on the basis of only ‘service charges’ or ‘commission’ or ‘mark-up’ or mark
down in the price, but all could not be taken together nor could mark-up be added to
amounts on which the same has been charged. This banks could have charged either
‘commission’ or ‘service charges’ or ‘mark up’ or ‘mark down’ in the price, but it could
not be that ‘commission’ or ‘service charges’ to be charged with mark-up or mark down
in price. Similarly various other financing modes have been mentioned. Therefore, he
said the BCD Circular No.32 was to clarify the situation that the banks shall not charge
interest mark-up on mark-up in any manner whatsoever. He said that under the powers
vested in it, the State Bank of Pakistan gave the directions which were to be implemented
from 1st of January, 1985. He said that, therefore, wherever interest was charged by the
banking company/Development Financial Institutions in any of its bank charges, such
was liable to be replaced by non-interest mode that was considered appropriate by it. In
view of the above, it has been categorically argued by Mr. Munir Malik that these two
circulars namely BCD Circular No.13, dated 20-6-1984 and BCD Circular No.32 dated
26-11-1984 are sufficient to come to the conclusion that in fact any increase would
amount to interest which was not allowed. He stated that in BCD Circular No. 13 dated
20-6-1984 as also BCD Circular No.32 dated 26-11-1984, it is categorically stated no
mark-up on mark-up can be charged and that, if such is charged it is liable to be deleted.
The question, therefore, he stated, boils down that if nothing can be done directly it could
not be done indirectly and referred to the case of Mian Muhammad Nawaz Sharif v. The
President of Pakistan PLD 1993 SC 473. He stated that rescheduling by addition of
further sums was nothing but an addition of mark-up and would amount to mark-up on
mark-up which could not be allowed. He stated that under BCD Circular No. 13 in
Annexure-I in item (B)(i), it is specifically provided that “in case of default, there should
be no mark-up on mark-up”. He stated that thereafter in BCD Circular No.32 dated 26-
11-1984. it is provided that, “moreover, overdue/penal interest or mark-up on mark-up
shall not be charged by a banking company/DFI from that date. Instead, it may take legal
steps for recovery of the overdue financing. “ He stated, therefore, where there is a
categorical stipulation and where the State Bank of Pakistan has specified that no
addition can be made in default and if such is made, the bank should take legal steps to
recover their money. If the bank chooses, therefore, not to recover the money and
reschedule the same, the bank will not be within its right to add to or change the amount
by increasing thereon by addition of the mark-up. He said that this would be against the
provisions of section 23 of the Contract Act which reads as under:--

“23. The consideration or object of an agreement is lawful unless-it is forbidden by law,

or

is of such a nature that, if permitted, it would defeat the provisions of any law; or

is fraudulent; or involves or implies injury to the person or property of another; or

the Court regards it as immoral, or opposed to public policy.

In each of these cases, the consideration or object of an agreement is said to be unlawful.

Every agreement of which the object or consideration is unlawful is void.”

6 Mr. Munir A. Malik stated that section 23 of the Contract Act contemplates six cases in
which the consideration or object is unlawful. The first being that it is forbidden by law;
the second, that it would defeat the provisions or any law; the third being, that it is
fraudulent; the forth, that it involves injury to some ones person or property; the fifth, that
Page No. 12 of 52
it is immoral or finally, the sixth that it is opposed to public policy. He says that therefore,
if any contract is entered into, the consideration or intention of which is to ‘defeat the
provisions or any law’ or if such agreement is ‘opposed to public policy’, such agreement
would not be lawful. He states that parties cannot contract out of the provisions of an Act,
such he states was held in the case of E.A. Evans v. Muhammad Ashraf PLD 1964 SC
536. He states that in the celebrated case of Sardar Ali v. Muhammad Ali PLD 1988 SC
287 (FB) the Hon’ble Supreme Court has held that the existing laws were to continue in
full operation and effect, notwithstanding the Islamisation process. He said that, the
Hon’ble Supreme Court observed that proceedings including appeals were to be decided
and concluded under the existing laws and such were to cease having effect only from the
day specified by the Court in that behalf, and the right accrued by those laws by virtue of
their continued operation were not affected. In view of such observation he asserted that
the BCD Circulars Nos. 13 and 32 shall have full force. As such, where time for payment
was extended on the grant of payment of excess on principal or on accrued mark-up is hit
by para. 4 of the said Circulars. The subsequent agreement would be, therefore, both
against public policy and was for a purpose that it could defeat the provisions of law. Mr.
Munir A. Malik has referred to the case of Wafaq-i-Pakistan v. Awamun Nas 1988 SCMR
2041 in which the Shariat Appellate Bench had declared that such contracts of sale (Bai)
where the goods did not exist, is not a valid sale, though an agreement of sale, he says
can be entered into, but such shall also not be enforceable, as there are no goods. There
has to be something that is being sold, thus in the said case directions were given to
amend the law accordingly. The declaration was also of the fact that in section 23 of the
Contract Act should also include such agreements that are against the injunctions of Islam
and all agreements against the injunctions of Islam are void agreements.

7. Mr. Munir Malik stated, however, that, the judgment delivered by the Shariat Appellate
Bench of the Supreme Court of Pakistan being Dr. M. Adam Khaki (supra) has given a
time schedule that has been mentioned in the order of the Court. I had put to him that the
time schedule related to the provisions that were mentioned in the said Order. At this he
stated that they related to the specific laws that have been dealt with. Mr. Munir Malik
read on the various provisions of the last paragraph of the order of the Court and stated
that eight laws appeared to have been held to be repugnant to the Injunctions of Islam and
ceased to have effect from 31st March, 2000, whereas other laws and provisions
mentioned therein, to the extent that they have been declared to be repugnant to the
Injunctions of Islam were to cease to have effect from 30th June, 2001. Thus, after that
date, as held in the Sardar Ali’s case (supra) notwithstanding any objection, the said law
with all the provisions till the date mentioned be valid and binding. He stated, therefore,
that those laws which have not been mentioned in the judgment will not be effected. He,
however, said that in the judgment, certain guidelines had been given for the Federal
Government to constitute a high level commission in the State Bank of Pakistan
empowering it to carry out control and supervise the process of transformation of the
existing financial system to one conforms to the Shariah. I had asked Mr. Munir as to
whether the Islamic banking was a part of the financial system, and if so, what would be
the effect of the judgment in Dr. M. Aslam Khaki (supra). Mr. Munir Malik said,
therefore, that, the transformation commenced from 1962, and specially in 1985, a part of
the overall financial system had been changed and converted to the system that came in
line with the Shariah by introducing BCD Circulars Nos. 13 and 32. The principle
enunciated by this judgment defined further and clarified the term ‘Riba’ and its
applicability. Mr. Munir said that the ratio decidendi of the case shall be applicable to all
laws. The question, therefore, came up as to, from when the system of Islamic banking
commence, to which Mr. Munir stated that it started from January, 1985. At this Mr.
Munir concluded.

8. Mr. Azizur Rehman and Ejaz Ahmed stood up in the Court and requested that as the
question that has been raised was very important and would affect the entire banking
system and as they mostly represent the banks, they may also be allowed to address this
Court. Such was allowed.

9. Mr. Azizur Rehman, argued with regard to SBP Circulars Nos.13 and 32, dated 20th
June, 1984 and 26-11-1984 respectively. He stated that the two Circulars are among many
which SBP has been issuing from time to time and the two Circulars in actual fact have to
be examined. The First Circular No. 13 according to him will not be attracted where
renewal of loan is made subsequently, since “renewal” amounts to merely extension and
Page No. 13 of 52
continuation of the earlier agreement between the parties. Circular No.32 merely pertains
to different items of Bank charges and, therefore, cannot be made basis for striking down
the contract between the parties. In other words Circular No. 32 does not have the effect
that it overrides Circular No. 13. In the case of United Bank Limited v. Central Cotton
Mills Limited reported as: 2001 MLD 78 (S.B.) deals with the said two Circulars. The
learned Single Judge of the High Court of Sindh Karachi came to the conclusion that
Circular No. 13 is not overridden by Circular No.32. He said that in SBP Circular No.
BID(Gen)2470/601-Q4-90 of 17-6-1990 which was addressed to all Banks with regard to
the treatment to be given to rescheduled loans and capitalisation of mark-up/interest and
the guidelines were given. In clause 2.1 of the said Circular, the “restructured” loan has
been defined as one whose terms and conditions have been modified principally because
of deterioration in the borrowers financial condition, in order to provide reduction in
interest rate or principal or a capitalisation of interest accrued. Clause 2.2 refers to a
‘rescheduled’ loan and defines it as one in which effective interest rate terms remain
unchanged from original terms but principal repayment terms have been extended
because of project delays and such loan has been defined .as not a restructured loan.
According to him, clause 7.1 provided for capitalised mark-up/interest on loans and
defined the words as ‘uncollected interest’ which is added to ‘unpaid principal’ in
accordance with contractual loan agreement. In the said Circular and the guidelines
attached to the same, the word ‘interest’ has really been utilised to mean interest and/or
mark-up as is evident from line 5 of the Circular itself He said that on the date of Circular
i.e. 17-6-1990 five years had elapsed from the date on which the system of mark-up had
been introduced. Guidelines, according to him were issued by Habib Bank Limited to its
various officers in order to deal with rescheduling, restructuring and writing off which
was contained in the aforesaid Circular of State Bank of Pakistan dated 17-6-1990. He
said that the guidelines issued by State Bank of Pakistan were attached. Circular No.4 of
17-2-2000 was also issued by State Bank of Pakistan under the heading
‘Rescheduling/restructuring of non-performing loans”. The Banks as per para. (i) were
required to continue to provide for rescheduled/restructured loans/advances for a period
of one year (excluding grace period). Also while reporting to CIB, it was made incumbent
that such loans/advances should be shown to State Bank of Pakistan as
“rescheduled/restructured” instead of ‘defaults’. In other words when Banks finalise
rescheduling/restructuring arrangements with the borrowers/customers, State Bank of
Pakistan does not treat the borrowers/customers as having committed defaults. In actual
fact in some cases if rescheduling/restructuring is not carried out, it would create lot more
problems for borrowers/customers who actually stand to gain from the new agreements.
Additionally he stated that an unreported judgment dated 8-1-1999 was passed by a
Division. Bench of this Court in Spl. H.C.A No.187198 (M/s Hardware Manufacturing
Corporation (Pvt.) Limited and 5 others v. United Bank Limited). It was held that by
executing a Finance Agreement, the Appellants’ liability on the original
contract/agreement stood extinguished and the earlier agreement was substituted by a
later Finance Agreement/contract. A reference was made in this connection by the
Division Bench to two reported cases i.e. PLD 1962 Karachi 334 and AIR 1943 PC 147.
He said that the said order of the Division Bench is binding on this Court, and therefore,
what is decided has to be acted and no judgment otherwise can be passed.

10. Mr. Aziz argued the position of Novation of Contract and stated that in the unreported
judgment of the Division Bench of the High Court of Sindh dated 8-1-1999, the decision
which was reached was in line with a number of cases which had mentioned, being 1994
CLC 2272 (Karachi) (D.B.) and 2000 CLC 1602 (Karachi) (S.B.). He said that it was
held by the Division Bench of the High Court of Sindh Karachi that, where a fresh
agreement was entered into and the defendant acknowledged that a certain sum was due
from him which formed consideration under the new agreement, the liability of the
defendant under the original contract was completely extinguished and there was a fresh
contract substituting the old contract and which was in the nature of, novation of a
contract within the meaning of section 52 of the Contract Act,. 1872. The Division Bench
has placed reliance for purposes of interpretation of section 62 of the Contract Act on
PLD 1964 SC 337 Likewise he said that in the second reported the conclusion of the
learned Single Judge was that section 62 of the Contract Act clearly provides that if
parties to a contract agree to substitute a new contract for the old one or to rescind or alter
it, the original contract between the parties need not be performed and that, there is
nothing in the Contract Act or in any other law which prohibits the parties from altering
terms of the original contract or executing a new contract to substitute the old one. It was
Page No. 14 of 52
further held that the subsequent agreement amounted to novation of the old contract, the
consideration of which was the agreement of the Bank to extend time for payment of the
outstanding liabilities of defendant No. 1.

11. On of the point of actual disbursement it was argued by Mr. Aziz stating that there
need not be any actual disbursements when a Bank grants rescheduling or restructuring.
Therefore, in rescheduling the liability to pay to the Bank is amended or re-cast giving
further time for re-payment to the Bank. He said that, in this connection the definition of
the word “debt” would also be relevant and. for the meaning of the word, he has relied on
PLD 1983 Karachi 176 (D.B.) where it was held that a debt in the hand of a debtor does
not belong to him but it belongs to the person to whom it is payable. A debt is something
which is owed by one person to another. It is an obligation and liability to pay or return
something. He states that similarly in the above referred case reported in 2000 CLC 1502
(Karachi) (S.B.), the learned Single Judge utilised the words “outstanding liabilities of
defendant No. 1 “ which was treated as consideration for the new contract. Thus, the
outstanding liabilities constituted the debt payable to the Bank. Since the
acknowledgement of liability contained in the fresh agreement is available, fresh
disbursements obviously were not required, as otherwise there would be duplication and
the Bank will be out of pocket by actually disbursing the outstanding amount again to its
borrower/customer.

12. Mr. Aziz said that the judgment reported in PLD 2000 SC 225 is actually the one
passed by Shariat Appellate Bench of the Supreme Court consisting of 5 Judges. The
Supreme Court has given directions and in any case until 30-6-2001 the present laws will
continue to be valid. Therefore, the contents of the judgment have not come into force so
far. A large number of steps have to be taken by the Federal Government and other
agencies including Banks for different phases of transformation which is still to be
effected. He had also referred during the arguments to the various Articles of the
Constitution of Pakistan, inter alia Article 203-H(1) which provides that all pending
proceedings in any Court or Tribunal shall. continue and the points in issue therein shall
be decided in accordance with the law for’ tote time being in force. He referred to
judgment of a learned Single Judge of the High Court of Sindh, Karachi, in Suit 1700 of
1999 where it was held that the said judgment of the Shariat Appellate Bench of the
Supreme Court and Injunctions of Islam cannot be pressed into service to avoid payment
of outstanding liabilities since verse 2:280 does not create a right in favour of a debtor for
payment of what is acknowledged as due.

13. Mr. Aziz said that Industrialists and Traders make lot of money by borrowing from
Banks, etc. and the money really comes from even small depositors who put their money
into the hands of the Banks. The interest or mark-up paid by these Industrialists and
Traders is included in their accounts and they get benefit of increased prices for their
produced/manufactured items and they ‘are allowed to reap benefits by showing
interest/mark-up as costs of production which interest/mark-up is allowable expenditure
in income tax returns.

14. Mr. Aziz concluded and said that, therefore, re-scheduling, restructuring and entering
into fresh agreement to renew the facility by adding mark-up is valid. It shall only be
effected after the judgment of the Shariat Appellate Bench of the Supreme Court becomes
applicable.

15. Upon -the conclusion of arguments of Mr. Azizur Rehman, Advocate, Mr. Ejaz,
Ahmed, Advocate, also argued his position, that the judgment in the case Dr. M. Aslam
Khaki (supra) was not applicable to the cases that had been instituted prior to the same,
He said that notwithstanding the fact that the said judgment is not applicable, it is
necessary to dilate upon the history as to how and what was the actual perspective that
the bankers had understood in respect of the said system. He has referred to the judgment
in the case of Dr. M. Aslam Khaki (supra). He stated that the said judgment also notices
the manner in which the system wad to work and referred to a note that has been
mentioned in the judgment of Mr. Junejo. He has stated that the State Bank of Pakistan
considered that the entire transaction of purchase and re-purchase as a notional
transaction and that, because it was considered as a notional transaction where, the mark-
up was not serviced, rescheduling was allowed by addition of mark-up on the un-serviced
mark-up. Such re-scheduling/restructuring was the only way that the banks could save
Page No. 15 of 52
their money and earn thereon. He stated, therefore, renewal by way of entering into a
fresh agreement was considered appropriate. He stated that the circulars namely BCD
Circular No. 13 and BCD Circular No.32 did not give any idea how the transactions were
to take place and it was, therefore, a belief that such transactions could be entered into or
done. He said that it was common knowledge that notional sale and such-like transactions
were valid transactions. He stated that disbursement for purchase in such notional
transaction was not necessary and that the amount of debt on a particular date could be
deemed to be proper and appropriate disbursement. Mr. Ejaz Ahmed stated that if a view
is taken by this Court that subsequent agreements are invalid agreements it will cause an
irreparable injury and harm to the banks whereby, the banks may in fact collapse. In the
judgment of Dr. M. Aslam Khaki (supra) a discussion on the concept of Negotiable
Instrument Act, 1881 has been referred to sections 79 and 80 of the said Act have also
been cited. Reference has been made to a booklet on mark-up system by Mr. Justice
Moulana Muhammad Taqi Usmani in which a detailed discussion has been held as to the
mark-up system as is in vogue and has been in practice in the banks. It has been pointed
out that the practice adopted under the garb of mark-up is authoritative of the
conditionalities attaching to Bai Moajjal as the permissibility of such a transaction is
dependent on fulfillment of the various conditions as enshrined in the Quaranic
injunctions in the order of the Court. It has been stated by Mr. Ejaz Ahmed that in BCD
Circulars Nos. 13 and 32, the concept of Bai Moajjal or Murabaha, has not been stated;
that what was categorically said in the notifications of the State Bank-of Pakistan was
that mark-up could be charged on a transaction but mark-up on mark-up could not be
charged, in that there was nothing to stop the banks from entering into such fresh.
agreements for renewal, restructuring or rescheduling. His emphasis lay on the fact that,
upon mark-up having been charged-under the agreement the same became a debt and
such debt became due and payable within the stipulated period. He said that in the books
of accounts such was a credit payable by the debtor, therefore, the debtor was in fact
using the money of the creditor, namely the bank. According to him, subsequent
agreements were nothing but agreements for sale and purchase where, the commodity
being sold was notional and that in fact, the debt payable under the first agreement
became the notional sale of notional goods at a purchase price of such goods and mark-up
was added to arrive at a notional repurchase price and so forth. He said that it has now
been explained as to how the bank should finance and what is the meaning of ‘Riba’ or
mark-up on mark-up. He stated that no doubt, now under the new definition that has been
given by the case of Dr. M: Aslam Khaki, subsequent agreements would be deemed to be
invalid agreements on account of the fact that the Supreme Court has held that purchase
if any; has to be actual purchase and not a notional transaction. Mr. Ejaz Ahmed further
submitted that the question of increase on money was also not understood by the banks,
in fact State Bank of Pakistan had also not understood the concept of money which has
now been stated in the said judgment of the Supreme Court. He stated that it could not
have been even thought of or understood that money could not earn money by way of
additional mark-up on a debt According to him, it is this judgment which has cleared the
concept of money and that in doing so it is stated that the money is not a ‘commodity’
and, therefore, cannot be traded like a trade of a commodity. He stated that it has been
held, therefore, that only commodities could be traded which were in accordance with the
principle that “Allah has allowed trade and prohibited Riba”. According to him, therefore,
in view of the above the Hon’ble Shariat Appellate Bench of the Supreme Court had
given a regulatory timetable whereby, a date of implementation has been given. He stated
that under the measures to be taken for the purposes of creating an infrastructure and a
legal framework a summary has been given in the order passed by the Court. It was stated
that the solution to the economic revival has to be taken into account and that the Federal
Government shall cause a board to be created for arranging exchange of information of
financial institutions about’ feasibility of project etc. and all technical assistance with
regard to the anomalies emerging in the practical operation of financial institutions or
difficulty arising out of the operation of financial practice etc. and that all this was to be
done by the 30th June, 2001, where after the laws and provisions of laws to the extent
that those declared to be repugnant of injunctions of Islam shall cease to have effect from
30th June, 2001.

16. Mr. Ejaz Ahmed said that:--

The question is whether the amount of purchase price (which has been stated to be the
debt of the customer) can be increased? And if so in what circumstances?
Page No. 16 of 52
The answer to this question depends on the meaning ascribed to the word “increase” and
accordingly the increases in the amount of purchase price are classified as follows: W

(a) Increases which are not permissible

(A) Mark-up on any overdue installment, where the finance facility is payable in
installments and the amounts and due dates of installments are specified in the
Agreement.

(B) Mark-up on overdue amounts in cases of, lump sum payment agreements.

(b) Increases which are permissible

(A) Where the amount of mark-up is to be booked by the Banks on accrual basis in each
quarter on the basis of outstanding balance and such outstanding balance also includes
the mark-up for the previous quarters.

In these cases, the banks can be allowed to charge mark-up on the outstanding balance
(inclusive of previous mark-up debits) as the bank under its general lien and right to set-
off is allowed to apply the credit balance of the Customer to offset the liabilities of the
Customer. Accordingly any mark-up recovered by the Bank by debiting the account of
the Customer should be recognised as a withdrawal by the Customer.

(B) At the time of fresh sanction (renewal) of the working capital facilities, sometimes
the amount of the facility is enhanced. The amount of the fresh finance facility’ is used to
adjust the outstanding liabilities of the Customer in respect of the previous facility.
Naturally the outstanding amount of the facility also includes markup. It is sometimes
argued that the amount of the second facility amounts to mark-up on mark-up or
capitalisation of mark-up or rollover.

Fresh finance facility is granted to the Customer by the Bank. The amount of the facility
can be utilised by the Customer for any purpose and the mere fact that the Customer used
such amount to pay-back its liabilities which included some amount of mark-up would
not make the amount of the fresh facility mark-up on mark-up.

The proposition would be further clarified with the converse argument i.e. the Customer
could have paid the outstanding liabilities from its own resources or by obtaining a
finance facilities of equal amount from a separate institution. In such a case the argument
of the later facility being mark-up on mark-up, capitalisation of mark-up or roll-over
cannot be sustained.

In such cases the enhanced amount of the facility or the such amount of the facility as has
been used to settle earlier liabilities on account of mark-up cannot be termed as increase
in the purchase price and is, therefore, permissible.

(C) It also needs to be clarified that the grant of afresh finance facility of a similar nature
particularly in cases of working capital facilities is not restructuring or rescheduling of
the liabilities. Accordingly, any increase in amount of the later facility is not increase the
marked-up price of the earlier facility.

(D) A number of times, the overdue facilities (mostly long term) are restructured or
rescheduled. Again restructuring and rescheduling of the overdue facilities is structured in
the following manner:

* by way of grant of fresh facilities

* by way of a new schedule of payment

Mr. Ejaz, thus concluded the arguments saying that in holding that the banks have
unlawfully rescheduled/restructured/renewed by entering into fresh agreement adding
mark-up, the banks shall collapse.

Page No. 17 of 52
17. With utmost respect to the learned counsel I disagree with the proposition in the first
instance that the said judgment of Dr. Aslam Khaki shall be operative from the date
mentioned in it as regards the banking transition. The laws by which the Banking
Business was to be conducted were set moving from 1962, and a concrete law was
enforced from 1-1-1985. BCD Circular No. 13 categorically states that a transitional
period is given to the banks for the purposes of transition from the old system of the
banking into the Islamic system of Banking. There are two things that are enshrined in
the judgment of Dr. M. Aslam Khaki. First being the economy of the country and the
other being the financing system of the banks. The Shariat Board was to arrange for
exchange of information for the evaluation of the practice and for providing guidance of
successfully managing the Islamic economy. Islamic economy is, in its totality the
economy of the country, and laws in respect of not only the banking, but other aspects
which include interest being charged by other institutions, payment to various banks and
other such-like transformation. The period of transformation has been given in the said
order which reads as under:--

“Keeping all these aspects in view, we have decided to appoint different dates for
different phases of the transformation. We, therefore, direct that:--

(1) The Federal Government shall, within one month from the announcement of this
judgment, constitute in the State Bank of Pakistan a High Level Commission fully
empowered to carry out; control and supervise the process of transformation of the
existing financial system to the one conforming to Shariah. It shall comprise Shariah
scholars, committed economics, bankers and chartered accountants.

(2) Within two months from the date of its constitution, the Commission shall chalk out
the strategy to evaluate, scrutinise and implement the reports of the Commission for
Islamisation of the Economy as well as the report of Raja Zafarul Haq Commission after
circulating it among the leading banks, religious scholars, economists and the State Bank
and Finance Division, inviting their comments and further suggestions. The strategic plan
so finalised shall be sent to the Ministries of law, Finance and Commerce, all the banks
and financial institutions to take steps to implement it.

(3) Within one month from the announcement of this judgment, the Ministry of Law and
Parliamentary Affairs shall form a Taskforce, comprising its officials and two Shariah
scholars from the Council of Islamic Ideology or from the Commission of the
Islamisation of Economy, to:--

(a) Draft a new law for the prohibition of Riba and other laws as proposed in the
guidelines above.

(b) To review the existing financial and other laws to bring them into conformity with the
requirements of the new financial system.

(c) To draft new laws to give legal cover to the new financial instruments.

The recommendations of the task force shall be vetted and finalised by the ‘Commission
for Transformation’ proposed to be set up in the State Bank of Pakistan, after which the
Federal Government shall promulgate the recommended laws. “

18. The said direction has to be read carefully. The requirement is that of the Federal
Government to constitute in the State Bank of Pakistan a Commission for transforming
the existing “financial system” to one conforming to the Shariah and thereafter a strategy
was to be chalked out to evaluate, scrutinise and, implement the report of the
Commission for Islamising the economy. In addition; it was the banks who were to take
steps to implement it. Laws on Riba were required to be introduced and reviewed and
existing financial laws and other laws were to be made out for the purposes of bringing
into conformity the requirements of the new financial system. It was, therefore, to be seen
that there was a distinction between the financial system and system of the Government
Financial Institutions. No doubt the financial system includes within it the system of
banking which is why a separate period has been given in the said order in respect of
preparation of model agreement etc. which reads as under:,--

Page No. 18 of 52
“(4) Within six months from the announcement of this judgment, all the banks and
financial institutions shall prepare their model agreements and documents for all their
major operations and shall present them to the Commission for transformation in the SBP
for its approval after examining them. (Underlining is mine)

(5) All the joint stock companies, mutual funds and the firms asking in aggregate finance
above Rs.5 million a year shall be required by law to subject themselves to independent
rating by neutral rating agencies.

(6) All the Banks and financial institutions shall, therefore, arrange for training
programmes and seminars to educate the staff and the clients about the new arrangements
of financing, their necessary requirements and their effects.

(7) The Ministry of Finance shall, within one month from the announcement of this
judgment, form a task force of its experts to find out means to convert the domestic
borrowings into project related financing and to establish a mutual fund that may finance
the Government on that basis. The units of the mutual fund may be purchased by the
public and they will be tradable in the secondary market on the basis of net asset value.
The certificates of the existing bonds of the existing Government Savings Schemes based
on interest shall be converted into the units of the proposed mutual fund. “

19. The financial system also includes intra-Government borrowing as well as borrowing
from the State Bank of Pakistan by the Federal Government and foreign debt. Such has
been separately dealt with in paras. 8 and 9 which read as under:--

“(8) The domestic inter-Government borrowings’ as well as the borrowing of the Federal
Government from State Bank of Pakistan shall be designed on interest-free basis.

(9) Serious efforts shall be started by the Federal Government to relieve the Nation from
the burden of: foreign debts as soon as possible and to re-negotiate the existing loans.
Serious efforts shall also be made to structure the future borrowings, if necessary, on the
basis of Islamic modes of financing.”

20. From the above, it will be seen that various aspects of law for transformation have
been given and it is for this, that the Hon’ble Supreme Court has given a specific time.
Certain laws in the judgment have been declared to be repugnant to the injunctions of
Islam and ceased to have effect from 31st March., 2000, however, other laws or
provisions of laws to the extent that those have been declared to be repugnant to the
injunctions’ of Islam would cease to have effect from 30th June, 2001. It will be noted
that BCD Circulars Nos.13 and 32 having been declared to be un-Islamic, the said
circulars do not cease to have effect from 30th June, 2001. They were in force since 1-1-
1985 and are valid legislation and continue to remain in force. The concept of BCD
Circular No. 13 is that it ‘was for the purposes of Islamisation of banks which was a part
of the global change in Pakistan for Islamising the economy in generality. Banks were
first to be placed in line for their transformation. It is in line of this, that BCD Circular
No. 13 came into existence.

21. For the purposes of looking into the concept as given by BCD Circular No. 13 we
may have to look into the history as to why and how such laws were required to be
enforced or made. It will not be out of place to mention that Pakistan itself was created to
be a religious Islamic State. Quaid-e-Azam had expressed the desire to institute an
Islamic Financial System in his speech (July, 1948) at the inaugural ceremony of the
State Bank of Pakistan. From the Constitution of 1956 to the Constitution of 1973 an
express desire has been shown to get rid of Riba. In the Article 38(f) of the Constitution
of 1973 it has been categorically stated that the State shay: eliminate Riba as early as
possible. Article 2 of the Constitution categorically states that “Islam shall be the State
Religion of Pakistan”. Article 2A was inserted to become a substantive part of the
Constitution by Presidential Order No. XIV of 1985 with effect from 2nd March, 1985.
All these put together categorically showed and it was in the knowledge of all, that
primarily Islam was the guiding factor. The Islamic Advisory Council created in 19,62 in
its various opinions till 1969 has time and over again stated that the Riba must be finished
in its every form and a, system that would work under the Islamic principles to be
enforced. It seems that initially such was not enforced. The Council of Islamic Ideology
Page No. 19 of 52
was therefore, created with the assignment to formulate an interest free system for
banking. The Council in cooperation with its various financial and banking experts
initially presented its interim report in November, 1978 and completed their report in
June, 1980. It is in the light of this report that the Government took the first practical step
to purge three financial institutions an interest system on 1st-of July, 1979. From 1980
onward other reforms were introduced till 1984 but such could not be properly handled.

22. The Constitution of Islamic Republic of Pakistan in Article 227 clearly provides that
all existing laws are to be brought in conformity with the injunctions of Islam as laid
down in the. Quran and the Sunnah. The important aspect, therefore, is that there are only
two modes in which the laws have to be brought in conformity with, namely, the Holy
Quran and Sunnah. Under Article 228 it had become mandatory upon the Government to
constitute a Council of Islamic Ideology which was constituted in 1974, thus it was a
clear intention of the legislature and the maker of the Constitution that all laws that are
made shall be in the line of and exactly what the Quran and Sunnah states. In fact, in the
case of Commissioner Income Tax Peshawar Zone v. Simen A.G. reported in PLD 1991
SC 368 it has been held that so long: as the existing statutes were not brought in
conformity with the injunctions of Islam, their interpretation, application and
enforcement where discretionary judicial elements are involved only that course would
be adopted which was in accord with the Islamic philosophy, its common law and
jurisprudence. In another case of Kaneez Fatima v. Wali Muhammad reported in PLD
1993 SC 901, it was held that the principles o: law and injunctions of Islam have to be
kept in view while interpreting the statute, and more so in the case where administrative
decisions affecting individual’s rights and liberties have been challenged. In the case of
Maple Leaf Cement Factory Limited v. Collector of Excise and Sales Tax reported in
1993 MLD 1645 it was held that the provisions of Articles 2A and 22.7 of the
Constitution postulate that the existing laws must be interpreted, as far as possible
keeping in view the Islamic principles of interpretation especially in fiscal statutes Courts
are bound to apply Islamic rules of interpretation unless excluded otherwise in preference
to the contrary accepted rules of interpretation under other jurisprudential concept and
fiscal laws are not exception in that behalf. The functions of Council of Islamic Ideology
have also been detailed in Article 230 of the Constitution. One of which is “to make
recommendations as to measures for bringing existing laws into conformity with the
injunctions of Islam and the stages by which such measures should be brought into
effect.” The introduction, therefore, of the aforesaid BCD Circulars Nos. 13 and 32 was
in fact upon recommendations of the Council of Islamic Ideology. In the case of Pakistan
v. Public at Large reported in PLD 1986 SC 240, there is a detailed discussion on the
meaning of term ‘Injunctions of Islam’. It has been held that the scope of expression
‘Injunctions of Islam’ has not been left to the discretion of the Courts and notions of the
individuals but it has been clearly spelt out that, as only those’ Injunctions which have
been laid down by the Holy Quran and the Sunnah of the Prophet (p.b.u.h.). In this
celebrated judgment of the Shartat Appellate Bench of the Supreme Court it was held
that:--

“We do feel that while expounding the. Injunctions of Islam a possibility of some
marginal so-called divergences might be visualised. It is a very difficult and perilous
exercise. I can lead to proper and improper consequences. Be that as it may, no such
expounding of the Injunctions of Islam will be permissible which does not pay attention
to the statement of the text of the Holy Quran and Sunnah and to its interpretatio4together
with its Khamir and Zamir. Within this framework while ‘expounding’ the Injunctions the
Court will remain under a duty in case of need during a new approach or to meet a new
situation to keep in view the following essentials, of course, amongst others:-

(i) Whether instead of attempting a relaxation of an Islamic rule, the relaxation may not
be made in the required need for which the relaxation is intended to be made. A very
simple exercise preliminary though, will be of great advantage to ask oneself: Cannot the
society exist or progress without the relaxation and where the answer is negative to ask
the further question: cannot it be done with a temporary and mildest one?

(ii) It is often said that modernism (even when used in good sense of: achievement,
progress and high attainment for the Ummah), Ijtihad is essential. There can be no cavil
with the proposition, but before doing the same within accepted spheres and under well-
recognised rules it should also be asked. Whether the same objects cannot be achieved
Page No. 20 of 52
without doing it; and, whether purpose would not be served by doing the similar Ijtihad
or making a deviation in the demands of modernism; in other words, cannot the society
change to word Islam?

(iii) Whether a relaxation is approvable on the accepted rules and principles of Ijtihad and
Ijmah, old or new; Zaroorat or Zarar; Tawil or Takhsis; Urf and other recognised methods
like Qiyas, Ihsan, Istehsan, Masalah-Mursalah etc.?

(iv) Whether in a case a new principle like the foregoing, is visualised there is support for
the same in the Holy Quran and the Sunnah?

(v) Whether there has been a need similar to the one in issue earlier if so, whether
attempts were made by those who were qualified to do the exercise and with what result;
the same would apply to attempts made in all other lands?

(vi) Whether there are precedents for guidance in the well-known authentic works-if so,
what are the reasons for not following them. It is pertinent to note here that the Pakistan
Courts when interpreting and applying laws do follow the precedents if they are by law,
binding. And even when not so binding, help is always sought from good precedents. Not
only this but also it is well-known, the judgments and opinions of foreign Judges and
jurists are accepted as legitimate guide or support for resolution of controversies. If that is
treated as permissible, (rather indispensable by some at least for the time being) there
should be no hesitation in examining the judgments and precedents from our own masters
including Sahaba, Aimma and Ulema, old and new.

(vii) When examining, views and opinions of the old, special place is to be given to the
Khulafa-e-Rashideen and Companions and Tabaeens in accordance with the Holy Quran
and Sunnah. It is high time, we reduce the dangers of sectarianism and make masterly
combination of both (old and new) with gradual elimination of uncalled for criticism and
Taboos against the so-called Taqleed and so-called Tajdid, when looking for and
following the precedents.

(viii) It would also be necessary when rendering an answer for a new situation to see
whether the interests of Islam and Muslim Ummah are advanced in Islamic way. The
collective conscience of the Islamic Ummah, past and present, is also to be kept in view
in making the answer.

(ix) Whether after doing the necessary exercise and after going through the above stages
and others which might be spelt out later, the question when asked from the spiritual and
mental faculties of oneself through Nafs Baseera, Nafs Lawwamah and Nafs Mutmainnah
and not the Nafs Ammarah (14) 75---(Nafs Baseera) (53) 12 (Nafs Ammarah)(27) 89
(Nafs Mutmainnah) (2) 75 (Nafs Lawwamah) the answer comes in the clear affirmative
for the intended attempt or step. (See Foot-notes Nos.5810 and 5819 the Text Translation
and Commentary on the Holy Quran by Abdullah Yusuf Ali (Vols. II, III). If not it must
be given upon. If it is in doubt even then it must be given up. In other words, it must be
beyond all doubts of reason, intellect and spirit.

(x) In unoccupied field, the precedent of Hzr. Moaz Bin Jabbal (r.) should be applied with
full consciousness of its limitations which can in the present day context, be spelt out
from the foregoing points.”

It will. therefore, be seen that, no such act of violating the Injunctions of Islam will be
permissible which does not pay attention to the text of the Holy Quran and Sunnah and its
interpretation together with its ‘Khamir’ and Zamir’.

23. In the present case the Council of Islamic Ideology has given the report which
enumerates in details as to which financing has to be entered into under the Islamic
system which had to be acted upon by the banks on the instructions of State Bank of
Pakistan given under its authority under the Banking Companies Ordinance, 1961. The
said report is based on the Quran and Sunnah and for the purposes of interpreting the said
existing laws its ‘Khamir’ and ‘Zamir’ has to be looked into and cannot be deviated from,
The Hon’ble Supreme Court of Pakistan in the case of Pakistan v. Public at large (supra)
has held that while expounding the injunctions of Islam and the Court will remain under
Page No. 21 of 52
the duty in case of need, during a new approach or to meet a new situation to keep in
view a number of essentials, which essentials have been narrated above. It is clear that
this Court will also have to look into whether, when there was a proper Ijtehad for the
purposes of arriving at a certain principle of law under the Islamic system, could this
Court take a view different with the Ijtehad that has already, been taken place. The Ijtehad
was by way of consultation, finalised and published as a report of the Council of Islamic
Ideology and thereafter when the judgment was announced by the Federal Shariat Court
being PLD 1992 FSC 1. There can be no cavil with the proposition’ that the position that
has been detailed and accepted by the Council of Islamic Ideology acted upon by the
Federal Government and State Bank of Pakistan giving direction to the banks to finance
under the modes prescribed and thereafter confirmed by the Federal Shariat Court and
eventually by the Shariat Appellate Bench of the Supreme Court in the case of Dr. M.
Aslam Khaki.

24. It is in pursuance to the long-standing act in attempting to change the old banking
system into a system of banking, to operate and run on the lines as provided by Quran
and the Sunnah. The banks, State Bank of Pakistan and all others were duly connected
and were party in the transformation of the banks by the introduction of the Islamic
Financing to be governed by BCD Circular No. 13. The ‘Modes of Transaction’ were
categorically mentioned wherefore the whole system commenced.

25. It will, therefore, be seen that a lot of work had been put in for the purposes of the
system to be transformed from the usual interest bearing system and un-Islamic modes,
into financial system based on the Injunctions of Islam, the Islamic Banking System. As I
have already stated, the Government felt it proper that the entire system could not be
transformed in one go, but chose to break it up into different sectors and the banking
being the first of them.

26. Various Islamic Councils that have been formed including the Council of Islamic
Ideology, were always of the unanimous on the opinion that Riba in its every form was
forbidden and the increase or decrease of the rate of the interest did not effect it being
otherwise. It is well-known that the committee of bankers that worked under the
chairmanship of the Governor State Bank of Pakistan in their report in 1980 also took the
similar stand. Scholars of the country, economic expert and bankers were agreed with the
same. This was all taken into account in the case of Dr. Mehmoodur Rehman Faisal and
others v. The Secretary, Ministry of Law, Justice and Parliamentary Affairs, Government
of Pakistan and others reported as PLD 1992 FSC 1.

When the concept of Islamic banking with its ethical values was propagated, financial
circles the world over treated it as a utopian dream. Having lived for centuries under the
valueless capitalist economic system, they asked what ethics had to do with finance?

27. Attitudes are changing gradually and in the last few years value neutral conventional
banking has begun to trouble the conscious of an increasing number of people. There is a
reluctance to hand over the funds to banks and financial institutions that invest in
companies engaged in unethical and socially harmful activities. The emerging Islamic
banking scene has succeeded in achieving general acceptance. Today, Islamic banking is
estimated to be managing funds to the tune of US $100 billion. Its clientele are not
confined to Muslim countries but are spread over Europe, United States and the Far East.
Islamic banking continues to grow at a rapid pace because of its value-orientated ethos
that enables it to draw finances from both Muslims and non-Muslims alike. Islamic
bankers, keeping pace with sophisticated techniques and latest developments have
evolved investment instruments that are not only profitable but are also ethically
motivated. Today, more than one hundred and fifty Islamic financial institutions are
operating world-wide.

The basic principle of Islamic banking is the prohibition of Riba-(Usury - or interest):--

“While a basic tenant of Islamic banking--the outlawing of riba, a term that encompasses
not only the concept of usury, but also that of interest--has seldom been recognised as
applicable beyond the Islamic world, many of its guiding principles have. The majority of
these principles are based on simple morality and common sense, which form the basis of
many religions, including Islam.
Page No. 22 of 52
The universal nature of these principles is immediately apparent even at a cursory glance
of non-Muslim literature. Usury was prohibited in both the Old and new Testaments of
the Bible, while Shakespeare and many other writers, particularly those writing in the
19th Century, have attacked the barbarity of the practice. Much of the morality
championed by Victorian writers such as Dickens ranging from the equitable distribution
of wealth through to man’s fundamental right to work -- is clearly present in modern
Islamic society.

Although the western media frequently suggest that Islamic banking in its present form is
a recent phenomenon, in fact, the basic practices and principles date back to the early part
of the seventh century.” (Islamic Finance: A Euromoney Publication, 1997).

28. It is evident that Islamic finance was practiced predominantly in the Muslim world
throughout the Middle Ages, fostering trade and business activities. In Spain and the
Mediterranean and Baltic States, Islamic merchants became indispensable middlemen
trading Activities. It is claimed that many concepts, techniques and instruments of Islamic
finance were later adopted by European financiers and businessmen.

The revival of Islamic banking coincided with the world-wide celebration of the advent
of the 15th Century of Islamic calender (Hijra) in 1976. At the same time financial
resources of Muslims particularly those of the oil producing countries, received a boost
due to rationalisation of the oil prices, which had hitherto been under the control of
foreign oil Corporations. These events led Muslims to strive to model their lives in
accordance with the ethics and philosophy of Islam.

Disenchantment with the value neutral capitalist and socialist financial systems led not
only Muslims but also others to look for ethical values in their financial dealings and in
the West some financial organisations have opted for ethical operations.

Islam not only prohibits dealing in interest but also in liquor, pork, gambling,
pornography and anything else, which the Shariah (Islamic Law) deems Haram
(unlawful). Islamic banking is an instrument for the development of an Islamic economic
order. Some of the salient features of this order may be summed up as:--

1. While permitting the individual the right to seek his economic well-being, Islam makes
a clear distinction between what is Halal (lawful) and what is Haram (forbidden) in
pursuit of such economic activity. In broad terms, Islam forbids all forms of economic
activity, which are morally or socially injurious.

2. While acknowledging the individual’s right to ownership of wealth legitimately

acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and
not to hoard it, keep it idle or to squander it.

3. While allowing an individual to retain any surplus wealth. Islam seeks to reduce the
margin of the surplus for the well-being of the community as a whole, in particular the
destitute and deprived sections of society by participation in the process of Zakat.

4. While making allowance for the ways of human nature and yet not yielding to the
consequences of its worst propensities, Islam seeks to prevent the accumulation of wealth
in a few hands to the detriment of society as a whole, by its laws of inheritance.

5. Viewed as a whole, the economic system envisaged by Islam aims at social justice
without inhibiting individual enterprise beyond the point where it becomes not only
collectively injurious but also individually self-destructive.

29. Islamic financial system employs the concept of participation in the, enterprise,
utilising the funds at risk on a profit and loss sharing basis. This by no means implies that
investments with financial institutions are necessarily speculative. This can be excluded
by careful investment policy, diversification of risk and prudent management by Islamic
Financial Institutions. It is possible, that investment in Islamic financial institutions can
provide potential profit in proportion to the risk assumed to satisfy the differing demands
of participants in the contemporary environment and within the guidelines of the Shariah.
Page No. 23 of 52
The-concept of profit and loss sharing, as a basis of financial transactions is a progressive
one as it distinguishes good performance from the bad and the mediocre. This concept,
therefore, encourages better resource management. Islamic banks are structured to retain
a clearly differentiated status between share-holder’s capital and client’s deposits in order
to ensure correct profit sharing according to Islamic’ Law.

30. Ar-Riba consists of several types of transactions which have been forbidden by Allah.
Dealing in riba is one of the greatest sins a Muslim can commit -- The greatest sin
according to Imam Malik.

All forms of riba fall into two basic categories.

A. Riba An-Nasee’a.

This is the most pervasive and well-known. It includes several kinds of transactions.

The “classic” one which was described by the Companions of the Prophet (sas) was
where someone owes another money for whatever reason (purchase, loan, etc.) which is
due at a certain time. When the time comes, the creditor would say to the debtor: “a
taqdhee am turbee?” (Will you pay up, or accent an increase?). It seems that there was no
axed rate set at the beginning of the transaction, rather it was set by “custom” and
expectations and what the creditor felt he could demand from the creditor who was
unable to pay. In this way, the original debt could easily expand to many times its’
original size. Allah said:

{Ya ayyuhaa alladhina aamanoo la ta’kuloo ar-riba adh’aafan mudhaa’afatan wa ittaqoo

Allaha la’allakum tufiihoon.}

{O you who believe do not consume interest doubling and multiplying and beware of
Allah that perhaps you may succeed.} Aal-’Imraan- 130

The question of Exchange of currency for currency or food for food with one side being
delayed is explained by the following hadith which explains this and several other issues:

“Gold for gold either ore or pure, silver for silver either ore or pure, wheat for wheat
measure for measure, barley for barley measure for measure, dates for dates measure for
measure, salt for salt measure for measure whoever increases or seeks an increase has
committed Riba. There is nothing wrong with selling gold for silver and the silver is more
as long as it is hand to hand as for deferred payment, no. And there is nothing wrong with
selling wheat for barley and the barley is more as long as it is hand to hand, as for
deferred payment, no. In another version, he (sas) said:’ When the items are different in
those categories, then sell however you wish as long as it is hand to hand. Abu Daud and
both narrations are Sahih.

Two sales in a sale. The Prophet (sas) forbade a transaction which was ‘two sales in a
sale’. This means that at the time of the sale, the two parties agree to different prices
corresponding to different times of payment. For example: 90 days like cash but after
that, the price goes up by 1% for every month of delay. This transaction is illegal and if a
Muslim has engaged in such a transaction before knowing, they only have a right to the
least of the prices.

‘Whoever transacted two sales in a sale has a right only to the lesser of the two or he
commits Riba’. “

A loan which benefits the lender. As we saw in the first point, money cannot be
exchanged for money with a delay no matter what the values. There is no “business”
transaction where money is given and returned later. A “loan” is NOT a business
transaction, but is a form of “Sadaga” or charitable transaction and the money returned
must be the same as the money given.

“The Prophet (sas) forbid “kulla qardhin yajurru manfa’atan” –any loan which returns a
benefit (i.e. to the lender).

Page No. 24 of 52
B. Riba Al-Fadhl.

It is forbidden in Islam to exchange currency for currency unless it is done real time --
i.e., no currency “futures” market. It is also forbidden to exchange food items for the
same kind of food unless is both real time and in equal measure. It is forbidden to
exchange food items for other food items unless it is real time. Obviously measures do
not have to be the same. Exchange of items in different categories, e.g., food for money,
money for goods, etc. can be done in nay quantities per the rule of supply and demand
and with or without delay of one of the two sides of the transaction. This category of Riba
is explained in the Sahih Hadith from Abi Daud above.

We should note that Islam forbid Ihtikaar (monopoly) in foodstuffs and all necessities. In
this case, the ruler has the right to interfere with the normal functioning of the “market”
(supply and demand) in order to protect the peoples’ necessities of life. A monopoly in
other necessities say for example diamonds is of no consequence and the ruler is not
allowed to interfere with the market.

No dealing in these interest transactions of any kind is allowed. The Prophet (sas) has
invoked Allah’s “la’na” upon five individuals for a single transaction: the payer of
interest, the receiver of interest, the scribe (probably computer programmer in our day)
who records it and the two witnesses. The word “la’na”, usually translated as “curse” is
much more than that. It means distance, i.e. that Allah will put you at great distance from
Him on Qiyanta. Similarly, Allah said about those who consume people’s property with
falsehood that He will neither look at them, speak to them nor cleanse them on that day.
This is the most severe punishment from Allah and those subjected to it will wish they
could be punished by Allah in his fire rather than to be ignored and put away from Him.
Also, as Allah said in Sura Taha:

{And whoever turns away from my reminder will surely have a miserable life and we
will resurrect him blind. He will say: Lord! Why have you resurrected me blind though I
used to see? He said: Likewise my signs came to me and you neglected them and in the
same way you, on this day, are neglected).

Riba may appear to be in increase and a benefit, but it will never bring any benefit and
will only bring those who deal in it the wrath of Allah, a declaration of war from Him and
His punishment in the hereafter. Allah said:--

{And whatever interest transactions you have made that they may grow in other people’s
wealth will not grow with Allah. And whatever zakat you have given desiring only
Allah’s countenance, these surely are the ones whose returns are multiplied}. Ar-Rum:39

Riba is one of the seven mubiqaat (sources of ruination) which the prophet (sas) told us
about in the Hadith:

“Stay far away from the seven destroyers.” They said: O Allah’s Messenger, what are
they? He said: “Associating partners with Allah, sorcery, killing the one protected by
Allah except by right, consuming riba, consuming the wealth of orphans, fleeing from
battle and slandering chaste and innocent believing women.” Muslim, Bukhari and
others.

And never forget the “la’na” of Allah invoked by the Prophet (sas) on the five parties
involved in any riba transaction,

“The Prophet (gas) invoked la’na on the receiver of interest, the payer of interest, the
scribe and the two witnesses. And he said: “They are the same.” Muslim

Some people are under the misconception that only high rates of interest are prohibited
and that low rates are permissible. This delusion comes from misunderstanding the verse
of the Quran, (translated), “O you who believe! Do not consume riba, increased
manifold.” [Quran, 3:130] This verse, however, does not mean that if the increase is small
it is permissible; it is merely describing the common or usual state of affairs Interest, as a
rule, will be increased and compounded several times, as the debtor repeatedly fails to
pay up. This is similar to the statements, “Do not sell My signs for a small price,”
Page No. 25 of 52
meaning at any price, for any price is too small to sell the signs of Allah for; and “Do not
kill your children out of fear of poverty,” which clearly cannot be taken to mean that it is
permissible to kill them for any reason besides fear of poverty. Further confirmation that
all interest is prohibited is in another verse of the Quran. “But, if you rent [from ribal then
for you is your principal.” [Quran, 2:279] So, those who repent may keep only their
principal (i.e. the initial amount loaned), and not even one penny or 1% more. Aside from
all of this, “little” and “much” are subjective. What one person regards as “a little”
interest may be considered “a lot” by someone else. So, the truth of the matter is that a
small amount of interest is prohibited just as is a large amount.

Similarly, the hadith literature confirms this understanding: “If a man extends a loan to
someone, he should not accept a gift. “ [Bukhari] Abu Burdah ion Abi Musa said, “I came
to Medina and met ‘Abdullah Ion Salam, who said, You now live in a country where riba
is rampant. Hence, if anyone owes you something and presents you with a loan of hay, or
a load of barley, or a rope of straw, do not accept it, for it is riba.” [Bukhari]

The unbelievers made a very similar claim. They said, “Trade is just like riba.” However,
this is an absurd analogy. It is like saying that there is nothing wrong with prostitution,
because it is the use of the body to earn money, just like any other kind of work.
Moreover, the claim that it is beneficial is invalid. In reality, it brings only a limited,
temporal, material benefit to only a certain category of people. On the larger scale, it
harms the debtor, especially in the case of his business running into loss. It restricts the
wealth among the wealthy and impedes its free circulation. It can lead to inflation and
other economic woes. It is selfish and unfair,

The Prophet (p.b.u.h.) said in the Farewell Pilgrimage, “Every ribs of Jahiliyyah is
abolished under these feet of mine, and the first riba I abolish is that of ‘Abbas. “ It was
around this time that Allah revealed the verse, (translated? “This day have I perfected for
you your religion, completed. My favour upon you and chosen Islam for you as your
religion.” [al-Ma’idah] The religion was completed and all the regulations (including
riba) had been legislated by that time.

But, this was not the last revelation. A few days after that, approximately nine days before
the Prophet (p.b.u.h.) left this world, some further verses were sent down. “O you who
believe! Fear Allah, and give up whatever remains of Riba. If Indeed You Are Believers.
(my emphasis) And, if you do not do [so], then receive news of a war from Allah and His
Messenger. [On the Day of Judgement, the consumer of riba will be given weapons and
asked to prepare for war with Allah and whoever has Allah as an adversary shall surely be
overcome]. But, if you repent, then for you is your principal do not wrong [by taking
interest], and you will not be wronged [by deprivation of the principal]. And, if [the
debtor] is in dire circumstances, then [give him] reprieve until ease. And, if would be
better for you that you [remit the debt as] charity, if only you knew. And, fear a day in
which you will be returned to Allah. Then, every soul shall be paid fox what it has
earned, and they will not be wronged.”, [Quran, 2:278-281] (my emphasis).

This is something for us to ponder over. The last revelation of the Quran -- at almost the
last possible time for revelation -- is on riba. This must be to reiterate its severity and to
issue a dire warning to us against it. Not even the dhimmis (non-Muslim citizens) are
allowed to deal in riba in the Islamic state. The Prophet (p.b.u.h.) wrote to the Christians
of Najran,’ The person amongst you who deals in interest is not under our protection.’
[Kanz al-Ummal].

“On the night I was transported (i.e, the night of Isra and Mi’raj), I was brought to a
people whose stomachs were [large] like houses, with snakes inside them which were
visible from outside their bellies. I said, ‘Who are these. O Gabriel?’ He said, ‘Consumers
of riba,’ “[Ion Abi Hatim, Ahmad]

(part of a long- Hadith of a dream:) “...then we came to a river,” I the narrator) think he
said: red like blood, “and there in the river was a swimming man, and on the bank of the
river was a man who had collected a lot of stones by him. The swimmer would try to
emerge [from the river], whereupon the one who had gathered the stones would throw a
stone into his mouth [forcing him back in]. “The Prophet (p.b.u.h.) conveyed that the
swimmer was the consumer of riba. [Bukhari]
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“Allah has cursed the consumer of riba, the one who gives it for consumption, the two
witnesses [to the contract] of [riba], and the scribe thereof. “[Ahmad, Abu Ya’la, Ion
Khuzaymah, Ion Hibban; Muslim, Nasa’i, Abu Dawud, Tirmidhi, Ion Majah’ Bukhari].

“On account of the wrong doing/oppression of the Jews, We made prohibited for them
good/wholesome things which had been lawful for them and [this was also] for their
abundant hindering from the path of Allah, their taking riba although they had been
prohibited from it, and their wrongfully consuming the property of people. “ [Surah al-
Nisa’]

“The nation amongst whom adultery and interest become common definitely bring the
punishment of Allah upon themselves.” [Abu Ya’la] According to a narration with
Ahmad, interest brings upon ought.

“By He in Whose control is my life! Some people of my Ummah will spend the night in
the state -of pride, haughtiness, play and amusement and in the morning, they will be
disfigured as apes and swine, because they made the unlawful lawful, kept (employed)
singing girls, drank liquor, consumed interest and wore silk clothes.” [‘ Abdullah Ibn
Ahmad] (emphasis is mine).

“When you trade in al-’eenah [a round-about transaction intended to circumvent riba, but
ending in the same result. A man would buy an article from a needy person at a low price;
stipulating that he should buy it back at a future date for a higher price], take hold of the
ears of cows, become contented with agriculture and abandon Jihad, Allah will impose
upon you a humiliation which he will not remove until you return to your religion.”
[Ahmad]

It should be quite clear by now that the interest obtained nowadays from banks and the
like is Haram without any doubt. The three councils of jurists that meet regularly to
discuss contemporary issues, have all declared, with a unanimity of all of their members,
that this interest is prohibited by the texts of the Quran and Sunnah (i.e. it is not merely a
matter of ijtihad), and that it is the very riba which Allah and His Messenger have
prohibited. One of the former Shaykhs of al-Azhar (raHimah Allah) observed, ‘This has
become a matter which is necessarily known to be part of the religion, and so, it towers
above any disagreement.’

“So, whoever receives an admonition from his Lord, then for him is what has passed and
his matter is with Allah. But, (as for) whoever returns (to dealing in interest, even after
learning of its prohibition and after hearing the serious and dire warnings against it) --
they are the inmates of the Fire; they shall abide therein.’ ‘.Say: O My servants who have
committed excesses against their own selves! Do not despair of the mercy of Allah!
Indeed, Allah forgives all sins. Indeed, He is the Most Forgiving, the Most Merciful’.”

If you have been guilty of consuming riba, then you should repent to Allah sincerely. You
should feel regret over your sin, cease it immediately, and resolve never to return to it
again. The interest which you have from the past must be disposed of. You cannot keep it,
for it is Haram money. [Quran, 2:279]. You may not destroy it, because the Messenger of
Allah (may Allah bless him and grant him peace) forbade the destruction of money
[Muwatta’]. Nor should you give it back to the bank, for that would only strengthen it and
further the institution of riba. Hence, you should give it away for general projects of
good, but with the intention of getting rid of Haram money, not with the intention of
charity.

31. Having discussed the concept of ‘Riba’ existent from the earlier days of Islam
distorted by the western banking system, I shall proceed to discuss the various aspects
that have been stated and detailed in the said judgment of Dr. Mehmood-ur-Rehman
Faisal (supra). It is important to narrate some facts which will show that not only the
bankers but the entire country as also the international banks remained involved in the
transformation and to say, that today, they have been taken by surprise by the judgment of
Dr. M. Aslam Khaki is incorrect. Such a stand is taken for the purposes only that having
done an act knowingly that the accrued markup became the banks profit and the same
was reflected in the balance sheet. The mark-up thus, charged continually by elapse of
Page No. 27 of 52
time was reflected as income. This deemed income showed the huge profits of banks,
which was due to the rescheduling and roll overs, where the mark-up on mark-up was
charged.

32. The discussion on charge of interest/mark-up that is, in the nature of Riba has been in
light all over the world in the various Islamic Fiaqah Conference. In the assembly of the
Islamic Fiqah of India in its seminar of the top scholars were of the opinion that “Interest
whether received on the loans for personal expenditure or an commercial and business
loans, is in the eyes of Islamic Shariah, forbidden.” Additionally, Islamic Fiqah Academy
established at the official level by the Organisation of the Foreign Minister also
considered this matter in December, 1985 and arrived at the same conclusion. In the
official document of the IMF the position of the Muslim Ummah described it as
follows:--

“It seems appropriate that the beginning of the study of Islamic Banking System should
be made from the definition of its basic terminology. Riba is an Islamic legal term which
is tantamount to an accepted addition before the use of money. Controversy is found in
the past whether Riba means interest or usury but now there is a consensus of opinion
among the Muslim scholars that this technical term is applicable to every form of Interest
and its corroboration is not merely excessive interest. Therefore, in the forthcoming
discussions riba and interest will be used as synonyms and the Islamic Banking System
will mean the system in which the payment or receipt of Interest will be prohibited,
whereas an interest giving or conventional bank will mean an institution in which interest
is received or given on the use of monetary fund-(International Monetary Fund Staff
papers, Vol. XXXIII No.1 March 1986.

Islamic Interest-free Banking, a Theoretical Analysis by Mohsin S. Khan pp.4-5).

The dispassionate analysis of the academic discussions of half a century absolutely lays
bare the fact that the questions and doubt raised about Interest (Ribs) are unreal and the
Qur’ an and Sunnah have prohibited Riba in its every form, be it the ancient banking
form or the modern banking, be it related to the consumption loans of the needy or
commercial and production loans, may they fall within the sphere of private limits or
Government, semi Government limits and whether provided at a lesser or exorbitant rate.
The second great success achieved in the last thirty years covers the principles and rules,
way of working, financial Instruments of interest-free banking and the proposal and
drafting of the strategy of investment. In this connection investigations have been made
with great endeavours and a chart of alternative system has been prepared with deep
foresight. At least two dozen Research books have been published in which the features
of the new system have been explained. Among them some of their authors have received
the Islamic Development Bank and the King Faisal Awards.

In Pakistan the report of the Council of Islamic Ideology (1980), which is based on the
report of the economic and banking experts, occupies the position of a mile-stone. In this
report, a very realistic blue-print has been presented to purge Pakistan’s domestic
economy of interest. A Committee of the Central Bank also worked on this subject in
1981 under the Chairmanship of the Governor of State Bank and the blue-print provided
by it is also very close to the blue print of the Council of Islamic Ideology. The Report of
the Council of Islamic Ideology was discussed in an International Seminar and its.
recommendations were, on the whole ratified. Moreover, some additional
recommendations were made, which were published under the title of ‘Money and
Banking in Islam,’ by the International Institute of Islamic Economics (Islamabad) and
Institute of Policy Studies (Islamabad). In 1989 the International Institute of Islamic
Economics held a Workshop on the subject as to how interest can be eliminated from
Government dealings. The Report of this Workshop (Elimination of Interest on
Government Transactions) has also been published. After that in June 1992 the
Commission for Islamisation of Economy submitted its interim Report, which has,
however, not been published so far. It was even not presented in the Senate and National
Assembly as required under the law. The Institute of Policy Studies held a Seminar in
1993 which was attended by about one hundred experts. Two editions of its proceedings
have been published in 1994 and 1995 entitled ‘Elimination of Riba from the Economy.’
The whole of this work presents a vivid outline of an alternative system in the light of
conditions prevailing in Pakistan. Regarding the foreign loans, clear guidance exists in
Page No. 28 of 52
the abovementioned reports of the Institute of Policy Studies and the Self-Reliance
Committee. Even an outline exists in the Self-Reliance Report (1991) which tells how to
execute this job and on the other hand with the help of a proper economic model a
complete programme has been given to eliminate Riba from the economy in three years.
The difficulty in that those demanding an alternative system neither study these reports
nor intend to act upon them. It seems that because the recommendations made in this
whole assignment, are not in accordance with their taste or desire, they, therefore, refute
the existence of these documents and are continuously harping upon, ‘where is the
alternative?’ The matter is not limited only to academic exercise and drawing a sketch of
the alternative system. No doubt much work has yet to be done and many stages have to
be covered, but whatever has been attained by way of implementation is sufficient to bow
before the prowess of Islamic Banking System.

The work of accumulating the savings and provision of resources “ has always been
carried out at the lowest and public levels C individual and institutional. After the first
World War, Dr. Muhammad Hamidullah had carried out research work and had shown
how investment to the extent of billions of rupees was being carried out through equity-
based venture system. During the last forty years the experiments include the Mit Ghamr
Bank of Egypt, which had been working from 1963 to 1967 and after that it adopted a
new form in the shape of Nasir Social Bank (1971). These institutions continued to work
very successfully for ten to twelve years on which studies were carried out which
declared them to be successful preliminary experiments (vide: The Research Report of T.
Wholus Scharf: Arab Islamic Banks: New Business Partners for Developing Countries,
Paris, OECD, 1993).”

33. In pursuance to the international discussion of the Muslims all over the world in
1975, Dubai Islamic Bank was formed to perform the work under the Islamic System.
Two major Financial Groups namely Darul Mal Islamia (DMI) and Al-Barks Groups
were also formed for the purposes of interest free banking. The Islamic Development
Bank formed in Jeddah in 1975. All these banks are continuing to work under the system
of Islamic Banking.

34. For the purpose of understanding the law in force for the time being and for the
purpose of understanding the two important judgments, i.e. the cases of Dr. Mehmood-ur-
Rehman Faisal (supra) and Dr. M. Aslam Khaki (supra), it will be important to
reproduces the two most important circulars that have been continued to be relied upon in
this respect. The first being BCD Circular No. 13, dated 20th June, 1984 which reads as
under:--

“STATE BANK OF PAKISTAN.”

Banking Control Department
Central Directorate
Karachi.

BCD Circular No.13 20th June, 1984.

All Banks,
Dear Sirs,

Elimination of ‘RIBA’ from the

Banking System.

As has been announced by the Finance Minister, it is the intention of Government that the
Banking System should shift over to Islamic modes of financing during the course of the
next financial year. These modes of financing have been described in Annexure 1. This
shift will take place according to the following programme.

(i) As from the lst July, 1984, all banking companies will be free to make finance
available in any of the modes of financing listed in Annexure 1. However, as a
transitional arrangement, they will also be free to lend on the basis of interest, provided
that no accommodation for working capital will be provided or renewed on interest basis
for a period of more than six months.

Page No. 29 of 52
(ii) As from the 1st January, 1985, all finances provided by a banking company to the
Federal Government, Provincial Governments, public sector corporations. and public or
private joint stock companies shall be only in any one of the modes indicated in
Annexure 1.

(iii) As from the 1st April, 1985, all finances provided by a banking company to all
entities, including individuals, shall be on the same basis as mentioned in (ii) above.

(iv) The appropriate mode of financing to be adopted in any particular case will be settled
by agreement between the banking company and the client. Some possible modes of
financing for various transactions have been shown in Annexure II.

(v) As from the 1st July, 1985, no banking company shall accept any interest-bearing
deposits. As from that date, all deposits accepted by a banking company shall be on the
basis of participation in profit and loss of the banking company, except deposits received
in Current Account on which no interest or profit shall be given by the banking company.

2. The instructions contained in items (i), (ii) and (iii) above shall, however, not apply to
on-lending of foreign loans which will continue to be governed by the terms of the loans.
Likewise, the instructions contained in item (v) above shall not apply to foreign currency
deposits.

3. The above instructions are being issued under the Banking Companies Ordinance,
1962. Further instructions, where necessary, will follow.

Please acknowledge receipt.

Yours faithfully,
(SIBGHATULLAH)
Director”

ANNEXURE -- I

Permissible Modes of Financing

(A) Financing by lending:--

(i) Loans not carrying any interest on which the banks may recover a service charge not
exceeding the proportionate cost of the operation, excluding the cost of funds and
provision for bad and doubtful debts. The maximum service charge permissible to each
bank will be determined by the State Bank from time to time.

(ii) Qard-e-Hasana loans given on compassionate ground free of any interest or service
charge and repayable if and when the borrower is able to pay.

4(B) Trade-related modes of financing including the following.-

(i) Purchase of goods by banks and their sale to clients at appropriate mark-up in price on
deferred payment basis. In case of default, there should be no mark-up on mark-up.

(ii) Purchase of trade bills

(iii) Purchase of movable or immoveable property by the banks from their clients with
Buy-Back Agreement or otherwise.

(iv) Leasing.

(v) Hire-purchase.

(vi) Financing for development of property on the basis of a development charge.

The maximum and the minimum rates of return to be derived by the Banks from these
modes of financing will be as may be determined by the State Bank from time to time.
Page No. 30 of 52
(C) Trade-related modes of financing including; the following;:--

(i) Musharika or profit and loss sharing.

(ii) Equity participation and purchase of shares.

(iii) Purchase of participation term certificates and Modaraba Certificates.

(iv) Rent-sharing.

The maximum and minimum rates of profit to be derived by the banks from such
transactions will be as may be prescribed by the State Bank from time to time. However,
should any losses occur, they will have to be proportionately shared among all the
financiers.

ANNEXURE -- II

Permissible modes of financing: for

Various Transactions

Nature of Business Basis of Financing:

I. Trade and Commerce Fixed investment

(a) Commodity operations of the Mark-up in price.

Federal and Provincial
Governments and their agencies

(b) Export Bills purchased/negotiated (i) Exchange Rate differential in the

under Letters of Credit (other than case of foreign currency bills.
those under reserve).
(ii) Commission or mark-down in the
case of Rupee bills.

(c) Documentary Inland Bills drawn Mark-down in price.

against Letters of Credit
purchased/discounted.

(d) Import Bills drawn under Letters Mark-up in price.

of Credit-

(e) Financing of exports under the Service charge/Concessional Service

State Bank’s Export Finance charge.
Scheme and The Scheme for
Financing Locally Manufactured
Machinery.

(f) Other items of trade and Fixed investment.

commerce.
Equity participation, P.T.Cs.,
Leasing or hire-purchase.
Working Capital
Profit and loss sharing or mark-up.

II. Industry Fixed investment

Equity participation, P.T.Cs.,

Modaraba Certificates, leasing, Hire
purchase or mark-up.
Working Capital

Profit and loss sharing or mark-up.

Page No. 31 of 52
III. Agriculture and Fisheries

(a) Short-term Finance. Mark-up. In the case of small

farmers and small fishermen who are
at present eligible for interest free
loans finances for the specified
inputs etc., upto the prescribed
amount may be on mark-up basis.
The mark-up amount may however,
be waived in the case of those who
re-pay the finance within the
stipulated period and payment of
the mark-up made by the State Bank
to banks by debit to Federal
Government Account.

(b) Medium and long-term Finance. Leasing or hire-purchase. In addition

(i) Tubewells and other to ownership of machinery, banks

wells may create charge on the land
in their favour as in the case of other
loan to the farmers under the
Passbook System.

(ii) Tractors, trailors and other farm Hire-purchase or leasing.

machinery and transport (including
fishing boats, solar energy plants
etc.)

(iii) Plough-cattle, Milch Cattle and Mark-up.

other livestock.

(iv) Fairy and Poultry. PLS/mark-up/hire-purchase/leasing.

(v) Storage and other farm Leasing or rent sharing basis with

construction (viz. Sheds for flexible weightage to the bank’s

funds.

(vi) Land Development. Development charge.

(vii) Orchards, including nurseries. Mark-up, development charge or

PLS basis.

(viii)Forestry. Mark-up, development charge or

PLS.

(ix) Watercourse improvement. Development charge.

IV. Housing Rent sharing with flexible weightage

to bank’s funds or buy-back cum
mark-up.

V. Personal Advances (other than

those for business purposes and
housing

(a) Consumer durables (cars, motor- Hire-purchase.

cycles, scooters and household

Page No. 32 of 52
goods).

(b) For consumption purposes. Against tangible security with buy

back arrangement.

And the other being BCD Circular No.32 dated 26-11-1984 which reads as under:--

“STATE BANK OF PAKISTAN”

Banking Control Department
Central Directorate
Karachi.

BCD Circular No.32 26th November, 1984.

All Banks and Development Finance Institutions.
Dear Sirs,

Elimination of ‘RIBA’ from the

Banking System Bank Charges.

Please refer to BCD Circular No. 13, dated the 20th June, 1984.

2. Vide BCD Circular No.7, dated the 28th March, 1984 bank charges except charges for
home remittances, have been deregulated. The schedules of bank charges received from
the banks show that the following items of bank charges are based on interest:--

(i) Mark-up in the case of import bills under import letters of credit.

(ii) Mark-down in the case of documentary bills drawn against inland letters of credit.

3. The schedules also provide for levy of overdue/penal interest in case of non-
retirement/non-payment .of inland cheques, bills etc., purchased.

4. In exercise of the powers vested in it under the Banking Companies Ordinance, 1962,
the State Bank of Pakistan is pleased to direct that as from the 1st January, 1985, interest,
wherever charged by a banking company/development finance institution in any of the,
items of bank charges, shall be replaced by a non-interest mode considered appropriate
by it. Moreover, overdue/penal interest or mark-up on mark-up shall not be charged by a
banking company/DFI as from that date. Instead, it may take legal steps for recovery of
the overdue finance.

5. Please acknowledge receipt.

Yours faithfully,
(SIBGHATULLAH)
Director”

35. An analysis of the said BCD Circular No. 13 is required to be done in the light of the
aforestated discussions that a complete conscious effort was put in by the Government
which included the bankers to bring about the transformation in the existing system in the
banks for shifting to the Islamic modes of financing. The first paragraph of said BCD
Circular No. 13 states’ that, it was the Government which acted through its Finance
Minister, showing the intention of the Federal Government, to transform the banking
system into the Islamic mode whereby, the financing done would be in the manner as
provided in the Annexures to the said Circular. It was not an abrupt transformation. The
transformation had actually commenced from 1962 and various committees had been
formed. Discussion at the highest level had taken place and naturally upon discussion
after numerous position a settled formula came in by way of this Circular. No doubt, this
circular does not mention the name of the transaction i.e. whether it is Morabaha
transaction, a transaction by bai or by Ijarah, Modaraba or any other such means but the
Annexure to the said notification categorically spelt out, what was to- be done and that,
these in fact reflected the various transactions that are and continued to be in vogue in
other Islamic banks. Though no names were given but it will be seen that these
Page No. 33 of 52
permissible modes were nothing but specified transaction allowed by the Islamic
Scholars. BCD Circular No.13 also speaks of “transitional management” and, after the
first of January, 1985 as provided in clause 2(i) of the said circular of finances provided
by a banking company, Federal Government, Provincial Government, public sector
corporation and public or private joint sectors companies could only be done in the
modes indicated in the Annexure-I to the said circular.

36. It cannot by any stretch of imagination be presumed that the meaning of the words
‘interest’, ‘mark-up’ or ‘Ribs’ were not understood. When this notification was issued all
the transactional aspects had been discussed at the top level by the Government which is
why the Finance Minister announced the public of transformation. This announcement
was also in the line with the Constitutions of the Islamic Republic of Pakistan.

37. In Annexure-I to the said circular namely BCD Circular No.13 there were three basic
forms of transaction that were allowed viz. the first being, ‘Financing by Lending’. From
the title, it is clear that though, otherwise in the usual parlance ‘financing’ and ‘lending’
would have in fact meant the same, but when ‘financing’ is used with ‘lending’ saying;
that there is lending, it would mean that there is a ‘loan’ given to finance some person.
The word ‘finance’ will have to be given a separate meaning and is to be treated to be
‘lending’ simplicitor. ‘Lendings’ are loans i.e. the delivery of the money to another
person. The money, therefore, being a ‘debt’ created by way of lending. In such a
situation the question that will arise is that, whether such debt created by lending could
attract a levy of further sums on elapse of time for repayment, as would be done under the
normal banking system on any money lent which would carry interest. Under this circular
there is a categorical stipulation, that, where there is a ‘lending’ the ‘debt’ so created by
giving ‘money’ to another person or financing to other person by way of lending, such
would not carry any interest or mark-up. It is, therefore, provided in sub-clause (i) of
clause (A) to Annexure-I that such ‘loans’ shall not carry interest or mark-up. The banks
were only allowed to recover ‘Service Charges’ which were not to exceed the
proportionate costs of operation. The important aspect that needs to be noted in the first
permissible mode, is the use of the words ‘excluding cost of funds and provision of bad
and doubtful debts. This phrase needs to be explained. The Shariat Appellate Bench of
the Supreme Court in the case of Dr. M. Aslam Khaki has held, that money is not the
commodity and in fact, is only a medium of exchange’. It has also been held, that in view
of it being the medium of exchange and cannot be treated as a commodity wherefore it
cannot be traded. It can only be used for the purposes, it is for, namely the exchange for
commodity. The value of the money cannot change, that is, if a currency note is for
Rs.100 it can only be exchanged with a hundred rupees or for various notes of the value
of the Rs.100, but no addition can be made thereto. Such medium of exchange can get the
commodity of the value of Rs.100 but, the money cannot be traded. It will be important
to note that in the modern world, money is obtained from various sources, which involve
cost. If such cost is taken into account, and if that money which is lent, the usual course
would have been that the bankers would have charged interest, which would carry his
own spread alongwith the cost of funding and provision of bad and doubtful debt, to
arrive at a rate of interest that, till such time the money is repaid, the debtor shall continue
to pay an additional sum for utilising the money. Such has been categorically restricted
by the said BCD Circular No. 13 in Annexure-I. The said judgment of Dr. M. Aslam
Khaki only reaffirms the same and categorically states that nothing can be added for the
purposes of utilisation of ‘money’. Notwithstanding what has been stated- by the Hon’ble
Supreme Court, even if BCD Circular No.13 is, therefore, seen, it is clear that by
inclusion of this particular phrase, the banks are prohibited to charge except for the
service charges, any other amount on a debt, to the extent that the cost of obtaining funds
by the lending agency and provision by such lender of his bad debt and charging interest
has categorically been done away with. The service charges are only the cost of the actual
banks operation and the maximum of which was to be determined by the State Bank of
Pakistan from time to time. This shows the importance that has been attached to the fact
that no ‘increase’ or ‘addition’ by elapse of time could be made on a ‘debt’ or ‘loan’, ‘i.e.
‘on money lent’.

38. The other manner of loans allowed is the ‘finance by the lending’ as ‘Qard-i-Hasana’
which is a loan given on compassionate ground, free from ‘interest’, ‘mark-up’ or
‘service charges’ and repayable, ‘if’ and ‘when’ the borrower is able to pay, I am not
aware whether this has even been acted upon.
Page No. 34 of 52
39. The next mode of financing that has been dealt with in Circular No. 13 is the ‘Trade
Related Modes of Financing’, which type is in fact, the basic earner for banks. Various
modes have been provided, one of which is, purchase of goods by banks and their sale to
the clients at an appropriate mark-up in price for deferred payment and which is the most
utilised manner of ‘financing’. We need to analyse this aspect also. It is important to first
note that the term ‘loan’ or ‘lending’ is missing and it is ‘financing’ that is being used.
The absence of the term ‘lending’ has to be given a meaning. As discussed above, there
was ‘Financing by Lending’, is a ‘loan’ of money, which may be repayable at a certain
time. ‘Financing’ is not ‘lending’. It is a form of a business activity, which has been
termed in the title as ‘Trading’. Thus, the finance is earned by trading, and cannot be
termed as a ‘Loan’ of money. The permissible mode allows the purchase of ‘goods’ or
various commodities by banks. The purchase of goods has to be given a proper meaning.
Purchase will never mean purchase of ‘money’. As discussed, this would amount to
‘lending money’, which is not allowed by the said BCD Circular and even if allowed, no
addition can be made to it. It is the ‘goods’ or ‘commodity’ that have to be purchased.
‘Money’ is neither ‘goods’ nor ‘commodity’. It is, therefore, a categorical stipulation in
sub-clause (i) of Clause (B) of Annexure-I. The banks are allowed to, sell goods that are
required by their clients. It is the ‘sale price’ of these ‘goods’ that shall be the financing. I
have already discussed that there is ‘financing by lending’ and this mode is the other
mode i.e. financing by sale or ‘Bai’. Therefore, money or the ‘sale price’ fixed and agreed
between the ‘Seller’ and the ‘Buyer’ is what is payable for the goods purchased. There
could be various types of purchase, however, the most common being, that the client of
the bank sells ‘goods’ to the bank for a value or the ‘purchase price’, which is the amount
that is actually ,paid by the bank to the customer. The customer simultaneously agrees to
repurchase the same goods for a ‘marked-up price’, which is the agreed ‘sale price’ or the
‘repurchase price’. Thus, the purchase and sale is by the same person (though some
writers say that this would also amount to ‘Riba’, but the law for the time being in force,
permits such sale and purchase), the money i.e. ‘the sale price’ or the ‘repurchase price’ is
payable on deferred payment basis. It is categorically provided in the said Circular, that
in case of default there shall be no mark-up on mark-up. Thus, delay in payment will
under no circumstances cause any addition of any sums. This is because of -the
categorical fact that the ‘repurchase price’ becomes a ‘loan’ or ‘debt’ and nothing could
be added thereon. We now also analyse this clause keeping in view judgment in Dr. M.
Aslam Khaki’s case, In the order of the Court it is observed that ‘the Holy Quran says:
‘and if he (the debtor) is poor he must be given respite till he is well-of (2:2801. It is
further held in the order, that if the purchase delays the payment despite his ability to pay,
he may be subjected to different punishment, but it cannot be taken to be a source of
further return to the seller on per cent, per annum basis as contemplated in section 79 of
Negotiable Instrument Act. The permissible mode of financing by sale and purchase,
therefore, could not carry any mark-up on mark-up and that, such was also not allowed in
the event of default. Thus, the comparison of the Circular and the judgment of the
Supreme Court has the same end result.

40. The sale price of the goods purchased by the client from the bank will, therefore, be a
determined price namely, a price on which certain profits by way of addition of mark-up
would also be included. Such price could be arrived at, as also observed by the Supreme
Court in the aforestated case on any sums that may be agreed between the parties, but
after the purchase price has been agreed to between the bank and the customer such
amount will only become a ‘debt’ and would, therefore, be nothing but ‘lending’. The
transaction of sale and purchase is complete, and the bank becomes an ‘unpaid seller’, i.e.
is only liable to be paid the repurchase price or the amount of ‘debt’ created by the sale
by the bank to the customer. The payment to be made is at a date in the future. Such will
only be a ‘loan’ of ‘debt’ repayable at a future date. If payment is not made on that future
date, it is the money due that is recoverable only and per the said Circular, no mark-up on
mark-up or addition thereto can be made. After it becomes ‘loan’, such amount will be
dealt with in the manner as provided in Clause A of Annexure-I and would, therefore,
only become loan payable by the purchaser to the bank. Such loan will not carry any
interest or mark-up. Only services charges, therefore, could be recovered. The usual
method being applied by the bank for the purposes of recovery of this interest, is the
indirect mode and method. What is being done is, that another ‘agreement’ is entered into
under Clause (B)(i) and the said ‘loan’ or ‘debt’ recoverable is translated into the said
agreement as the ‘purchase price’ of the goods and commodity. On this purchase price is
Page No. 35 of 52
added a mark-up in the agreement which will, therefore, become the ‘sale price’ or
‘repurchase price’ i.e. sale by the customer to the bank and an addition of further mark-up
is made to the said existing sale price to arrive at a further marked up price. In the
subsequent agreement there is no transaction of sale or purchase of goods but a fictitious
act is done where b notional nods are transacted and not detailed in the agreement and a
sale and purchase price is agreed upon. This is nothing but a fraud on the Constitution,
the law and the people of this country. It is a mockery of Islam and the Islamic Modes of
Transaction approved by law. In the case of Mian Muhammad Nawaz Sharif v. The
President of Pakistan PLD 1993 SC 473, it has been held that, ‘what cannot be done
directly cannot be done indirectly’. This is also a very well-settled law, that no one can be
allowed to circumvent the law, no one can be allowed to act otherwise than what is
provided. It is also settled law, that if a U thing has to be -done in a specific manner, it
has to be done in that manner alone and none else. No one can be allowed in the name of
their own profitability to cause the existing law to be bypassed, avoided or interpretted, or
usage or customs to be developed which are contrary to an existing unequivocal and
exact law. BCD Circular No.13 is very categorical. It clearly states that no mark-up on
mark-up shall be charged. There is not ambiguity surrounding this issue. In the garb of
the other agreement such will not be allowed to be taken. Mr. Azizur Rehman has
referred to the following cases:--

(i) Unreported judgment being Spl. H.C.A. No.187 of 1998, M/s. Hardware
Manufacturing Corporation (Pvt.) Limited and 5 others v. United Bank Limited,

(ii) Banque Indosuez v. Banking Tribunal for Sindh and Balochistan and others 1994
CLC 2272.

In which according to him, the two Division Benches of this Court have held that ‘roll
over’ being a ‘custom’ and ‘old practice’ can be allowed. According to him and that has
been discussed above, this Court shall be bound by the judgment pronounced by the
Division Bench: No doubt, all judgments that are not distinguishable do bind on any
other Court which may be subordinate to it. I, sitting in the original side as a single Judge
will be bound by the judgment of Divisional Bench. I have, therefore, perused the said
judgment in some detail. The principle expounded by my brothers is not incorrect. The
facts of the said case are, however, distinguishable from the present case and I say this
with all respect and humility at my command. Iris apparent that all the facts, details and
law were also not discussed by the Hon’ble Judges of the Division Bench. The case of
Mehmoodur Rehman Faisal (supra) was also not considered which was a judgment of
Federal Shariat Bench and binding on the Court. The Hon’ble Judges of the Federal
Shariat Appellate Bench in the aforestated judgment which was the judgment of the Full
Bench held that: ‘in view of the above discussion, the rule of Maslaah cannot be invoked
in aid to permissibility of ‘bank interest’. It was also held that:

“ 153. For consideration of the other point, whether an increase to offset the depreciation
in the value of currency can be justified. and considered as an alternate and substitute for
interest, in the eye of Shari’ah, we may quote first from the well-known works of
Economics as to the theory of inflation and indexation, purely from economic point of
view and then we would examine the same on the anvil of the Quran and Sunnah.

154. ‘Inflation is a persistent tendency for the prices of most of the goods and services of
rise over time. Inflation has been a worldwide problem throughout, much of the 20th
century. Nonetheless, inflation has proved to be extremely difficult for economists to
define or to distinguish from related problems.”

The learned Judges after having discussed the various possible reasons for rise in the
price, including inflation and keeping in view the indexation have come to the conclusion
that all increase in any manner whatsoever is Riba. It was held that:--

“169. Guided by the Hadith the Fiqaha have opined that in case dirhams or dinars are lent
out by counting, they will be paid back by counting not, by weight. Similarly in case
these are lent out by weight they will be returned by weight not by counting. In respect of
the loan of a commodity it is further provided by the Fuqaha that it should be returned in
the same kind and quantity irrespective of any change in its price at the time of return of
the loan.”
Page No. 36 of 52
41. Once it is held that loan of a commodity has to be returned in the same kind and
quantity irrespective of any changes in its price, the concept of ‘roll over’ will also have
changed. I am, therefore, of the view that the concept of ‘roll over’ though, dominant and
an easy method of earning money, had actually been done away with, by the introduction
of BCD Circular No.13 providing that no mark-up on mark could be charged. The
argument that mark-up on mark-up would actually mean that no mark-up could be
charged on the mark-up levied on the principal amount in the first instance has been
made, it has been argued that the words ‘mark-up on mark-up’ will only be read as if
there shall not be charged any further sum on the mark-up that was added to the first
agreement for the purposes of arriving at a repurchase price, but it could be charged on
the actual purchase price namely, the purchase of the goods from customers. I am afraid, I
shall also not subscribe with this view. The position is very clear that the mark-up is
charged for the purposes of arriving at a repurchase price arid as discussed above, the
said mark-up is merged and becomes a part of the debt. Such amount cannot be dealt with
separately as, the entire amount will form a debt and it is this debt that shall be payable
by the borrower. The practice of keeping mark-up in a separate account and principal on
the separate account and charging mark-up on the principal and not the mark-up is not
contemplated by the said notification namely BCD Circular No. 13. Once the principal
debt is determined as discussed above, the debt becomes a finance V by lending and no
mark-up, by whatever name called, can be charged. If one were to presume that such
mark-up on the mark-up could not be charged, but could be charged on the principal
money lent, the outcome would in fact be the same. All payments made would be, (in fact
are) adjusted towards mark up and then mark-up would be charged on the principal. This
will be purposively avoiding the law. Interest has been defined as an increase on money
by elapse of time i.e. that a sum that is continued to be paid till such W time the debt
remains in place at a certain rate and for utilisation of the monies that may have been
given to another person. In the instant case also the arguments, therefore, that mark-up on
the principal can be charged also held no ground. The charge of mark-up on mark-up will
mean an addition in the existing marked-up price, Mark-up is charged only for the
purposes of arriving at a price sale of a commodity, and the addition to arrive at a price is
the profit in trade and which is the only amount a bank can gain. There would be no
commodity to sell after the agreement of sale has been acted upon. The bank, as
aforestated shall only be an unpaid seller. In the subsequent agreement it will only be the
money (the debt) that is being resold and which cannot be done. In fact, if the said
subsequent agreements are read, it will be clear that the said agreements are in fact sale
and purchase of goods’ and not of ‘money’, but there are no goods’, and is a garb to
overcome and avoid an existing law.

42. Great emphasis has been placed on the fact that, in the event an order is passed, that
all monies that have been charged under the various financing given by the banks to the
customers are stated to be unlawfully done, the banks shall collapse. This may be true
but, the question of charging mark-up on mark-up is not one which is new. I have
discussed above, that this was being in light and was/had been taken up and discussed at
some length from 1962. Presuming that the bankers did not know of such also and
presuming that they had acted bona fide in entering into subsequent agreements and
presuming that they were under a bona fide belief that mark-up on mark-up was only the
charge on the mark-up and could be added to the principal by subsequent agreement.
They will, however, have to consider that the matter had been taken immediately
thereafter and the first judgment of this Court that was in place was the case of Bank of
Oman Limited v. East Trading Company PLD 1987 Karachi 404. In this case, it was held
that the Courts in Pakistan are bound by the Constitution and any law repugnant to the
Constitution is void. It was further held that the principle and the provisions of the
Objective Resolution by virtue of Article 2A are now a part of the Constitution and
justiceable subject, however, to limitation imposed by Articles 203-A, B(c), 203-D, 203-
G and 203-GG of the Constitution whereby special and specific jurisdiction has been
conferred on the Federal Shariat Court to declare the law as defined by Article 203-B(c)
read with Article 203-G or any provision thereof as repugnant to the injunctions of Islam
laid down in the Holy Quran and Sunnah of the Holy .Prophet (p.b.u.h.) and that the said
law and any provision thereof so declared by it. In another case of Habib Bank Limited v.
Muhammad Hussain reported as PLD 1987 Karachi 612 whilst dealing with the provision
of the Banking Companies (Recovery of Loans) Ordinance, 1979 i.e. before the issuance
of BCD Circulars Nos. 13 and 32, it was held that, such interest cannot be awarded but,
Page No. 37 of 52
because of binding view in the case reported as Muhammad Bachal Memon v.
Government of Sindh PLD 1987 Karachi 296 interest was allowed.

43. In the case of Aijaz Haroon v. Inam Durrani PLD 1989 Karachi 304 the entire
position was again discussed agreeing with the position of Dr. Justice Tanzil-ur-Rehman,
J. in the above referred cases:--

I am of the view that all laws whether they be Constitutional or sub-Constitutional must
yield to the Sovereignty of Allah as reflected in the Holy Quran and Sunnah and if there
be a clear commanding that behalf it is that command alone which has to be given effect
to and all other legislation applicable in this Islamic Republic of Pakistan must be
construed as subordinated thereto. Sovereignty over the entire universe vesting, as it
does, in Almighty Allah, is the cornerstone of the Constitutional edifice of this Republic
and the Injunctions of Islam, meaning thereby Injunctions of Quran and Sunnah, as
interpreted by a particular sect in Islam in relation to the personal law of that sect and
subject to the status and personal laws of non-Muslims, are enforceable, as such.”

In this case it was also held that:

“The Law of Allah does not brook injustice of any kind and, therefore, whenever a case
for payment, for refund or return of money, comes before a Court of law in Pakistan it
has to be the endeavour of that Court to order the payment, refund or return, as the case
may be, of so much of current legal tender to the person entitled as is equal, in terms of
buying power or other intrinsic value, to the amount initially, loaned out contracted to be
paid or deposited. “

However, Mr. Wajihuddin Ahmed, J. held that as the legal tender had lost value, the
amount to be paid would be calculated based on the depreciation of the value of the
Rupee as compared with a basket of foreign currencies.

It was further observed:

“63. This brings me to the crucial question as to how equity is to be done between the
parties. For obvious reasons no rule of thumb is available to determine the extent of
erosion, which the principal sum due, and earlier decreed in this case, has suffered till the
date of payment, if any, or the decree. Such matter, as a rule involves application of
detailed accounting procedures, based on official data on the subject. Simple decree on
the basis of the afore-quoted statistics may not do. The case, therefore, in principle, calls
for a Preliminary Decree, if one can be passed under law. This, however, does not imply
that where smaller amounts or periods are involved a given case cannot be disposed of on
approximations.

64. The relevant provision regarding Final and Preliminary Decrees is contained in
section 2(2) of the Code of Civil Procedure, 1908, which provision defines such decrees.
It is true that there are specific provisions for Preliminary Decrees to Order XX, Rules 12
to 16 and 18 and in Order. XXXIV, Rules 2 to 5 and 7 to 8, C. P.C., but the same, in my
view contain only examples in which Preliminary Decrees may be passed and such
Decrees can be passed, wherever the requirements of a case so dictate, under section.
2(2), C.P.C., which is the basic provision in the Code in that behalf. I am fortified in this
view by the decisions in Dattatraya Purshotam Parnekar and others v. Radhabai
Balkrishna AIR 1921 Bom. 220, (Raja) Peary Mohan Mookerjee v. Manohar Mookerjee
AIR 1924 Cal. 160 and a Travancore Full Bench decision reported in AIR 1953 T.C. 220.

65. I would, therefore, grant in this case to the plaintiff a decree of a preliminary nature
for assessment as to what was the equivalent real worth of the money which was initially
borrowed that is to say of the sum of Rs.5,00,000 as payable on 20-5-1984, the amount
and date reflected, as they are in the Promissory Note in suit. For this purpose and in
order to make accurate assessment I would appoint a Commissioner to do the needful and
for that purpose the Commissioner would be entitled to seek assistance from the relevant
functionaries of the State Bank of Pakistan. Mr. A.K.M. Idris, Advocate, of this Court is
appointed such Commissioner and his fees, tentatively, shall be Rs.5,000, which would
be included in the Bill of Cots. The Commission shall be returnable within three months
from the date this Preliminary Decree is transmitted to the learned Commissioner.”
Page No. 38 of 52
44. Subsequently, however, a Division Bench of this Court, one of the member of which
was Mr. Wajihuddin Ahmad, J. in the case of Habib Bank Limited v. M/s Farooq
Comport Fertilizer Corporation Limited and 4 others 1993 MLD-1571 held that:--

“Word ‘finance’, within the meanings of section 2(e) of the Banking Tribunals
Ordinance, 1984 does not invovle any equivalent of interest and by its own force does not
carry returns beyond the stipulated period unless emanating in due course of law or
expressly covenanted, again within the framework of law. In the relevant agreement,
envisaging sale and purchase of goods, no such term (finance) nor perhaps a term to that
effect could be improvised, the reason being that such an improvisation may have
exposed itself as a degenerative, relegating the transaction to one, carrying interest,
Patently, a provision for sale/ and repurchase of the goods within period specified (Bai
Muajjal), culminating on repurchase, was calculated to advance the concept of trade and
to forestall the extension of interest. Such agreements were to be construed in the light of
Islamic Fiqh. The enforcement of Shariah Act, 1991, lends support to such observations
because that legislation declares the Quran and Sunnah as the Supreme Law of the land
and, if more than one interpretations be possible, enjoins upon all Courts to interpret
statute-law in a manner consistent with Islamic principles and jurisprudence. Relevant to
the present case trade and commerce is to be encouraged and Riba, correspondingly,
eliminated. Banking Tribunal, thus, acted in accordance with law and within the
parameters of the agreed stipulations, when it disallowed any mark-up beyond the period
of the contract, extending it only for the cushion period of specified days, which covered
the period between demand and default as well as period likely to be consumed in the
institution and conclusion of proceedings for recovery. “

45. The next question that has been raised is that BCD Circular No.32 does not strike
down BCD Circular No.13. This was never the case of any other person. However, Mr.
Azizur Rehman tried to distinguish the two whereby, he states that Circular 32 relates to
charges by the bank. He states that the said circular speaks of charges and that, therefore,
there is no nexus between BCD Circular No.13 and BCD Circular 32. He states, that it is
stated therein that interest shall not be charged on bank charges. I do not agree with the
proposition of Mr. Azizur Rehman. A careful perusal of the said circular shows that it is
in addition and furtherance to BCD Circular No. 13, dated 20th June, 1984. There is a
clear stipulation in the preamble to BCD Circular No.32, that “Please refer to BCD
Circular No. 13, dated the 20th June, 1984.” The only thing that it changes is in clause (3)
of Circular 13 which gives the date of 1st April, 1985 to be a cut-off date for financing to
individual whereas such date had been modified to 1st of January, 1985 in para. 4 clause
(4) of the Circular No.32. The power has been exercised by the State Bank of Pakistan
under the Banking Companies Ordinance, 1962 stating that, from the 1st of January, 1985
interest wherever is charged by a banking company/Development Financial Institutions in
any of the item of the bank charges would be replaced by non-interest mode considering
to be proper. It is this, ‘bank charges’ that Mr. Azizur Rehman contends is to be ‘other
charges’. The entire clause has to be read for the purposes of understanding the provision.
The bank charges has been used in conjunction with replacement of an interest free mode,
here the bank charges would imply, all amounts charged to the account which also
included interest. It is, thus, that the subsequent portion of the said notification says, that
overdue or penal interest or mark-up on mark-up shall not be charged by a banking
company as from that date instead the bank shall take legal steps to recovery the finance.
There are two implications of this notification, first being that of mark-up on mark-up
and interest in any form charged by a banking company shall cease from the 1st January,
1985, the cut-off date. Secondly, that no future mark-up on mark-up would be charged.
The effect of this is that, where a default has been made, the bank was required to take
legal steps. A co-relation has been developed between not charging mark-up and
proceeding to recover money instead. Therefore, there was no question of renewal of a
debt by addition of mark-up. It is important, therefore, to note that the State Bank of
Pakistan has taken a categorical view in this regard and which is in fact a correct issue,
that the banks in financing and where debt is created, cannot take any additional amount
on such debt. In taking additional amount it shall be deemed to be Riba which is
prohibited. It is, thus, that the State Bank of Pakistan instructed to the banks to institute
proceeding for recovery. If the banks choose to give additional time then, it will do so
without charging any amounts. The law when promulgated was very clear. Mr. Azizur
Rehman says if this Court were to take a view that all mark-up on mark-up charged from
Page No. 39 of 52
the first day has been unlawfully done, it shall be detrimental to the banks. No doubt,
such difficulty may arise, but then once the banks are required to act in accordance with
law, specially when the change of law is so great that the entire system has been modified
and that, numerous discussions had been taken place which included banks to arrive at
the notification issued it will not lie in their mouth to say that they were unaware of the
correct prospect of the law. Even if they were not aware from 1987 onwards the Court
had otherwise held that such transactions to be unlawful. The banks should have been
taken cognizance of the judgments. Mr. Azizur Rehman has referred to the SBP Circular
No. BID(Gen)2470/ 601-04-90 and said that BID Circular No.3, dated 20-2-1989
regarding Prudential Regulations for loan classification etc. was taken into account and
that in connection with .treatment that was to be given to rescheduled loans and
capitalization of mark-up, the State Bank had given guidelines. Instead in the guidelines
the mark-up on mark-up, according to him were required to be capitalized and such is
provided according to him in section 6.2.4 of the rescheduling and restructuring debts.
Mr. Azizur Rehman has, however, chosen not to read the first paragraph of the said
guidelines. The entire regulation has to be read to understand the import of the regulation.
It reads as under:--

“6.1

Introduction

The, bank’s borrowers may, at times, face financial distress due to a number of reasons.
This, in turn, may lead to a situation where they are unable to service their debt
obligations as they fall due. In instances of this manner, the Bank may, at its sole
discretion, decide to offer financial reprieve to such customers, with the sole aim of
safeguarding its (the Bank’s) own best interests.

After evaluation of available options, it may be decided to grant reprieve in the form of
rescheduling or restructuring of the financial obligations of customers. One of the prime
considerations should be that:--

‘The discounted expected monetary value (EMV is the amount of cash flow times its
estimated probability) of inflows accruing to the Bank, in the event that financial reprieve
is granted, significantly exceeds the net (i.e. net of legal and other expenses) present
value of cash flow arising from liquidation of available securities.

The reprieve (or accommodation) referred to, hereinabove, may involve modification of
the terms of the loan by:

Extending/amending the repayment schedule

Reducing the rate of mark-up

Reduction the amount of accrued mark-up and/or principal

Extending further credit

And/or settlement of part of debt outstanding by foreclosing on or transferring certain

assets to the Bank.

Normally such accommodation/deprieve would be considered (by the Bank), if the

borrower and/or sponsors offer additional security, thereby strengthening the Bank’s
position.”

46. It will be seen from these guidelines that the banks were allowed to reschedule or
restructure of financial obligations and the method was given i.e. extending or amending
the repayment schedule reducing the rate of mark-up reducing the amount of agreed
mark-up and/or principal and extending the correct facility. Nowhere in the said circular
has it been stated that an additional mark-up could be charged on a debt for extending the
time for payment. It is the mark-up that has already been charged for the purposes of
arriving at a marked-up price which was allowed to be capitalized. Capitalization only
brings it in the line of the accounting system. Such was advised to the banks only for their
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accounting purposes and nothing else. This circular has been issued by the Central
Directorate and relates only for the purposes of classification of account else, if it is not
allowed to be capitalized a provision will be required to be made by the bank, that tray
cause further loss to the banks. In the same guidelines, the restructured loan has been
defined as under:--

“2.1 A ‘restructured’ loan is one whose terms and conditions of loan have been modified,
principally because of a deterioration in the borrower’s financial condition, to provide for
a reduction in interest rate or principal or a capitalization of interest accrued.

2.2 A ‘rescheduled’ loan in which effective interest rate terms remain unchanged from
original terms, but principal repayment terms have been extended because of project
delays, is not considered a ‘restructured’ loan, as loan as interest continues to be serviced
on time.” ‘

47. A careful analysis of this will also show that it provides a reduction in rate or
capitalization in the interest accrued. Accrual of interest is in relation to the agreement
entered into and nothing can be read beyond such position. A perusal of clause (2.3) will
show that a troubled debt restructure has also been defined and various situations have
beer: catered for. In this also, there is no increase in the sums. Reliance therefore by Mr.
Azizur Rehman on this aspect will be a farce. Had the State Bank not intended and the
Government not wanting to proceed under the Islamic System of Banking, the choice was
open. If they had opted to proceed, they cannot be allowed to beat about the bush.
Reliance, therefore, on the said regulation of the State Bank is not only incorrect but
seeking an interpretation which otherwise is not available. Mr. Azizur Rehman also refers
to BPRD Circular No.9, dated 27th April, 2000 namely the Prudential Regulations. He
has referred to clause (3) of the same stating that the rescheduling/restructuring of non-
performing loans shall not change the status of classification of a loan/advance etc. unless
the terms and conditions of rescheduling/restructuring are fully met for a period of at
least one year (excluding grace period, if any) from the date of such rescheduling or
restructuring. This is only in respect of placing a defaulter on the list of CIB and is
nothing to do with the increase or decrease modes. Mr. Azizur Rehman has placed
reliance on the case of Hardware Manufacturing Corporation (Pvt.) Limited v. United
Bank Limited in the Special High Court Appeal No. 187 of 1998 in which it has been
held that:--

“By execution of the finance agreement dated 30-6-1994 original appellant’s liability on
the basis of original contract/agreement was extinguished and the same was substituted
by another finance agreement/contract through the valid documents wherein the
appellants acknowledged the stated sum therefore under the new finance agreement the
appellants would be liable under the law of contract. Reference may be made to Abdul
Qayoom v. Ziaul Haq and another PLD 1962 (W.P.) Karachi 334 and Gauri Dutt Ganesh
Lall Firm v. Madho Prassd and others AIR 1943 P.O. 147),”

48. This position has been discussed by me above, in which I had said that this judgment
is distinguishable from the present case. The facts of the case no doubt relate to a ‘roll
over’ of the facility but there is no discussion as to whether the said agreements were in
respect of sale and purchase of commodity and if it were whether such subsequent
agreements carried a clause of such extension. Mr. Azizur Rehman referred to the
discussion in the said judgment stating that where the arguments were that roll over was
in practice on interest base banking and prohibited by BCD Circular 13, dated 20-6-1984
issued by the State Bank of Pakistan, the Court had held that the parties having agreed or
entered into an agreement, the terms of the subsequent agreement will be applicable
notwithstanding the fact that it was a roll over and roll over in fact, is an accepted
custom.

49. In another unreported case which has been cited by him is in the Special High Court
Appeals Nos. 186 and 187 of 1998, Mr. Azizur Rehman stated that the same position was
taken up and the Division Bench of this Court and had decided the matter that the old
method of roll over was in practice and, therefore, allowed. I am otherwise bound by the
judgment of the Federal Shariat Court as also the Appellate Bench of the Supreme Court
notwithstanding the distinction that I have drawn, and, therefore, hold otherwise. In this I

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may refer to a judgment of a division Bench of the Lahore High Court being United Bank
Limited v. Ch. Ghulam Hussain 1998 CLC 816 where it has been held that:--

“Significantly, the statement of account filed by the appellant does not show any
disbursement, whatsoever, under these two agreements which have to be treated a void,
being without consideration. The supporting material of these agreements i.e., D.P.C.
Notes etc. (pages 483, 485, 487 and 489) also suffer from the same fatal defect and
cannot be looked into for holding that respondents Nos. 1 and 2 had incurred any
financial liability thereunder. We hold accordingly.”

50. Mr. Azizur Rehman has referred to a judgment in the case of United Bank Limited v.
Central Cotton Mills Limited 2001 MLD 78 where according to him, the said judgment
allowed the interest. Mr. Azizur Rehman probably has not understood the import of the
said judgment. The import of the said judgment is that all transactions that were entered
into prior to the first day of January, 1985 were required to be converted into Islamic
mode of financing as such, the same was allowed. Mr. Azizur Rehman has referred to the
discussion on the subject where Mr. Mushtaq Ahmed Memon, J. (as he then was) had
stated that the renewal of loans subsequently also cannot attract the applicability of the
above referred circular issued by the State Bank of Pakistan since renewal merely
amounts to extension and the continuation in force of the earlier agreement. No doubt
such could be correct. This does not say ‘increase in the quantum of loan’, but is an
extension in the time for payment of the initial agreement. He also places reliance on this
judgment to say that BCD Circular No.32 does not strike done BCD Circular No.13. Mr.
Azizur Rehman should have read the last portion of that notification where Mr. Mushtaq
Ahmed Memon, J. (as he then was) has held that “in the circumstances, the contention to
the effect that the fixed loan was granted on mark-up basis does not inspire confidence.”
Likewise the assertion that the interest based facility could not be continued or renewed
after BCD Circular No.13, is equally without force. True, that the interest based facility
could be renewed and such is provided in Circular 13 but this judgment does not say that
an amount could be added, to the said debt that is, due and payable. The contention,
therefore, also does not have any force. In fact the same learned Judge in an Order passed
in Suit No. 1659 of 1999 observed:--

“Having considered the submissions of the learned counsel, I cannot resist expressing
doubt about the validity of the fresh agreement between the parties as is asserted by the
learned counsel for defendant on the basis of correspondence- Even if the parties had
settled fresh terms in novation of agreement dated 23-5-1996, the same appear,
tentatively speaking, to be violative of the Quranic Injunctions restraining a creditor from
taking advantage of a debtor to make repayment within the agreed time.

51. Mr. Azizur Rehman has referred to the novation of the contract. The contract stands
novated according to him after a new contract has been entered into. There is no cavil to
this proposition, but to the present case this is not what is being sought. What actually has
been sought is that whether such an agreement-could at all be entered into and if so,
whether any amount could be added. In my view it is only the extension by addition of
mark-up by the bank to arrive at a restructured documents. Mr. Azizur Rehman has relied
on the judgment of Bank Indosuez v. Banking Tribunal for Sindh and Balochistan and
others reported in 1994 CLC 2272 and states that when there is a novated contract, that
contract has to be looked into as a fresh contract to determine whether the same was in
conformity with the definition as given under section 2(c) of the Banking Tribunal
Ordinance, 1984. He refers to the following passage of the said judgment:--

“...A fresh agreement was entered into by a document whereby the defendant
acknowledged that a sum of Rs.10,000 was due from him to the said firm which formed
the consideration of the agreement entered into between him and the plaintiff. It was held
by a Division Bench of this Court that under the new agreement the liability of the
defendant under the original contract was completely extinguished and there was a fresh
contract substituting the old contract by introducing new business and it was in the nature
of novtion of a contract within the meaning of section 62 of the Contract Act. In S.
Sibtain Fazli v. Star Film Distributors PLD 1964 SC 337 the above principle was re-
affirmed by Hamoodur Rehman, J. In the following words:--

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‘It is an essential element of novation, when new contracting parties are substituted, that
the rights and obligations of original contractors shall be extinguished and the right and
the liabilities of new contracting parties accepted in its place’.”

He states that the old contract by introducing the new agreement was in the nature of
novation of contract within the meaning of section 62 of the Contract Act. There is no
cavil to this well-established principle but the question that has to be looked into, is
whether any act has been done by the bank whereby, an existing law has been avoided.
Where the rights of parties have altered, and a valid contract alters rights of a previous
agreement, the arguments would have been valid. This is not the case here. Subsequent
agreements do not change the previous agreements. There is no mentions or reference o”
previous agreements. The only document shown is a Sanction Advice, which is an
internal document of the bank. The document could be seen only to what was approved
by the bank. The agreement overrides all arrangements. The sanction advice, in the
presence of the agreement, viz-a-viz the customer cannot be construed to be adverse
disadvantage to the customer. The agreement is the document signed by both, the
contents of which have to be seen. The question whether where a law categorically
disallows mark-up on mark-up, can an agreement cause it to be charged, or could any act
be done by the parties to the agreement by which mark-up is added, or mark-up on mark-
up is included to a marked-up price. If not, could this agreement be a valid contract. Mr.
Azizur Rehman has referred to the Prudential Regulation in Regulation No. XVI
prohibits window dressing which reads as under:-

“Regulation-XVI

Window Dressing

1. All banks are directed to refrain from adopting any measures or practices whereby they
would either artificially or temporarily show an ostensibly improved position of banks
accounts as given in their Balance Sheets and Profit and Loss Accounts specially in
relation to its deposits and profit. Particular care shall be taken in showing inter-branch
and inter-bank counts accurate and strictly according to their true nature.”

52. A careful perusal will show that the banks have been restrained from adopting any
measures or practice whereby they, either artificially or temporarily show an ostensibly
improved position of the bank account. The addition of mark-up is added towards the
assets of the bank which gives an ostensibly improved position of the bank accounts
which cannot be allowed. Otherwise also, it is established principle of law that what
cannot be done directly cannot be done indirectly. It is also a very established principle of
law that any contract which is of such a nature that, if permitted it would defeat the
provisions of any law, or which is contrary to public policy is a void agreement.

53. It will thus, have to be seen as to what provisions of law would be defeated if such an
agreement is entered into. The law in the notification by way of circulars, being, BCD
Circulars Nos.13 and 32 issued in 1984. The Circulars have been discussed above.
Suffice to mention that the agreement which seeks to add and cause an additional amount
to be paid in respect of some previous agreement is nothing but a manner to avoid the
restrictions imposed by BCD Circulars Nos. 13 and 32. It is clear that no mark-up on the
marked price could be charged on the said agreement entered into initially. If it could be,
the banks could have utilised the provisions of section 79 of the Negotiable Instruments
Act. The same has since 1985 never been invoked.

The new documents approved and utilized by the bank, utilize the D.P. Note where no
rate of mark-up is mentioned. It is only the repurchase price that is stated. The new
subsequent agreement is nothing but to avoid the restriction imposed by law. The other
question which needs to be elaborated is the validity of subsequent contracts that have
been entered into where the actual sale has not been made. I shall discuss this
subsequently herein.

54. The other question is as to what is the ‘public policy’, and such will have to be looked
into. The Constitution of the Islamic Republic of Pakistan is the basic document on the
touched stone of which all laws have to be looked into. The Preamble of the Constitution
where under “the principles of democracy, freedom, equality, tolerance and social justice
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as enunciated by Islam shall be fully observed.” Article 2 states that Islam shall be State
Religion of the Pakistan. Article 2A incorporates Objectives Resolution as reproduced in
the annex to the Constitution. Article. 38 also clearly stipulates that the State shall
eliminate Riba as early as possible and Article 227 clearly states that the existing laws
have to bring in conformity with the Injunction of Islam as laid down in the Quran and
the Sunnah. In view of the provisions of the Constitution in fact, even prior to this, right
from the days when this country achieved independence that it was clear that all laws
were liable to be promulgated which were and ought to have been in accordance with the
Holy Quran and the Sunnah. I have already dilated at length on this issue and shown the
quantum of work that has been carried out for such purposes. The policy has always been
that, all laws, practices and procedures would be in accordance with what is provided in
the Quran and Sunnah. In fact, BCD Circular No. 13, the preamble also states that the
banking system was to shift over to the Islamic modes of financing, such is the public
policy. After the law has been brought in conformity with the Holy Quran and Sunnah,
way and methods are being employed by the Bank to continue the previous usurious
Banking Practice, despite the fact that the law has been Islamised in accordance with the
Constitution of the Islamic Republic of Pakistan. Such a practice that is sought to be
developed by the banks is a fraud on the Islamic provisions. No one can be allowed to
play a fraud on the existing law by trying to avert the existence of such law that
prescribes that mark-up on mark-up cannot be charged. The act of entering into a future
transaction admittedly is in respect of renewal of financing and does not contain any
aspect of actual disbursement or payment. Such contracts are contracts that are against
the public policy.

55. When one is talking of novation of contract it will be seen as to what is the aim for
novating the same. The position will have to be seen in its true, proper and correct
perspective. The agreement for financing ac is termed by the banks is nothing but an
agreement of sale and purchase of tangible properties, goods or commodities. Once the
goods are purchased by the bank, the bank makes a payment for the purchase of the
goods which according to the agreement is termed as the ‘sale price’. The goods are
thereafter sold to the customer and such sale is the resale/repurchase on a marked-up
price. There are, therefore, two distinct transactions under the said single agreement. The
first being the purchase by the bank for consideration. It is at this juncture that the ‘sale
price’ is disbursed to the seller namely, the customer. This is the amount that the bank say
is the ‘finance’ or the amount to be paid to the customer. The second is in respect of
resale by the Bank to the customer but such is the actual Murabaha transaction/Bai
Muajjal. Thus, before entering into this transaction, the bank has to be the owner of the
goods/property being sold to the customer. It is thus, the first transaction that is entered
into. After sale to the Bank, and the bank paying the sale price being the ‘consideration’
of purchase by them of a defined good/property/commodity, they can by the ‘Bai
Muajjal’ transfer that title to the customer, that they have acquired by purchase of the said
property. It is a well-established principle of law that no one can transfer a title, better
that what he has. Thus, the sale is concluded between the bank and the customer upon
such purchase price as may be agreed, the repurchase price. It is this price, which is liable
to be paid by the customer on deferred payment. After the second transaction, i.e. the sale
by the bank to the customer is concluded, the contract of sale and purchase is finalised,
the bank becomes an unpaid seller whereby the purchaser is liable to pay the repurchase
price This the purchaser (customer) is indebted to the bank for the repurchase price
payable within the period prescribed. Thus, repurchase price becomes the debt. Thus, the
only thing required under the said agreement is recovery of debt, the goods having been
sold and consumed by the customer. Such is the loan or debt. Therefore, a clear
distinction between the agreement entered into and the debt paid or payable therefore, is
to be looked into. Once the debt has been determined the contractual obligation under the
agreement is concluded and it is the debt now that becomes payable. The amount will be
the liability of the customer and such cannot be increased by addition of any mark-up A
perusal of section 23 of the Contract Act categorically states that consideration or object
of an agreement is lawful unless it is of such a nature that if permitted, would defeat to
provision of-any law. A subsequent agreement whereby, there is a settlement of previous
debt or is renewal thereof shall in fact amount to defeating the provision of the specific
law available. Such will riot be novation but an independent agreement contemplating an
actual sale and purchase. Such an agreement entered into only for renewing the previous
debt shall be a void agreement. The position in law is absolutely clear. I had also referred
to the clear instructions of the State Bank in ‘Regulation XVI above. Such renewal. will
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only be Window Dressing and that all profits shown will be nothing but,’ added mark-up.
Mark-up cannot be allowed to be added on an ‘existing debt’, as there can be no
agreement between the parties in respect of that ‘specific debt’ except that there could be
enlargement of time, and that too without increase in the debt payable.

56. The subsequent agreement technically would have no nexus with the previous
agreement in which a debt had been created. It is a fresh agreement. An agreement by
which fresh commodities, goods or articles are to be sold or purchased, therefore, when
goods are sold under the fresh contract there shall be consideration by actual and physical
payment in the statement of account and not merely adjustment stating that an amount is
due and therefore, the bankers can exercise lien. A lien can only be exercised on a credit
in the account of the bank to set off a liability and not by additional credit to set off to the
previous debt. A debit will not be a credit of the customer and where it is not a credit of
the customer, section 171 of the Contract Act shall not apply. Section 171 clearly
stipulates that a banker in the absence of a contract shall have right to retain a security for
such balance goods (bailed to them). A loan or finance or debt given to a customer shall
not be an amount or goods bailed to the banking company as such, no right can be
claimed.

57. The subsequent agreement does not have any stipulation that there could be a set off
by a subsequent finance. Even if it were there, the question would be that such an amount
could be where a mark up has been added thereon for the purposes of adjustment of
marked-up price. I am of the considered view that such cannot be done. The argument,
therefore, that the subsequent agreement is a novation and that once a contract is novated
the previous contract cannot be’ looked into is not correct in the present scenario.

58. If it is presumed for the sake of argument that the last agreement that had been
entered into is the agreement on the basis of which the amount due is payable by the
defendants/customers then we will have to look into the contract itself. Admittedly, the
contract is one of sale and purchase of commodities. In the circumstances it shall be
governed by the Sales of Good Act, 1930. Sale is defined in section 4 which reads as
under:--

“4. Sale and agreement to sell.---(1) A contract of sale of goods is a contract whereby
the seller transfers or agrees to transfer the property in goods to the buyer for a price.
There may be a contract of sale between one part-owner and another.

(2) A contract of sale may be absolute or conditional.

(3) Where under a contract of sale the property in the goods is transferred from the seller
to the buyer, the contract is called a sale, but where the transfer of the property in the
goods is to take place at a future time or subject to some condition thereafter to be
fulfilled, the-contract is called an agreement to sell.

(4) An agreement to sell becomes a sale when the time elapses or the conditions are
fulfilled subject to which the property in the goods is to be transferred. “

It will be seen that a distinction is created in ‘Sale’ and ‘Agreement of Sale’. A contract of
sale is, where the seller transfers or agrees to transfer the property in the goods for a price
and such could be absolute or conditional, Subsection (4) of section 4 of the Sales of
Goods Act above states that the ‘Agreement of Sale’ becomes a ‘Sale’ when the time
elapses or conditions are fulfilled subject to which the property in the goods has to be
transferred. It clearly implies that there has to be conclusion as to the transfer of property
in the goods which is the principal element of sale. This Act also came under scrutiny by
the Shariat Appellate Bench of the Supreme Court in the case of Islamic Republic of
Pakistan v. Public at Large (supra) and in the judgment in the case of Federation of
Pakistan v. Awamunnas 1988 SCMR 2041 that, a contract of ‘Sale’ or ‘Ijarah’ of a
commodity shall only be valid where the ‘commodity’ is in existence and that there has to
be a transfer of such property. Whilst dealing with the concept of ‘agreement of sale’ it
was stated that where the goods did not exist, the Islamic Injunctions do nor recognise
such agreement. Sale cannot take place, but an Agreement of Sale can be entered into and
this agreement is not a complete ‘Sale’ of ‘Goods’. The sale will only accrue when the
commodity is transferred to the purchaser or consideration thereof has been paid. From
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the principle laid down we see that the agreement which is a subsequent one does not
have the ingredients of a sale and at best be treated an ‘Agreement to Sell’. Such
agreement can possibly be specifically enforced whereby the purchaser may seek
direction against the seller upon payment of actual consideration to sell his property, but
if such is not done the purchase price/repurchase price mentioned in the said agreement
will not be taken to be a debt payable by the purchaser. If money has actually been
transferred or handed over to him there are only two possibilities, one is the transfer of
the property for which money had been given, or the return of the money that had been
given to him. The customer will, therefore, only be liable to the extent that was actually
paid to him. If there was damage caused due to the refusal to sell the commodity if there
was one then such shall be required to be proved. The judgment of the Supreme Court
was delivered m 1988 has also been reaffirmed in the judgment of Dr. M. Adam Khaki. I
am also of the same view and either where the resultant would be that it is the principal
amount that was actually paid would become due but where there is a sale, the sale price
has been transmitted and are sale is made, the resale price will be payable by the
defendants to the plaintiff. It is well-settled principle of law that parties cannot contract
out of the provisions of the Act. See in the case of Woman Shriniwas Kini v. Ratilal
Bhagwandas & Co. AIR 1959 SC 689 it has been held that an agreement to waive an
illegality is void on the ground of public policy. Similar views have been taken in the
case of Anayat Ali Shah v. Anwar Hussain 1995 MLD 1714.

59. We now come to another question, i.e. whether an agreement without consideration is
a valid agreement. Section 25 of Contract Act reads as under:--

“25. An agreement made without consideration is void unless:--

(1) it is expressed in writing and registered under the law for the time being in force for
the registration of documents and is made on account of natural love and affection
between parties standing in a near relation to each other, or unless

(2) it is a promise to compensate, wholly or in part, a person who has already voluntarily
done something for the promisor, or something which the promisor was legally
compellable to do, or unless

(3) it is a promise made in writing and signed by the person to be charged therewith, or
by his agent generally or specially authorised in that behalf, to pay wholly or in part a
debt of which the creditor might have enforced payment but for the law for the limitation
of suits.

In any of these cases such an agreement is a contract. “

The subsequent agreements of finance are not covered by the exception to the general
principle, that an agreement without consideration is void. Section 24 of the Contract Act
reads as under:--

“24. If any part of a single consideration for one or more, objects, or any one or any part
of any one of several considerations for a single object, is unlawful, the agreement is
void.”

It will be seen that if any part of a single consideration is unlawful the agreement is void.

60. I have discussed the unlawful act. Thus, the agreements made subsequently with an
aim to avoid and defeat the provisions of the law of not charging mark-up on mark-up are
void.

61. The question of disbursement has also been dealt with above. It was argued that there
is no need of actual disbursement and that debt could be deemed to be disbursement.
Reliance is placed on the Judgment of Moudood Ahmed Farooqui v. Ameen Fabrics PLD
1983 Karachi 176, in which it has been held that ‘debt’ means an obligation and liability
to pay or return something owed by one person to another. There is no cavil to this very
settled principle that a debt is liability of the person and the reliance on this judgment is
not incorrect. The position is what has been stated is that such is liable to be paid to tide
creditor as such a fresh loan which is given will be that of the customer and from which
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he clears a previous debt. One is amazed at this argument. This is nothing but a fraud on
the statute. Once it is a debt in respect of one agreement it will be a debt in respect of the
other agreement also and a liability, therefore, saying that from a finance obtained, it
being a debt, a previous debt can be set off has no place. In the said judgment the
question was in respect of the dividend declared and not paid to the shareholder, dividend
declared becomes the property of the debtor. Debt does not become the property of the
shareholder. In the circumstances the case is distinguishable from the present case.

62. The last point that was argued by Mr. Azizur Rehman was that the judgment in the
case of Dr. M. Aslam Khaki v. Muhammad Hashim reported in PLD 2000 SC 225 is
operative from 30-6-2001 and the present laws will continue to be valid till that date.
There can be no cavil to the proposition that all laws that are in conflict with the Islamic
provisions shall remain valid only upto 30-6-2001. BCD Circulars Nos. 13 and 32 have
not been declared to be in conflict with the Islamic provisions. What has been said by the
said judgment of the Hon’ble Shariat Appellate Bench of the Supreme Court of Pakistan
is that all laws or part thereof that have been declared to be against the Injunctions of
Islam shall be changed and modified by 30-6-2001 where after they shall become invalid
and not be acted upon.

63. Further to the question that has now been raised is that the judgment of Dr. M. Aslam
Khaki shall apply prospectively and not retrospectively. High Court is bound by the
decision of the superior Courts under Article 189 of the Constitution of the Islamic
Republic of Pakistan which reads as under:--

“189.’ Decision of Supreme Court binding on other Courts. Any decision of the Supreme
Court shall, to the extent that it decides a question of law or is based upon or enunciates a
principle of law, be binding on all other Courts in Pakistan.”

Thus, it is clear that the decision of the superior Courts namely the Supreme Court is
binding on the High Court. In fact, the order of the Shariat Court is also, under Article
203-GG subject to Articles 203-D and 203-F binding. The judgment by the Federal
Shariat Court was announced in 1992, however, such remained stayed during the period
of appeal which was finally decided in 2000. The argument ‘is that as the appeal had
remained stayed, therefore, it is the judgment by the Supreme Court from which date, it
shall be acted upon. What the learned counsel have not looked into is that there are two
specific points in the said judgment, be it before the Federal Shariat Court or the Hon’ble
Supreme Court. One is that reliance to the specific laws that were being discussed and
admittedly, the laws of banks except section 79 of the Negotiable Instruments Act,
section 25 of the Banking Companies Ordinance, Rule 9(2) and (3) of the Banking
Companies Rules, section 22(1) of the State Bank Act, 1956 and section 8(2)(a) and (b)
of the Banking Companies (Recovery of Loans) Ordinance, 1979 were before the Court.
None of these except Banking Companies (Recovery of Loans) Ordinance, 1979 related
to the charge of mark-up and mark-up on mark-up. In that law namely, the Ordinance,
1979 there was only the charge of ‘interest’ and was prior in date when the BCD
Circulars Nos. 13 and 32 came into existence. In fact, BCD Circulars Nos. 13 and 32
changed the entire law, its perspective and modes and methods of banking converted
them into trade related modes. Loans were only treated to be given without any mark-up
and increase except for service charges. BCD Circular No. 13 categorically states that no
mark-up on mark-up shall be charged and it is well-settled principle that nothing can be
done indirectly what cannot be done directly. In this regard, Mr. Azizur Rehman had cited
two latest judgments that this indirect process namely, entering into future mark-up in the
case of Mst. Aisan v. Manager, Agricultural Development Bank of Pakistan, Chunian
2001 CLC 57 and Muhammad Ramzan v. Citibank N.A. 2001 CLC 158. The first one
being the judgment of the learned Single Judge of the Lahore High Court and the other
being a judgment of a Division Bench one of which Judge was the same as who delivered
the first judgment. Both the aforesaid judgments are in fact distinguishable in that, they
are dealing with section 15 of the Banking Companies (Recovery of Loans, Advances,
Credits and Finances) Act, 1997 which provides for mark-up on decree from the date of
the institution of the debt till payment. What their lordships had observed is that the
judgment of the Supreme Court in the case of Dr. M. Aslam Khaki will for that purpose
act retrospectively. In fact a history of the introduction of the provisions of mark-up
during the period it remained in the Court it seems would be, that such was in Court and
the delay could not be ascribed to the creditor who could not be penalised because of
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delay of the Court. Such had not been considered by the Council of Islamic Ideology as
such, it was not provided in BCD Circulars Nos.13 and 32 these provisions not being
there, their lordships were absolutely, correct in holding that the provisions of section 15
in the Act, 1997 will only be applicable from the date of the judgment and not
retrospectively. The difference and distinct feature in the application of the judgment of
the Supreme Court to the present case is that, the said two Circulars having not been
declared to be void or ultra vires they, therefore, having been held to be intra vires, will
remain in force from the date they were promulgated. According to the doctrine of stare
despises the precedent in the case of Dr. M. Aslam Khaki gives the authority of
established law. The cases earlier decided by the High Court and upon application of the
same doctrine would result into the effect that it would be presumed that the Courts gave
decisions with all possible care and consideration and had not acted per incuriam. What is
binding on the other Courts under the present Article 189 is the ratio of the decision of
the Supreme Court and not any finding or conflict of opinion of the Court or any question
which was not required to be decided in a particular case. In the present case also a
similar situation has occurred whereby the decision of the Court is in respect of certain
laws that have been specified and will not effect the laws that are in existence but the
ratio of the decisions which is based on- the Quran and Sunnah and its application will
remain binding. For the purposes of looking into as to what is the scope of the
jurisdiction of the Federal Shariat Court, we need to read sub-Article (a) of Article 203-D
which reads as under:--

“203-D. The Court may, either of its own motion or on the petition of a citizen of
Pakistan or the Federal Government or Provincial Government, examine and decide the ~
question whether or not any law or provisions of law is repugnant to the Injunctions of
Islam as laid down by the Holy Quran and Sunnah of the Holy Prophet (p.b.u.h.)
(hereinafter referred to as the ‘Injunctions of Islam’).

Thus, the Federal Sharait Court will examine only such question of law or provisions of
law that are repugnant to the injunctions of Islam. Reasoning or ratio for arriving at the
same will, however, remain applicable. The banking system had been converted into
Islamic form in 1985. It was not held to be against the injunctions of Islam. This Court
has to only see that whether the manner in which an agreement had been entered into or
otherwise is within four corners of laws laid down by the BCD Circulars Nos. 13 and 32.
This Court for the purposes of looking into the law which is valid and existing shall
remain bound by the ratio given in the case of Dr. M. Aslam Khaki. It shall not be that
such case is being acted upon retrospectively. In the case of Sakhi Muhammad v. Capital
Development Authority PLD 1991 SC 777 it was held that “decision would not have the
effect of altering the law from the date of its announcement/commencement so as to
render void all decisions made by the subordinate Courts or authorities made in the light
of the earlier interpretation. “The position is that application of interpretation continues to
be on the basis of earlier judgments which were announced as early as 1987. Dr. M.
Aslam Khaki’s case (supra) confirms the earlier view.

64. The position is that BCD Circulars Nos.13 and 32 are the consequences of the reports
of the Council of Islamic Ideology provided for the furtherance of Islamic financing
where mark-up on mark-up has been stated to be un-Islamic and usurious. Riba was
disallowed and that because of such disallowance it was in the line with the arguments
put forward for the purposes of Islamic financing. In fact, the judgment of the FSC as
also the Hon’ble Shariat Appellate Bench of the Supreme Court of Pakistan have not in
any manner held that the law as was enacted is against the injunction of Islam. What has
been said is that the bankers have not acted in accordance with law in force. It has also
been said that the manner in which Murabaha/Bai Muajjal transaction though lawful
transaction have been misapplied by the banks. Misapplication of the law was by the
banks. Even if it is held that the said judgment shall be applicable from the date provided
therein, the ratio of the case for the purposes of determined and deciding cases shall be
applicable on a valid and operative law from the date of the enactment. The definition
shall remain applicable from the date when the law came into force. It is not a case where
any law has been declared to be ultra vires. I am aware of the well-settled principle that
where a law has been declared to be ultra vires, the declaration shall act prospectively and
not retrospectively. This is a case where the law has been held to be valid, proper and
intra vires. In such a situation where a law has been declared to be intra vires, it is only
the interpretation of the specified law that has to be taken into account. It cannot be said,
Page No. 48 of 52
therefore, that this judgment will act prospectively. This judgment only acts to clarify an
existing valid law. Even otherwise, this appeal is from the judgment in the case of
Mehmoodur Rehman Faisal (supra). This case decided alongwith many other cases the
point in issue. However, in the Supreme Court the leading case came to be the case of Dr.
M. Aslam Khaki as such there the case is known by that name. The banks should have
anticipated actions and should have protected themselves after the earlier judgment.
Appeals may been filed, but any decision could have been forthcoming. The banks were
aware of the factum from 1987 onwards when mark-up on mark-up was declared against
the injunction of Islam by the High Court. Taking refuge, therefore, behind the judgment
that it shall be applicable from June, 2001 is not correct. No one can be allowed to make
a mockery of a legal process, the Islamisation and the provisions of the Islamic modes of
transactions/financing. It seems that the law introduced in 1985 was taken by the banks as
only a change in the name and as such, continued as if they were charging interest. The
banks had thus made a mockery of the law by avoiding and creating legal fictions. The
concept never changed. Even today during the course of arguments the question of
lending on mark-up basis is being spoken. From this it is clear that even today the law is
being utilised only as a garb or screen to protect themselves. Laws having been Islamised
one needs to understand that they have to be interpreted and acted upon in the manner as
they are. They have to be acted upon in the manner they are required to be acted upon and
cannot be extended or transformed. In fact it has been observed that “the Superior Courts
of Pakistan have in large number of cases applied the Islamic teachings and philosophy,
when the statute law is silent about a situation, the field is unoccupied, so to say, a
statutory void is to be filled, or the Court ‘has discretion to follow one of the several
courses, one of which is more in accord with Muslim jurisprudence. Such was held by the
Hon’ble Supreme Court has held in the case of Muhammad Bashir v. The State PLD
1982 SC 139, that such a void has to be filled up by Islamic Common Practice and
provisions. The banks chose otherwise. In the case of Fazal Ghafoor v. Chairman
Tribunal Land Disputes 1993 SCMR 1073, it has been held “when there is a vacuum on
question of law left by statutory silence, the prevailing mode having full Constitutional
support, would be that of Islamic Common Law”.

65. Mr. Ejaz Ahmed has also argued in detail, most of which have been dealt with and
covered by the discussion above. However, the important aspect that needs to be seen is
with regard to the argument that has been advanced by Mr. Ejaz Ahmed about the concept
of mark-up on mark and the renewal. Mr. Ejaz states that the marked-up price is an
agreed consideration and that if such price is not paid the remedy available to the bank to
seek recovery. This is a correct proposition. He further says that mark-up on marked-up
amounts to recovering the opportunity cost of money which is not permissible under the
Islamic mode of financing. This is also correct. On the basis of this, subsequently, Mr.
Ejaz Ahmed dealt with the question of renewal and distinguished the renewal by way of
adjustment and continuing facility on a revolving basis. As far as the adjustment is
concerned, he states that the amount of sale price is credited to the customer’s account
and is set off against the existing liability of the customers on account of the facility
originally granted and, therefore, accounts operates on a revolving basis. As far as
continuing facility, he states that the adjustment as stated above, does not take place and
the account continues to operate on a revolving basis and in fact, he states that this is an
established practice in the banking industry and the customer are aware of this
mechanism. He states that such a mechanism is beneficial for customers and it allows to
customers to withdraw the amount within the amount of facility at any time and repay the
sale as and when the excess money is available to him during the currency of the facility.
He states, therefore, customer benefits from the fact that the mark-up is charged only on
the outstanding. He states that if the mark-up facility is strictly construed to mean that the
bank is only obliged to disburse once, then according to him the finance becomes more
expensive for the customers as, once the full amount of finance facility is availed the
customer will be charged mark-up on the full amount. The excess liquidity of the
customer will remain lying in the current account with no profit. I do not agree with this
proposition. This proposition presupposes dealing in money and mark-up on the money.
The concept that has been evolved is that the purchase is made by the bank and it is the
sale price which is actually disbursed, the repayment is the repurchase price and it is the
price that is fixed’ There is no concept of addition of further sums by elapse of time. The
consideration for the actual sale has to be made by the bank to the customers and has to
be done so in its entirety. The customers will be in his right to withdraw the entire amount
or to leave any sum in his account. He will be in his right to transfer this amount to
Page No. 49 of 52
saving account or otherwise. Money being the consideration for sale would, therefore be
required to be transferred to the customer. The second portion of the agreement as
discussed above, is the actual finance agreement which in fact is a Bai Muajjal. ‘Bai’
meaning sale and ‘Muajjal meaning upon deferred payment. This Bai Muajjal or
Murabaha transaction is that, the bank having purchased as resold this commodity at a
higher price to the customer. At this point, the customer is not required to pay the sale
consideration but what is required is to do so within the specified period at an agreed
repurchase price. The consideration for the sale of the commodity by the bank to the
seller cannot ‘tie adjusted against this repurchase price as it is Bai Muajjal the payment is
deferred. The consideration for the resale by the bank to the customer is a contract
between the two and such becomes a debt. This debt is, therefore, only liable to be paid
by the customer. There is therefore, no question of a revolving facility the amount that is
available with the customer being the sale consideration of the sale made to the bank.
This amount can be utilised at the wish and whims of the customer. I am, therefore, not
convinced that the transactions as stated by Mr. Ejaz are in true spirit the financing as
provided under BCD Circulars Nos. 13 and 32.

66. The next question, therefore, is whether the purchase price can be increased and
which has been answered by Mr. Ejaz saying that it depends on the meaning ascribed to
the word ‘increase’ and accordingly the increase in the purchase price has been classified
as (a) where the increase is not permissible; (b) where increase has been permissible. In.
the first classification he states that mark-up on overdue. installment where the finance
facility is payable in installment and due dates of installments are specified in the
agreement and where mark-up on overdue amounts in the cases of lump sum payment
agreements no increase can be allowed. He states that, however, increase would be
permissible in specific transactions namely the mark-up is to be booked by the banks on
accrual basis or where there is a fresh sanction or the renewal of the working capital or
where there is a restructuring or rescheduling of liability. I will also not subscribe to this
view. What cannot be done directly cannot be done indirectly. It is also a well-settled
principle that if a certain thing has to be done in a certain manner it has to be done in that
manner and no other. I have already discussed above, that mark-up in itself is only
restricted for the purposes of arriving at the repurchase price and once such is arrived at
the amount of repurchase price becomes the debt, therefore, there could be no question of
separation of mark-up. The mark-up has to be capitalized which is also provided in the
Prudential Regulation. Unless such mark is capitalised the repurchase price cannot be
determined. Thus, if the mark is capitalized and added to the principal amount (principal
meaning the sale price) and having arrived at the repurchase price any increase by way of
renewal, capitalisation, booking on accrual basis or by any means will be nothing but
addition of mark-up on mark-up.

67 In a Hadis narrated by Abdullah Ibn Abu Qatadah reported in Book 9, Number 3795
of Sahih Muslim the following was said;

“Abu Qatadah demanded (the payment of his debt) from his debtor but he disappeared;
later on he found him and he said: I am hard up financially, whereupon he said: (Do you
state it) by God? By God. Upon this he (Qatadah) said: I heard Allah’s Messenger
(p.b.u.h.) said: He who loves that Allah saves him from the torments of the Day of
Resurrection should give respite to the insolvent or remit (his debt).”

The concept of increase money rational to time cannot be allowed. In another Hadis
narrated by Uthman ibn Affan reported in Book 8, Number 3849 of Sahih Muslim the
following was said:

“Allah’s Messenger (p.b.u.h.) said: Do not sell a dinar for two dinars and one dirham for
two dirhams.”

In another Hadis narrated by Abu Sa’ id al-Khudi in Book 9, Number 3854 of Sahih
Muslim the following was said:

“Allah’s Messenger (p.b.u.h.) said: Gold is to be paid for by gold, silver by silver, wheat
by wheat, barley by barley, dates by dates, salt by salt, like by like, payment being made
hand to hand. He who made an addition to it, or asked for an addition, in fact dealt in
usury. The receiver and the given are equally guilty.”
Page No. 50 of 52
In another Hadis on this subject narrated by Abu Hurayrah in Book 9, Number 3856 is as
follows:

“Allah’s Messenger (p.b.u.h.) said: Dates are to be paid for by dates, wheat by wheat,
barley by barley, salt by salt, like by like, payment being made on the spot. He who made
an addition or demanded an addition, in fact, dealt in usury except in case where their
classes differ. This Hadith has been narrated on the authority of Fudayl ibn Ghazwan with
the same chain of transmitters, but he made no mention of (payment being) made on the
spot.”

68. From the above, it will be clear that any increase or difference in the value thereof
will be usurious and will come within the definition of ‘Riba’. I am not inclined to grant
such increase.

69. In view of the above, I am of the considered opinion that once the agreement has been
entered into and the repurchase price determined there can be no renewals by increasing
the debt. If there is- a renewal or restructuring nothing can be added to arrive at extended
figure. The question that needs, therefore, to be answered is what will be the amount
payable by the defendant/customer of the banks. If they have entered into a subsequent
agreement or addition of mark-up thereon, I have already held that subsequent
agreements are void. The bank can only seek recovery of the amounts of the marked-up
price under the first agreement. However, if the bank is able to establish the fact that the
amount has been actually disbursed under the subsequent agreement and it is not for the
purpose of adjustment of the previous debts and that there has been a de facto sale and
purchase in commodity in that situation all agreements that may have been entered into
for such purposes and independent of the previous agreements can be looked into and
money shall be recoverable there against. Every agreement will therefore have to be
proved. For this evidence needs to be led. If the bank has chosen to extend the time for
repayment of the amounts given it cannot increase the sum. Naturally if extension is
given there is a consideration that he is unable to pay at that point of time. If there is
delay in the repayment of the debt, the banks shall be free to proceed to recover the
amount of loss caused to them by such delay. This, however, shall be required to be
proved. In the case of Dr. M. Aslam Khaki the Hon’ble Shariat Appellate Bench of the
Supreme Court of Pakistan has observed that:--

“...If the purchaser could not pay at the due date because of his poverty, the Quranic
command is very clear that he should be given more time till he is able to pay. The Holy
Quran says:

And if he (the debtor) is poor, he must be given respite till he is well-off. (2:280).

“However, if the purchaser has delayed the payment despite his ability to pay, he may be
subjected to different punishments, but it cannot be taken to be a source of further ‘return’
to the seller on per cent per annum basis as contemplated in section 79. “

70. What has been stated is that agreements that have been entered into on a subsequent
date will be the only agreements that can be looked into and all agreements that have
concluded by elapse of time shall be deemed to be past and closed transactions. I do not
agree with this view. Admittedly, the bankers have chosen to reform or rename the
transactions though, it continues to emanate from one single account. If the account is the
same it will be seen that the certain amount was due and payable on a certain date and
remained unpaid. It is this debt that continues in the subsequent agreements. The sanction
letters clearly show that they are renewal of facility and such renewal of facility by way
of subsequent agreement is only a garb to get out of the legal restrictions imposed on
them by BCD Circulars Nos. 13 and 32. Such cannot be allowed. A valid law being acted
upon shall have to be acted in the manner as it prescribes. When it says mark-up on mark-
up cannot be charged, the same cannot be charged in any form or manner whatsoever.
When it says that in the event of a default being committed, recovery has to be made and
no mark-up on mark-up or penalty can be charged, it specifically implies and assumes
without ambiguity that no mark-up even if restructured can be allowed. It is my
considered view that agreement continues to be effective for the recovery of the debt by
the unpaid seller, the Bank, despite the fact that new agreement may have been entered
Page No. 51 of 52
into. The said agreements are nothing but a continuance of the first agreement and only
for the purposes of enhancement and charge of mark-up by elapse of time. I am,
therefore, of the view that such will not be deemed to be a past and closed transaction and
shall continue till such time the payment of the debt caused by the first agreement is
made over or the agreement is extinguished by being fully acted upon or that by a
concluded case decided by any Court of law. All pending proceedings in respect of any
finance on the basis of the ‘Murabaha’ or ‘Bai Muajjal’ shall continue to be current.

71. In view of the above, where it is clear that such is genuine and bona fide dispute, I
grant leave to defend the present suit to the defendants. The defendants shall file the
written statement within a period of 21 days where after evidence shall be led for the
purposes of determination as above. C.M.As. 1356 and 1357 of 2000 stand disposed of
accordingly.

‘72. Before parting I must place my appreciation for the efforts of Mr. Muneer A. Malik,
Advocate, Mr. Azizur Rehman and Mr. Ejaz Ahmed, Advocates, who appeared and
placed a lot of material and presented the law due to which it had become possible for me
to- decide this matter.

Q.M.H./M.A.K./H-30/K Leave to defend granted.

Page No. 52 of 52
2001 Y L R 1549

[Karachi]

Before Anwar Mansoor Khan, J

UNITED BANK LTD., KARACHI---Plaintiff

versus

Messrs GRAVURE PACKAGING (PVT.) LTD. and 4 others---Defendants

Suits Nos.220 of 1995 and 493 of 1998, decided on 6th August, 2001.

(a) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No. 13, dated 20-6-1984---Introduction of the Circulars
by State Bank of Pakistan---Islamisation of Banking System in Pakistan---
Commencement of transitional period---Judgment by Supreme Court in case of Dr. M.
Aslam Khaki reported as PLD 2000 SC 225---Applicability---Laws by which the
Banking business was to be conducted was set moving from the year 1962, and a
concrete law was enforced from 1-1-1985---BCD Circular No.l3, dated 20-6-1984, had
stated the transitional period given to the Banks for the purpose of transition from old
system of banking into the Islamic System of Banking---Contention that the judgment by
the Supreme Court ix case of Dr. M. Aslam Khaki would be operative from the date
mentioned in it as regards the banking transition was repelled.

Dr. M. Aslam Khaki v. Syed Muhammad Hashim PLD 2000 SC 225 ref.

(b) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No. 13, dated 20-6-1984---BCD Circular No. 32, dated
26-11-1984---Islamisation of banking system---Constitution of Shariat Board--Object and
purpose ---Shariat Board was to arrange for exchange of information for the evaluation of
the practice and for providing guidance of successfully managing the Islamic economy---
Islamic economy is in its totality the economy of the country and laws in respect of, not
only the banking but also in other aspects which included interest being charged by other
institutions, payment to various Banks and other such-like transformation---Supreme
Court in its judgment in the case of Dr. M. Aslam Khaki PLD 2000 SC 225 had given
period of transformation.

Dr. M. Aslam Khaki v. Syed Muhammad Hashim PLD 2000 SC 225 ref.

(e) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No. 13, dated 20-6-1984---BCD Circular No. 32, dated
26-11-1984---Islamisation of economy--Judgment by Supreme Court in case of Dr. M.
Aslant Khaki reported as PLD 2000 SC 225---Effect of the judgment on BCD Circular
No.13, dated 20-6-1984 and BCD Circular No. 32, dated 26-11-1984---Supreme Court in
the judgment gave various aspects of law for transformation and for that purpose specific
time had been given---Circulars Nos. 13 & 32 which were in force since 1-1-1985, were
valid legislation and continued to remain in force.

Dr. M. Aslam Khaki v. Syed Muhammad Hashim PLD 2000 SC 225 ref.

(d) Constitution of Pakistan (1973)---

----Arts. 227 & 230---BCD Circular No.13, dated 20-6-1984---BCD Circular No.32,
dated 26-11-1984---Islamisation of laws--Council of Islamic Ideology---
Recommendations of---Circulars Nos. 13 & 32 were introduced upon the
recommendations of the Council of Islamic Ideology for bringing the existing laws into
conformity with the Injunctions of Islam---Both the Circulars were the consequence of
the reports of the Council provided for the furtherance of Islamic financing where mark-
Page No. 1 of 66
up on mark-up had been stated to be un-Islamic and usurious ---Riba was disallowed and
because of such disallowance the Circulars were in line with the arguments put forward
for the purposes of Islamic financing.

Commissioner Income-tax, Peshawar Zone v. Simen A.G. PLD 1991 SC 368; Kaneez
Fatima v. Wali Muhammad PLD 1993 SC 901; Maple Leaf Cement Factory Limited v.
Collector of Excise and Sales Tax 1993 MLD 1645 and Pakistan v. Public-at Large PLD
1986 SC 240 ref.

(e) Constitution of Pakistan (1973)---

----Art. 2A---Expression ‘Injunctions of Islam’ in Art.2A of the Constitution ---Scope---

Expression ‘Injunctions of Islam’ has not been left to the discretion of the Courts and
notions of the individuals but the same has been clearly spelt out, as only those
Injunctions which have been laid down by the Holy Qur’an and the Sunnah of the
Prophet (p.b.u.h.)---Under the Injunctions of Islam no such act of violating the
Injunctions will be permissible which does not pay attention to the text of the Holy
Qur’an and the Sunnah and its interpretation together with its Khamir’ and ‘Zamir’.

Dr. M. Aslam Khaki v. Syed Muhammad Hashim PLD 2000 SC 225 ref.

(f) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No. 13, dated 20-6-1984---BCD Circular No. 32, dated
26-11-1984---Constitution of Pakistan (1973), Art. 230---Islamisation of banking
system---Issuance of BCD Circular No-13, dated 20-6-1984 and BCD Circular No.32,
dated 26-11-1984---Issuance of Circular by the State Bank of Pakistan---Scope---Council
of Islamic Ideology had proposed and Federal Government and State Bank of Pakistan by
acting on that proposal had given direction to the Banks to finance under the mode
prescribed which was confirmed by Federal Shariat Court and eventually approved by the
Shariat Appellate Bench of Supreme Court in the case of Dr. M. Aslam Khaki.

Dr. M. Aslam Khaki v. Syed Muhammad Hashim PLD 2000 SC 225 and Dr. Mehmoodur
Rehman Faisal and others v. The Secretary, Ministry of Law, Justice and Parliamentary
Affairs, Government of Pakistan PLD 1992 FSC 1 ref.

(g) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No. 13, dated 20-6-1984---Islamisation of banking

system--Introduction of Islamic Financing---State Bank of Pakistan and all others were
duly connected and were party in the transformation of the Banks by the introduction of
the Islamic Financing to be governed by BCD Circular No. 13, dated 20-6-1984---
Circular provided the ‘Modes of Transaction’ which were categorically mentioned
wherefore the whole system commenced.

(h) Islamic Jurisprudence---

---- Riba---Concept ---Riba in its every form is forbidden and the increase or decrease of
the rate of interest does not affect the same being otherwise.

Dr. Mehmoodur Rehman Faisal and others v. The Secretary, Ministry of Law, Justice and
Parliamentary Affairs, Government of Pakistan PLD 1992 FSC 1 ref.

(i) Islamic Jurisprudence---

---- Financing in Islam---Interest (Riba) free economy---Effect on general public---

Attitudes are changing gradually and in the last few years value neutral conventional
banking has begun to trouble the conscience of an increasing number of people---
Reluctance is seen to hand over the funds to Banks and financial institutions that invest in
companies engaged in unethical and socially harmful activities---Emerging Islamic
banking scene has succeeded in achieving general acceptance.

Islamic Finance: A Euromoney Publication, 1997 ref.

Page No. 2 of 66
(j) Islamic Jurisprudence---

---- Financing in Islam---Interest (Riba) free banking---Salient features---Islamic banking

is an instrument for the development of an Islamic economic order---Islamic financial
system employs the concept of participation in the enterprise, utilising the funds at risk
on a profit and loss sharing basis which by no means implies that investments with
financial institutions are necessarily speculative---Such system can be excluded by
careful investment policy, diversification of risk and prudent management by Islamic
financial institutions ---Investment in Islamic financial institutions can provide potential
profit in proportion to the risk assumed to satisfy the differing demands of participants on
the contemporary environment and within the guidelines of the Shariah---Concept of
profit and loss sharing, as a basis of financial transactions is a progressive one as it
distinguishes good performance from the bad and the mediocre---Said concept, therefore,
encourages better resource management---Islamic Banks are structured to retain a clearly
differentiated status between shareholder’s capital and client’s deposits in order to ensure
correct profit sharing according to Islamic Law---Some of the salient features of the order
summed up.

Following are the few salient features of Islamic Economic Order:--

(1) While permitting the individual the right to seek his economic well being, Islam
makes a clear distinction between what is Halal (lawful) and what is Harram (forbidden)
in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic
activity, which are morally or socially injurious

(2) While acknowledging the individual’s right to ownership of wealth legitimately

acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and
not to hoard it, keep it idle or to squander it.

(3) While allowing an individual to retain any surplus wealth, Islam seeks to reduce the
margin of the surplus for the well-being of the community as a whole, in particular and
destitute and deprived sections of society by participation in the process of Zakat.

(4) While making allowance for the ways of human nature and yet not yielding to the
consequences of its worst propensities, Islam seeks to prevent the accumulation of wealth
in a few hands to the detriment of society as a whole; by its laws of inheritance.

(5) Viewed as a whole, the economic system envisaged by Islam aims at social justice
without inhibiting individual enterprise beyond the point where it becomes not only
collectively injurious but also individually self-destructive.

(k) Islamic Jurisprudence---

---- Riba An-Nasee’a---Explained.

(l) Islamic Jurisprudence---

---- Riba Al-Fadhl---Explained.

(m) Islamic Jurisprudence---

---- Loan---Concept---Loan is not a business transaction but is a form of ‘Sadaqa’ or

charitable transaction and the money returned must be the same as the money given.

(n) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No. 13, dated 20-6-1984---BCD Circular No. 32, dated
26-11-1984---Islamisation of Banking System---BCD Circular No. 13, dated 20-6-1984
and BCD Circular No.32, dated 26-11-1984---Effect---While issuing the Circulars
complete conscious effort was put in by the Government which included the bankers, to
bring about the transformation in the existing system in the banks for shifting to the
Islamic modes of financing.
Page No. 3 of 66
(o) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No. 13, dated 20-6-1984, Annex. I---Islamisation of
Banking System---Forms of transaction allowed by BCD Circular No.13, dated 20-6-
1984--Annexure I to BCD Circular No.13, dated 20-6-1984, had provided three basic
forms of transactions which were allowed viz. the first being, ‘Financing by Lending’,
from the title it was clear that though, otherwise in the usual parlance ‘financing’ and
‘lending’ would have in fact meant the same, but when ‘‘financing’ was used with
‘lending’ saying, that there was lending, which would mean that there was a ‘loan’ given
to finance some person---Word finance’ will have to be given a separate meaning and was
to be treated to be ‘lending’ simpliciter---’Lending’ were loans i.e. the delivery of money
to another person---Money, therefore, being a ‘debt’ created by way of lending, question
would arise whether such debt created by lending could attract a levy of further sums on
elapse of time for repayment as would be done under the normal banking system on any
money lent which would carry interest--Under BCD Circular No.13 categorically
stipulated, that, where there was a ‘lending’ the ‘debt’ so created by giving ‘money’ to
another person or financing to other person by way of lending, the Banks under cl. A(i) to
Annex. I, to BCD Circular No.13, dated 20-6-1984, were only allowed to recover
‘Service Charges’ which were not to exceed the proportionate costs of operation and as
such the Circular had forbidden interest or mark-up on loans.

(p) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No. 13, dated 20-6-1984, Annex. 1---Islamisation of
Banking System---Restrictions imposed by BCD Circular No.13, dated 20-6-1984,
Annex. 1---Financing in modern world-Practice and procedure---Service charges, extent
of---Money, in the modern world is obtained from various source, which involves cost---
If such cost is taken into account, and if that money which is lent, the usual course is that
the bankers charge interest, which carries its own spread alongwith the cost of funding
and provision of bad and doubtful debt, to arrive at a rate of interest that, till such time
the money is repaid, the debtor continues to pay an additional sum for utilising the
money---Such practice has categorically been restricted by Annex. 1 of the BCD Circular
No. 13, dated 20-6-1984---Judgment by Supreme Court in case of Dr. M. Aslam Khaki
PLD 2000 SC 225 only reaffirms the same and categorically states that nothing can be
added for the purposes of utilisation of ‘money’---BCD Circular No.13, dated 20-6-1984,
has prohibited the Batiks to charge, except for the service charges, any other amount on a
debt, to the extent that the cost of obtaining funds by the lending agency and provisions
by such lender of his bad debt and charging interest has categorically been done away
with--Service charges are only the cost of the actual Bank’s operation and the maximum
of which was to be determined by the State Bank of Pakistan from time to time as such
the same has shown the importance that has been attached to the fact that no ‘increase’ or
‘addition’ by elapse of time can be made on a ‘debt’ or ‘loan’ i. e. ‘on money lent’.

Dr. M. Aslam Khaki v. Syed Muhammad Hashim PLD 2000 SC 225 ref.

(q) Islamic Jurisprudence---

---- Qard-i-Hasana--- Meaning--- Qard-i-Hasana is a loan given on compassionate

ground, free from ‘interest’, ‘mark-up’ or ‘service charges’ and repayable, ‘if’ and ‘when’
the borrower is able to pay.

(r) Constitution of Pakistan (1973)---

----Arts. 227 & 230---BCD Circular No.13, dated 20-6-1984---Mode of financing dealt
with, in BCD Circular No. 13, dated 20-6-1984---Money whether goods or commodity---
Trade Related Modes of Financing---Scope---Various modes have been provided, one of
which is, purchase of goods by Banks and their sale to the clients at an appropriate mark-
up in price for deferred payment and same is the most utilised manner of ‘financing
---Term ‘loan’ or ‘lending’ is missing in such type of mode of financing, and it is
‘financing’ that is being used--‘Financing’ is not ‘lending’, it is a form of business
activity, which has been termed in the title as ‘Trading’, thus, the finance earned by
trading, cannot be termed as a ‘loan’ of money---Permissible mode allows purchase of
Page No. 4 of 66
‘goods’ or various commodities by Banks as such the ‘purchase’ never means purchase of
‘money’ and the same amounts to ‘lending money’ which is not allowed by the BCD
Circular No. 13, dated 20-6-1984, and even if allowed, no addition can be made to it---
Money is not ‘goods’ or ‘commodity’ that has to be purchased---’Money’ under the
provisions of cl. B(i) of Annex. I of BCD Circular No.13, dated 20-6-1984 is neither
‘goods’ nor ‘commodity’---Banks are allowed to sell goods that are required by their
clients and it is the ‘sale price’ of such ‘goods’ that is the financing.

(s) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No. 13, dated 20-6-1984---Mark-up on mark-up, charging
of---Judgment by Supreme Court in case titled Dr. M. Aslam Khaki reported as PLD
2000 SC 225---Effect---Permissible mode of financing by sale and purchase cannot carry
any mark-up on mark-up and the same is not allowed even in the event of default---BCD
Circular No. 13, dated 20-6-1984, and the judgment of Supreme Court provide the same
end result---Practice of keeping mark-up in a separate account and principal in a separate
account and charging mark-up on the principal and not on the mark-up is not
contemplated by the BCD Circular No.13, dated 20-6-1984---Once the principal debt is
determined, the debt becomes finance by lending and no mark-up, by whatever name
called, can be charged---If one were to presume that such mark-up on the mark-up cannot
be charged, but can be charged on the principal money lent, the outcome would in fact be
the same.

(t) Interpretation of statutes---

----Bypassing existing law---No one can circumvent the law, no one can be allowed to act
otherwise than what is provided by law--If a thing has to be done in a specific manner, it
has to be done in that manner alone and none else---No one can be allowed in the name
of their own profitability to cause the existing law to be bypassed, avoided or interpreted,
or usage or customs to be developed which are contrary to an existing unequivocal and
exact law.

Mian Muhammad Nawaz Sharif v. The President of Pakistan PLD 1993 SC 473; Banque
Indosuez v. Banking Tribunal for Sindh and Balochistan and others 1994 CLC 2272; Mst.
Aisan v. Manager, Agricultural Development Bank of Pakistan, Chunian 2001 CLC 57
and Muhammad Ramzan v. Citibank N.A. 2001 CLC 158 ref.

(u) Words and phrases---

---- Interest (as in financing) ---Defined--Interest is an increase on money by elapse of

time i. e. that a sum that is continued to be paid till such time the debt remains in place at
a certain rate and for utilisation of monies that may have been given to another person.

(v) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No. 13, dated 20-6-1984---BCD Circular No. 32, dated
26-11-1984---Distinction---Only thing that para.4, cl. (3), of BCD Circular No.32, dated
26-11-1984, changes is in cl. 3 of BCD Circular No.13, dated 20-6-1984, which gives the
date of 1-4-1985, to be a cut off date for financing to individual, whereas such date has
been modified to 1-1-1985 in para. 4, Cl.4 of Circular No. 32.

(w) Interpretation of statutes---

---- Provisions of statute, understanding of--Entire clause has to be read for the purpose
of understanding the provision of statute.

(x) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No. 13, dated 20-6-1984---BCD Circular No. 32, - dated
26-11-1984---Contract Act (IX of 1872), Ss. 23 & 62---Islamisation of economy --Riba---
Contract against public policy --Novation of contract---Renewal of contract of debt by
addition of mark-up---Charging mark-up on mark-up---BCD Circular No.13, dated 20-6-
1984 and BCD Circular No.32, dated 26-11-1984--- Effect--- Subsequent agreement
Page No. 5 of 66
whereby there is a settlement of previous debt or is renewal thereof, amounts to defeating
the provisions of the specific law available, and thus, same would not be the novation but
an independent agreement contemplating an actual sale and purchase which is entered
only for renewing the previous debt and shall be a void agreement---Such renewal of the
contract is window dressing and all profits shown are nothing but added mark-up---Mark-
up cannot be allowed to be added to an ‘existing debt’, as there can be no agreement
between the parties in respect of that ‘specific debt’ except that there can be enlargement
of time and that too without increase in the debt payable---No one can be allowed to play
a fraud on the existing law by trying to avert the existence of such law that prescribes that
mark-up on mark-up cannot be charged---Act of entering into a future transaction
admittedly is in respect of renewal of financing and does not contain any aspect of actual
disbursement or payment---Such contracts are contracts that are against the public
policy---Effect of BCD Circular No. 13, dated 20-6-1984 and BCD Circular No. 32:
dated 26-I1-1984, is that where a default has been made the Bank was required , take
.legal steps ---Co-relation has been developed between not charging mark-up and
proceeding to recover money instead--Mark-up cannot be added for the renewal of
debt---Taking additional amount on the debt in Riba which is prohibited.

E.A. Evans v. Muhammad Ashraf PLD 1964 SC 536; Sardar Ali v. Muhammad Ali PLD
1988 SC 287; Bank of Oman Limited v. East Trading Company PLD 1987 Kar.404;
Habib Bank Limited v. Muhammad Hussain PLD 1987 Kar. 612; Muhammad Bachal
Memon v. Government of Sindh PLD 1987 Kar. 296; Aijaz Haroon v. Inam Durrani PLD
1989 Kar. 304; Habib Bank Limited v. Messrs Farooq Comport Fertiliser Corporation
Limited and 4 others 1993 MLD 1571; United Bank Limited v. Ch. Ghulam Hussain
1998 CLC 816; United Bank Limited v. Central Cotton Mills Limited 2001 MLD 78 and
Banque. Indosuez v. Banking Tribunal for Sindh and Balochistan and others 1994 CLC
2272 ref.

(y) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---SBP Circular No. BID(Gen) 2470/601-04-90 & BID Circular No.3,
dated 20-2-1989---Re schedule or re-structure of financial obligations---Guidelines to
Banks--Nowhere in the Circulars has been stated that an additional mark-up can be
charged on a debt for extending the time for payment, it is the mark-up that has already
been charged for the purposes of arriving at marked-up price which is allowed to be
capitalised--Capitalisation only brings it in the line of the accounting system---Such was
advised through -the circulars to the Banks only for their accounting purposes and
nothing else.

(z) Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act
(XV of 1997)---

----S. 9---Contract Act (IX of 1872), Ss. 23 & 62---Void agreement---Suit for recovery of
Bank loan---Charging of mark-up on mark up ---Novation of contract---Contract against
public policy---Entering into new contract including the amount of mark-up ---Validity---
Subsequent agreements do not change the previous agreements, there is no mention or
reference of the previous agreement---Only document shown is a sanction advice which
is an internal document of the Bank---Document could be seen only to what was
approved by the Bank-- Agreement overrides all arrangements---Sanction advice, in the
presence of the agreement, vis-à-vis the customer cannot be construed to the
disadvantage to the customer---Agreement is the document signed by both parties the
contents of which have to be seen---Banks have been restrained from adopting any
measures or practice whereby they, either artificially or temporarily show an ostensibly
improved position of the Bank account--Addition of mark-up is added towards the assets
of the Bank which gives an ostensibly improved position of the Bank accounts and the
same cannot be allowed---What cannot be done directly cannot be done indirectly and
any contract which is of such nature that if permitted would defeat the provisions of any
law or which is contrary to public policy is a void agreement ---Where mark-up is
capitalised and added to the principal amount (principal means the sale price) and having
arrived at the repurchase price, any increase by way of renewal, capitalisation, booking
on accrual basis or by any means will be nothing but addition of mark-up on mark-up---
Bank can only seek recovery of the marked-up price under the first agreement---If,
however, the Bank is able to establish the fact that the amount has been actually
Page No. 6 of 66
disbursed under the subsequent agreement and it is not for the purpose of adjustment of
the previous debts and that there has been a de facto sale and purchase in commodity, in
that situation all agreements that may have been entered into for such purposes and
independent of the previous agreements, can be looked into and money is recoverable
there-against.

Dr. M. Aslam Khaki v. Syed Muhammad Hashim PLD 2000 SC 225; Hashwani Hotels
Limited v. Federation of Pakistan PLD 1997 SC 315; Mian Muhammad Nawaz Sharif v.
The President of Pakistan PLD 1993 SC 473; United Bank Limited v. Central Cotton
Mills Limited 2001 MLD 78; PLD 1962 Kar. 334; AIR 1943 PC 147; 1994 CLC 2272;
2000 CLC 1602; PLD 1964 SC 337; PLD 1983 Kar. 176; Moudood Ahmed Farooqui v.
Ameen Fabrics PLD 1983 Kar. 176 and Al-Qur’an (2:280) ref.

(aa) Contract Act (IX of 1872)---

----S. 23---Expression public policy’--Concept---Scope.

(bb) Contract Act (IX of 1872)---

----S. 171---Lien---Provisions of S.171, of Contract Act, 1872---Applicability---Lien can

only be exercised on a credit in the account of Bank to set off a liability and not by
additional credit to set off previous debt---Debit is not a credit of a customer and where it
is not a credit of the customer, provisions of S.171 of the Contract Act, 1872, are not
applicable.

(cc) Sale of Goods Act (III of 1930)---

----S.4(4)---’Agreement to sell’ becoming a ‘sale’---Conditions to be fulfilled---Transfer

of property in the goods which is the principal element of sale was a condition to be
fulfilled.

Wafaq-i-Pakistan v. Awamun Nas 1988 SCMR 2041 and Pakistan v. Public at Large PLD
1986 SC 240 ref.

(dd) Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act
(XV of 1997)---

----S.9---Sale of Goods Act (III of 1930), S.4---Recovery of Bank loan---Re-scheduling

of finance agreement---Inclusion of mark-up in principal amount---Validity---Sale only
accrues when commodity is transferred to the purchaser or consideration thereof has been
paid---Agreement which is a subsequent one does not have the ingredients of a sale and
at the best can be treated an ‘agreement to sell’, such agreement can possibly be
specifically enforced whereby, the purchaser may seek direction against the seller upon
payment of actual consideration to sell his property, but if not so done repurchase price
mentioned in the subsequent agreement cannot be taken to be a debt payable by the
purchaser--Agreements made subsequently with an aim to avoid and defeat the provisions
of law of not charging of mark-up on mark-up are void.

Dr. M. Aslam Khaki v. Syed Muhammad Hashim PLD 2000 SC 225 and Moudood
Ahmed Farooqui v. Ameen Fabrics PLD 1983 Kar. 176 ref.

(ee) Contract Act (IX of 1872)---

----S. 23---Contract out of law---Scope--Parties cannot contract out of the provisions of

Act.

Waman Shriniwas Kini v. Ratilal Bhagwandas & Co. AIR 1959 SC 689 and Anayat Ali
Shah v. Anwar Hussain 1995 MLD 1714 ref.

(ff) Constitution of Pakistan (1973)--

----Arts. 189, 203-D, 203-F & 203-GG--Decisions of Supreme Court and Federal Shariat
Court ---Effect---Decision of Supreme Court is binding on High Courts under the
Page No. 7 of 66
provisions of Art. 189 of the Constitution, whereas the order of Federal Shariat Court is
also binding under Art.203-GG subject to Arts. 203-D & 203-F of the Constitution.

(gg) Banking Companies Ordinance (LVII of 1962)---

----Ss.41 & 42---BCD Circular No. 13, dated 20-6-1984---BCD Circular No. 32, dated
26-11-1984---Banking system---Effect on--BCD Circular No.13, dated 20-6-1984 and
BCD Circular No.32, dated 26-11-1984, changed the entire law, its perspective and
modes and methods of banking, converting them into trade-related modes---Loans were
only treated to be given without any mark-up and increase except for service charges.

(hh) Interpretation of statutes-

---- Law declared ultra vires---Effect---Where a law has been declared to be ultra vires,
such declaration acts prospectively and not retrospectively.

(ii) Interpretation of statutes---

----Law declared intra vires---Effect---Where a law has been declared to be intra vires, it
is only the interpretation of the specified law that has to be taken into account--Present
judgment cannot be said to act prospectively.

(jj) Interpretation of statutes---

---- Vacuum left in a law---Where vacuum in law is left by statutory silence, the
prevailing mode having full Constitutional support would be for the application of
Islamic Common Law.

Muhammad Bashir v. The State PLD 1982 SC 139 and Fazal Ghafoor v. Chairman,
Tribunal Land Disputes 1993 SCMR 1073 ref.

(kk) Islamic Jurisprudence---

---- Islamic Financing System---’Bai Muajjal’ and ‘Murabaha’ transaction-- Concept---

Such transaction is that the Bank having purchased as re-sold the commodity at a higher
price to the customer and at such a point the customer is not required to pay the sale
consideration but what is required of him to do so within the specified period at an agreed
repurchase---Consideration for the sale of the commodity by the Bank to the seller cannot
be adjusted against this repurchase price, as it is Bai Muajjal the payment is deferred---
Consideration for the re-sale by the Bank to the customer is a contract between the two
and such becomes a debt---Such debt is, therefore, only liable to be paid by the
customer---No question of revolving facility would arise as it is the amount that is
available with the customer being the sale consideration of the sale made to the Bank.

(ll) Islamic Jurisprudence---

---- Riba---Concept---Any increase or difference in the value thereof is usurious and

comes within the definition of ‘Riba’.

Sahih Muslim, Book 9, No.3795 by Abdullah ibn Abu Qatadah; Sahih Muslim, Book 8,
No.3849 by Uthman ibn Affan; Sahih Muslim, Book 9, No.3854 by Abu Sa’id Al; Khudi
and Sahih Muslim, Book 9, No. 3856 by Abu Hurayrah ref.

(mm) Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act
(XV of 1997)---

----S.10---Leave to defend the suit, grant of--Bona fide dispute---Charging mark-up on

mark-up---Judgment by Supreme Court in case titled Dr. M. Aslam Khaki reported as
PLD 2000 SC 225---Effect---Where the Bank had charged mark-up on mark-up from the
defendant, such was genuine and bona fide dispute---Leave to defend the suit was granted
in circumstances.

(nn) Banking Tribunals Ordinance (LVIII of 1984)---

Page No. 8 of 66
----S.2(e)---BCD Circular No. 13, dated 20-6-1984---Expression ‘accommodation’ or
facility’---Meaning---Word ‘accommodation’ or facility’ has to be read in conjunction
with the words ‘not based on interest’ and in reading the fact that it is not based on
interest, reference has to be made to the proceedings of BCD Circular No.13, dated 20-6-
1984 issued by State Bank of Pakistan in respect of the finances to be granted in terms of
the Islamic System of Banking.

(oo) Banking Companies Ordinance (LVII of 1962)---

----Ss.3-A & 25---Directions given to Banking Companies---Effect of---Powers of State

Bank---State Bank of Pakistan, under the provisions of Ss.3-A & 25 of Banking
Companies Ordinance, 1962, can give directions to the Banking Companies and the Non-
Banking Financial Institutions (N.B.F.Is.) to act in accordance with such directions---
Such directions are binding on all the Banks and Non-Banking Financial Institutions and
the same are as a consequence of promulgation of the statute or an Act of Parliament---
State Bank of Pakistan can give the directions to the Bank whenever it is satisfied that it
is necessary or expedient in public interest.

Hashwani Hotels Limited v. Federation of Pakistan and others PLD 1997 SC 315 ref.

(pp) Islamic Jurisprudence---

---- Financing in Islam---Charging of interest by Banks---Banks are required to proceed

in the manner that, they would not charge any interest and will act in accordance with
law, i.e. Banking in the Islamic System of Financing.

(qq) Constitution of Pakistan (1973)---

----Art.2A---Objectives Resolution---Effect on Fundamental Rights given in the Constitu-

tion ---Constitution has adopted the Injunctions of Islam as contained in the Qur’an and
the Sunnah of the Holy Prophet (p.b.u.h.) as the real and effective law and Injunctions are
now the positive law---Provisions of Art.2A of the Constitution have made effective and
operative the sovereignty of Almighty Allah and it is because of that Article that the legal
provisions and principles of law, embodied in the Objectives Resolution, have become
effective and operative---Every man-made law must now conform to the Injunctions of
Islam as contained in the Qur’an and the Sunnah of the Holy Prophet (p.b.u.h.)---Even
the Fundamental Rights as given in the Constitution must not violate the norms of Islam.

Zaheeruddin and others v. The State 1993 SCMR 1718 ref.

(rr) Banking Tribunals Ordinance (LVIII of 1984)---

----S.6---Recovery of Bank loan---Roll-over agreement of Bank loan---Void

agreements--Charging of mark-up on roll-over agreement---Validity---Roll-over
agreements that had been entered into and not acted upon, as no disbursements had been
made, were void---No claim could be made by the Banks on the basis of the
agreements---All documents, whether negotiable instruments or otherwise were, as a
consequence, also void---No roll-over could be allowed, and that the amount payable
would be the amount on the basis of the agreement against which disbursement had been
made---Where the statement/break-up of liability filed by the plaintiff-Bank was not from
the actual disbursement, the suit was decreed in the sum of amount actually disbursed.

Habib Bank Limited v. Qayyum Spinning Limited and others 2001 MLD 1351; Dr.
Aslam Khaki v. Syed Muhammad Hashim PLD 2000 SC 225; U.B.L. v. Central Cotton
Mills Ltd. 2001 MLD 78; PLD 1962 Kar. 334; AIR 1943 PC 147; 1994 CLC 2272; 2000
CLC 1502; PLD 1964 SC 337; PLD 1983 Kar. 176; Webster’s Dictionary; Oxford
Dictionary; Sirajuddin v. Sardar Khan 1993 SCMR 745; Muhammad Ramzan v. Citibank
N.A. 2001 CLC 158; U.B.L. v. Chaudhary Ghulam Hussain 1999 PTCLR 162 (Lahore);
NLR 1988 TD 403; U.B.L. v. Messrs Novelty Enterprises PLD 1998 Kar. 199 and Habib
Bank v. Farooq Compost Fertilizer Corporation Limited 1993 MLD 1571 ref.

(ss) Banking Tribunals Ordinance (LVIII of 1984)----

Page No. 9 of 66
----S.6---Recovery of Bank loan---Onus to prove---Defendants guarantors denied signing
of any guarantee---Effect---Where there was denial, the onus was on the plaintiff-Bank to
prove that the gurantees were signed by the defendants guarantors---No evidence was led
by the plaintiff-Bank to prove that the signatures contained on the guarantees were in fact
the signatures of the defendants guarantors---Defendants guarantors were not liable to
pay the loan---Suit was dismissed accordingly.

Azizur Rehman for Plaintiff.

Saalim Salam Ansari and Abid Sherazi for Defendants.

Date of hearing: 16th May, 2001

JUDGMENT

The present suit has been filed by the plaintiff against the defendants for recovery of
Rs.33.081 millions as due on 30-12-1994. The said suit was filed under the Banking
Tribunals Ordinance, 1984. The facts are, that the defendant No. 1 was sanctioned by the
Plaintiffs’ I.I. Chundrigar Road Branch on 9-7-1987 a sum of Rs.6 million as cash finance
on mark-up basis wherefore, the defendant No.l executed an agreement for financing for
short-medium-long term on mark-up basis (IB-6) whereby, it was agreed that the
customer namely the defendant would sell to the bank the raw materials finished goods!
machinery etc. for a total sum of Rs.6 million. In pursuance to the said agreement, the
various goods were bought and the consideration for purchase was paid to the defendant.
No. 1. The second portion of the said agreement provided for purchase by the customer of
the same goods at a marked-up price known as the “purchase price” being Rs.7.2 million
calculated by the bank and agreed by the defendant No.1 The said amount was re-payable
in lump sum. The prompt payment bonus of Rs.0.258 million was also provided in the
said agreement. The re-payment of the debt thus, credited on account of purchase by the
defendant No.1 from the bank for payment in instalments/lump sum that a subsequent
future date was secured by a demand promissory note, dated 9-7-1987 for Rs.7.200
million. In addition to the above, the defendants Nos.2 to 5 secured the said amount by
guaranteeing repayment thereof under a letter of guarantee, dated 9-7-1987 filed as
Annexure-D to the plaint and referred to in the affidavit in evidence as Exh. P/4. In
addition to the above, according to the plaintiff the defendant had requested the plaintiffs
branch by an application an agreement to open L/Cs which were opened. The payment
under the Bill of Exchange were to be made by the plaintiff amounting to Rs.3.7 million
being deferred payment L/C under U.S. Aid, Rs.1.8 million finance against imported
merchandise and Rs.1.5 million in N.I.D.F. plus mark-up thereon. The said amount
included the amount of Rs.7.2 million secured by mortgage of the property of the
defendant No.l and confirmed by the defendant No.l by a memorandum of deposit of title
deed as Annexure-H/Exh.P/8 alongwith the affidavit-in-evidence. The said mortgage is
also registered with the Registrar of Joint Stock Companies by a Certificate of Mortgage,
dated 22-9-1988 Annexure-I/Exh.P/9.

2. The said account was transferred from the I.I. Chundrigar Road Branch to the
Corporate Branch of the Plaintiff Company where fresh agreements were entered into
which have been filed with the plaint as Annexures R and S (Exh.P/18 and Exh.P/19).
Under the said agreement the same amount namely Rs.7.20 million was mentioned as re-
purchase price with a prompt payment bonus of Rs.0.258 million. In the second
agreement, however, it seems that the said Bills of Exchange were purchased by the bank
for Rs.1.5 million and sold to the defendant No.l for Rs.2 million re-payable on or before
31-12-1990. Another amount being N. I. C. F. was admitted by the defendant by a letter
of admission wherein the liability to the extent of Rs.9,893,834.86 was admitted. The
balance confirmation has been filed alongwith the plaint as Annexure-T (Exh.P/20). The
said N.I.C.F. facility was, in 1991 it is stated that further documents were executed
whereby, the said N.I.D.F. facility was increased to Rs.I2.453 million being the purchase
price on a sale price of Rs.9.893 million with a prompt payment bonus of Rs.0.935
million. Such agreement is filed as Annexure-V/Exh.P/22. The said amount under the
second agreement N.I.C.F. facility was guaranteed by a letter of guarantee by the said
defendants Nos.2 to 5 Annexures-X, Y,.Z and Z-I (Exhs.P/24 to P/27). It is the case that
in 1993 the said N.I.C.F. facility was again renewed whereby the amount of Rs.12.223
Page No. 10 of 66
million which was the purchase price in Exh.P/22 became the sale price and the purchase
price was enhanced to Rs.16.074 million with a prompt payment bonus of Rs.1.406
million. The other three being the N.I.C.F. facilities (forced) after adding together the
three various N.I.F.F. facilities into one single N.I.C.F. facility became Rs.13,953,846
which, was admitted by entering into another agreement Annexure-Z 8/Exh.P/34 which
was signed by the defendants. This confirmation only was in regards to the total amount
and no additional mark-up or purchase price was mentioned in the said agreement. On
account of the various finances given, the plaintiffs have, therefore, claimed a decree
against the defendants in the sum of Rs.39.747 million jointly and/or severally as also a
mortgage decree with liquidated damages and future mark-up from 1-1-1995 till
realization as also costs of the suit.

3. The written statement has been filed by the defendants in which preliminary objections
as to the maintainability of the suit were taken on the ground that in fact the suit is for
rendition of account and not a suit for recovery and that the claim of liquidated damages
is unlawful. It was further stated that the agreements are not witnessed and are violative
of Article 17(2) of the Qanun-e-Shahadat Order, 1984 and that the person filing the plaint
had no authority to verify the same. The suit has been filed as a mortgage suit. The
objection has been taken that the mortgage per the Islamic financing and the law
prevalent could only be that by possession and, therefore, the memorandum of deposit of
title deed and mortgage are invalid and cannot be looked into. The objection is also taken
that the amount includes exaggerated amount of mark-up and the same cannot be
allowed. The execution of the guarantees has also been disputed by the defendants Nos.2
to 5 as, according to the said defendants, the same are not actual signatures of the
defendants. The name is not decided and cannot be accepted in view of Article 17(2) of
the Qanun-e-Shahadat Order, 1984. In addition to the denial of guarantee, the defendants
have also denied the payments claimed by the plaintiff on account of L/Cs and according
to the defendants, the same had been paid off. However, the plaintiffs have admitted the
factum of the payment to the extent of Rs.6,848,855 as, according to them, the same has
been admitted in Exh. D/11. The defendants have filed a statement of account which
according to them is under the formula given by the State Bank of Pakistan which is as
follows:---

“(a) N. I.C.F. Account

Outstand- Mark- Mark-up Total out- Less

ing up of of cushion standing adjust
Balance 365 period of before re- ment
Amount days adjust- payment
O.D. on 210 ment
30-6-1987 days

UPTO 30-6-1994

Rs. Rs. Rs. Rs. Rs.

4006142 878161 505243 5389546 4083524

Net Balance After Adjustment(s) Rs.1306022

(B) N.I.D.F. Account

1234325 139726 8039111454441 135000

Net balance outstanding after Rs.1319441

adjustments/re-payments

(C) U.S. AID L/c Account’s outstanding Rs.5768798

Page No. 11 of 66
(D) O.S. P.A.D. L/c Account’s outstanding Rs.580000

Grand outstanding/balance Rs.8974261

4. The defendants have vehemently contested the addition of mark-up on mark-up and
subsequent agreements, stating that the same is unlawful and cannot be allowed. In fact
what has been claimed is that the subsequent agreements are void, not having been acted
upon. The plaintiffs have also claimed damages on account of breach of agreement.

5. The following issues were framed

(1) Whether the plaintiff Bank has charged mark up on mark-up? If so, what is its effect?

(2) Whether the suit is bad for non joinder of necessary party?

(3) Whether defendants Nos.2 to 5 are liable as guarantors and if so to what extent?

(4) Whether the defendants are liable to pay the suit amount?

(5) What should the decree be?

6. Before all the issues could be argued, I had asked Mr. Aziz to how Mark-up, on mark-
up could be charged in view of the clear Circular of the State Bank of Pakistan. I had also
asked Mr. Aziz, as to under what law can he take refuge on the agreements, against which
no disbursements had, admittedly been made, and were only for roll over of an existing
debt. I had also pointed out, that the agreements do not otherwise disclose that there
existed a debt earlier and that the agreements are in fact for the purchase by the bank and
sale to the borrower. Mr. Aziz was very candid and said that in the event that this Court
were to apply the principle of the said the State Bank’s Circulars, in fact it would be the
bank who would have to pay back the amount to the defendant. It was pointed out that in
an order, in the case of Habib Bank Limited v. Qayyum Spinning Limited and others
2001 MLD 1351 it was held that Mark-up on Mark-up could not be charged. It was also
held that all agreements which were not acted upon by actual disbursement, and which
were meant for the purposes of roll over of an existing debt were void and could not be
considered. In fact in the case of Dr. Aslam Khaki v. Syed Muhammad Hashim PLD 2000
SC 225 such has also been held.

7. Mr. Aziz stated that notwithstanding the said decisions, he would wish to reiterate his
contentions that he had made in the case of Qayyum Spinning and in the unreported case,
being Habib Bank Ltd. v. Hafiz Textile Mills Ltd. Suit No.8-153 of 2000.

8. Mr. Aziz stated that, with regard to S.B.P. Circulars Nos.13 and 32, dated 20th June,
1984 and 26-11-1984 respectively. He stated that two. Circulars arc among many which
S.B.P has been issuing from time to time and the two Circulars in actual fact have to be
examined. The First Circular No.13 according to him will not be attracted where renewal
of loan is made subsequently. since “renewal” amounts are merely extension and
continuation of the earlier agreement between the parties. Circular No.32 merely pertains
to different items of Bank charges and, therefore, cannot be made basis for striking down
the contract between the parties. In other words Circular No.32 does not have the effect
that it over rides Circular No. 13. In the case of U.B.L. v. Central Cotton Mills Ltd.
reported as 2001 MLD 78 (S.B.) deals with the said two Circulars. The learned Single
Judge of the High Court of Sindh Karachi came to the conclusion that Circular No. 13 is
not overridden by Circular No.32. He said that in S.B.P. Circular No. BID(Gen)
2470/601-04-90 of 17-6-1990 which was addressed to all Banks with regard to the
treatment to be given to re-scheduled loans and capitalisation of mark-up/interest and the
guidelines were given. In clause 2.1 of the said Circular, the “restructured” loan has been
defined as one whose terms and conditions have been modified principally because of
deterioration in the borrowers financial condition, in order to provide reduction in interest
rate or principal or a capitalisation of interest accrued. Clause 2.2 refers to a
“rescheduled” loan and defines it as one in which effective interest rate terms remain
unchanged from original terms but principal re-payment terms have been extended
Page No. 12 of 66
because of project delays and such loan has been defined as not a restructured loan.
According to him, clause 7.1 provided for capitalised mark up/interest on loans and
defined the words as ‘uncollected interest’ which is added to ‘unpaid principal’ in
accordance with contractual loan agreement.

9. It is his case that in the said Circular and the guidelines attached to the same, the word
“interest” has really been utilized to mean interest and/or mark-up as is evident from line
5 of the Circular itself. He said that on the date of Circular i.e. 17-6-1990 five years, had
elapsed from the date on which the system of mark-up had been introduced. Guidelines,
according to him were issued by H.B.L. to its various officers in order to deal with re-
scheduling, restructuring and writing off which was contained in the aforesaid Circular of
S.B.P., dated 17-6-1990. He said that the guidelines issued by S.B.P. were attached.
Circular No.4 of 17-2-2000 was also issued by S.B.P. under the heading “Re-
scheduling/restructuring of non-performing loans”. The Banks as per Para (i) were
required to continue to provide for rescheduled/restructured loans/advances for a period
of one year (excluding grace period). Also while reporting to C.I.B., it was made
incumbent that such loans/advances should be shown to S.B.P. as “re-scheduled/re-
structured” instead of ‘defaults’. In other words when Banks finalise re-scheduling/re-
structuring arrangements with the borrowers customers, S. B. P. does not treat the
borrowers/customers as having committed defaults. In actual fact in some cases if re-
scheduling/re-structuring is not carried out, it would create lot more problems for
borrowers/customers who actually stand to gain from the new agreements. Additionally
he stated that an unreported judgment, dated 8-1-1999 was passed by a Division Bench of
this Court in Special High Court Appeal No. 1871 of 1998 (Messrs Hardware
Manufacturing Corporation (Pvt.) Ltd. and 5 others v. U.B.L.). It was held that by
executing a Finance Agreement, the appellants liability, the original contract/agreement
stood extinguished and the earlier agreement was substituted by a later Finance
Agreement/contract. A reference was made in this connection by the Division Bench to
two reported cases i.e. PLD 1962 Karachi 334 and AIR 1943 P.C. 147. He said that the
said order of the Division Bench is binding on this Court, and therefore, what is decided
has to be acted, and no judgment otherwise can be passed.

10. Mr. Aziz argued the position of Novation of Contract and stated that in the unreported
judgment of the Division Bench of the High Court of Sindh, dated 8-1-1999, the decision
which was reached was in line with a number of cases which had mentioned, being 1994
CLC 2272 (Karachi) D.B. and 2000 CLC 1502 Karachi S.B. He said that it was held by
the Division Bench of the High Court of Sindh Karachi that, where a fresh agreement was
entered into and the defendant acknowledged that a certain sum was due from him which
formed consideration under the new agreement, the liability of the defendant under the
original contract was completely extinguished and there was a fresh contract substituting
the old contract and which was in the nature of novation of a contract within the meaning
of section 52 of the Contract Act, 1872. The Division Bench has placed reliance for
purposes of interpretation of section 62 of the Contract Act on PLD 1964 SC 337.
Likewise he said that in the second reported the conclusion of the learned single Judge
was that section 62 of the Contract Act clearly provides that if parties to a Contract agree
to substitute a new contract for the old one or to rescind or alter it, the original contract
between the parties need not be performed and that, there is nothing in the Contract Act
or in any other law which prohibits the parties from altering terms of the original contract
or executing a new contract to substitute the old one. It was further held that the
subsequent agreement amounted to novation of the old contract, the consideration of
which was the agreement of the Bank to extend time for payment of the outstanding
liabilities of defendant No. 1.

11. On the point of actual disbursement it was argued by Mr. Aziz stating that there need
not be any actual disbursements when a Bank allows re-scheduling or re-structuring of an
existing debt. Therefore, in re-scheduling, the liability to pay to the Bank is amended or
recast giving further time for re-payment to the Bank. He said that, in this connection the
definition of the word “debt” would also be relevant and for the meaning of the word, he
has relied on PLD 1983 Karachi 176 (D.B) where it was held that a debt in the hand of a
debtor does not belong to him but it belongs to the person to whom it is payable. A debt is
something that is owned by one person to another. It is an obligation and liability to pay
or return something. He states that similarly in the above referred case reported in 2000
CLC 1502 (Karachi) (S.B.), the learned Single Judge utilized the words “outstanding
Page No. 13 of 66
liabilities of defendant No. 1 “ which was treated as consideration for the new contract.
Thus, the outstanding liabilities constituted the debt payable to the Bank. Since the
acknowledgement of liability contained in the fresh agreement is available, fresh
disbursements obviously was not required, as otherwise here would be duplication, and
the Bank will be out of pocket by actually disbursing the outstanding amount again to its
borrower/customer.

12. Mr. Aziz said that the judgment reported in PLD 2000 SC 225 is actually the one
passed by Shariat Appellate Bench of the Supreme Court consisting of 5 Judges. The
Supreme Court has given directions and in any case until 30-6-2001 the present laws will
continue to be valid. Therefore, the contents of the judgment have not come into force so
far. A large number of steps have to be taken by the Federal Government and other
agencies including Banks for different phases of transformation which is still to be
effected. He had also referred during the arguments to the various Articles of the
Constitution of Pakistan, inter alia Article 203-H(1) which provides that all pending
proceedings in any Court or Tribunal shall continue and the points in issue therein shall
be decided in accordance with the law for the time being in force. He referred to a
judgment of a learned Single Judge of the High Court of Sindh, Karachi, in Suit 1700 of
1999 where it was held that the said judgment of the Shariat Appellate Bench of the
Supreme Court and Injunctions of Islam cannot be pressed into service to avoid payment
of outstanding liabilities since verse 2280 does not create a right in favour of a debtor for
payment of what is acknowledged as due.

13. Mr. Aziz said that Industrialists and Traders make, lot of money by borrowing from
Banks, etc. and the money really comes from even small depositors who put their money
into the hands of the Banks. The interest or mark-up paid by these Industrialists and
Traders is included in their accounts and they get benefit of increased prices for their
produced/manufactured items and they are allowed to reap benefits by showing
interests/mark-up as cost of production which interest/mark-up is allowable expenditure
in income tax returns.

14. Mr. Aziz said that therefore rescheduling, re-structuring and entering into fresh
agreement to renew the facility by adding mark-up is valid. It shall only be effective after
the judgment of the Shariat Appellate Bench of the Supreme Court becomes applicable.
Mr. Aziz adopted the arguments made by Mr. Ejaz Advocate in the Qayyum Spinning
case and argued that notwithstanding the fact that the said judgment is not applicable, it is
necessary to dilate upon the history as to how and what was the actual perspective that
the bankers had understood in respect of the said system. He has referred to the judgment
in the case of Dr. M. Aslam Khaki (supra). He stated that the said judgment also notices
the manner in which the system was to work and referred to a note that has been
mentioned in the judgment of Mr. Junejo. He has stated that the State Bank of Pakistan
considered that the entire transaction of purchase and re-purchase as a notional
transaction, and that, because it was considered as a notional transaction where, the mark
up was not serviced, rescheduling was allowed by addition of mark-up on the un-serviced
mark-up. Such rescheduling/re-structuring was the only way that the Banks could save
their money, and earn thereon. He stated therefore, renewal by way of entering into afresh
agreement was considered appropriate. He stated that the Circulars namely BCD Circular
No.13 and BCD Circular No.32 did not give any idea how the transactions were to take
place and it was, therefore, a belief that such transactions could be entered into or done.
He said that it was common knowledge that notional sale and such like transaction were
valid transaction. He stated that disbursement for purchase in such notional transaction
was not necessary and that the amount of debt on a particular date could be deemed to be
proper and appropriate disbursement. Mr. Aziz -stated that if a view is taken by this Court
that subsequent agreements are invalid agreements it will cause an irreparable injury and
harm to the Banks whereby, the banks may in fact collapse. In the judgment of Dr. M.
Aslam Khaki (supra) a discussion on the concept of Negotiable Instruments Act, 1881 has
been referred to sections 79 and 80 of the said Act have also been cited. Reference has
been made to a booklet on mark-up system by Mr. Justice Moulana Muhammad Taqi
Usmani in which a detailed discussion has been held as to the mark up system as is in
vogue and has been in practice in the Banks. It has been pointed out that the practice
adopted under the garb of mark up is authoritative of the conditionalities attaching to Bai
Moajjal as the permissibility of such a transaction is dependent on fulfilment of the
various conditions as enshrined in the Quaranic Injunctions in the order of the Court. It
Page No. 14 of 66
has been stated by Mr. Aziz that in BCD Circulars Nos.13 and 32, the concept of Bai
Moajjal or Murabaha, has not been stated and what was categorically said in the
Notifications of the State Bank of Pakistan, was that mark up could be charged on a
transaction, but mark-up on mark-up could not be charged, in that there was nothing to
stop the Banks from entering into such fresh agreements for renewal, re-structuring or re-
scheduling. His emphasis lay on the fact that, upon mark up having been charged under
the agreement the same became a debt and such debt became due and payable within the
stipulated period. He said that in the books of accounts such was a credit payable by the
debtor, therefore, the debtor was in fact using the money of the creditor, namely the Bank.
According to him, subsequent agreements were nothing but agreements for sale and
purchase where, the commodity being said was notional and that in fact, the debt payable
under the first agreement became the notional sale of notional goods at a purchase price
of such goods, and mark-up was added to arrive at a notional re-purchase price and so
forth. He said that it has now been explained as to how the bank should finance and, what
is the meaning of ‘Ribs’ or mark-up on mark-up. He stated that no doubt, now under the
new definition that has been given by the case of Dr. M. Aslam Khaki, subsequent
agreements would be deemed to be invalid agreements on the account of the fact that the
Supreme Court has held that purchase if any, has to be actual purchase and not a notional
transaction. Mr. Aziz, Advocate further submitted that the question of increase on money
was also not understood by the Banks, in fact State Bank of Pakistan had also not
understood the concept of money which has now been stated in the said judgment of the
Supreme Court. He stated that it could not have been even thought of or understood that
money could not earn money by way of additional mark-up on a debt. According to him,
it is this judgment which has cleared the concept of money and that in doing so it is stated
that the money is not a ‘commodity’ and, therefore, cannot be traded like a trade of a
commodity. He stated it has been held, therefore, that only commodities could be traded
which were in accordance with the principle that “Allah has allowed trade and prohibited
Riba”. According to him, therefore, in view of the above Honourable Shariat Appellate
Bench of the Supreme Court had given a regulatory timetable whereby, a date of
implementation has been given. He stated that under the measures to be taken for the
purposes of creating an infrastructure and a legal framework a summary has been given
in the order passed by the Court. It was stated that the solution to the economic revival
has to be taken into account and that the Federal Government shall cause a board to be
created for arranging exchange of information of financial institutions about feasibility-of
project etc. and all technical assistance with regard to the anomalies emerging in the
practical operation of financial institutions or difficulty arising out of the operation of
financial practice etc. and that all this was to be done by the 30th June, 2001, whereafter
the laws and provisions of laws to the extent that those declared to be repugnant of
Injunctions of Islam shall cease to have effect from 30th June, 2001.

The question is whether the amount of purchase price (which has been stated to be the
debt of the customer) can be increased? And if so in what circumstances?

The answer to this question depends on the meaning ascribed to the word “increase” and
accordingly the increases in the amount of purchase price are classified as follows:

(a) In ceases which are not permissible.

(A) Mark-up on any overdue instalment, where the finance facility is payable in
instalments and the amounts and due dates of instalments are specified in the Agreement.

(B) Mark-up on overdue amounts in cases of lump sum payment agreement.

(b) Increases which are permissible

Where the amount of mark-up is to be booked by the Banks on accrual basis in each
quarter on the basis of outstanding balance and such outstanding balance also includes
the mark-up for the previous quarters.

In these cases, the Banks can be allowed to charge mark-up on the outstanding balance
(inclusive of previous mark-up debits) as the Bank under its general lien and right to set-
off is allowed to apply the credit balance of the Customer to offset the liabilities of the

Page No. 15 of 66
Customer. Accordingly any mark-up recovered by the Bank by debiting the account of
the Customer should be recognized as a withdrawal by the Customer.

(B) At the time of fresh sanction (renewal) of the working capital facilities, sometimes
the amount of the facility is enhanced. The amount of the fresh finance facility is used to
adjust the outstanding liabilities of the Customer in respect of the previous facility.
Naturally the outstanding amount of the facility also includes mark-up. It is sometimes
argued that the amount of the second facility amounts to mark-up on mark-up or
capitalization of mark-up or roll-over.

Fresh finance facility is granted to the Customer by the Bank. The amount of the facility
can be utilized by the Customer for any purpose and the mere fact that the Customer used
such amount to pay back its liabilities which included some amount of mark-up would
not make the amount of the fresh facility mark-up on mark-up.

The proposition would be further clarified with the converse argument i.e. the Customer
could have paid the outstanding liabilities from its own resources or by obtaining a
finance facility of equal amount from a separate institution. In such a case the argument
of the later facility being mark-up on mark-up, capitalization of mark-up or rollover
cannot be sustained.

In such cases the enhanced amount of the facility or the such amount of the facility as has
been used to settle earlier liabilities on account of mark-up cannot be termed as increase
in the purchase price and is, therefore, permissible.

(C) It also needs to be clarified that the grant of afresh finance facility of a similar nature
particularly in cases of working capital facilities is not restructuring or re-scheduling of
the liabilities. Accordingly, any increase in amount of, the later facility, is not increase the
marked-up price of the earlier facility.

(D) A number of times, the overdue facilities (mostly long term) are restructured or
rescheduled. Again restructuring and re-scheduling of the over due facilities is structured
in the following manner:

* by way of grant of fresh facilities

* by way of a new schedule of payment

15. Mr. Aziz-ur-Rehman, Advocate further argued that under the Banking Companies
Ordinance, 1962 the word loans, advances and credit have been defined to include
finances as defined in the Banking Tribunals Ordinance, 1984. The Ordinance in section
2(e) defines a finance to mean:---

“(e) ‘finance’ includes an accommodation or facility under a system which is not based
on interest but provided on the basis of participation in profit and loss, mark-up or mark-
down in price, hire-purchase, lease, rent-sharing, licensing, charge of fee of any kind,
purchase and sale of any property, including, commodities, patents, designs, trade marks
and copyrights, bills of exchange, promissory notes or other instruments with or without
buy-back arrangement by a seller, participation term certificate, musharika certificate,
modarba certificate, term finance certificate or any other mode other than an
accommodation or facility based on interest and also includes guarantees, indemnities
and any other obligation, whether fund based or non-fund based, and any accommodation
or facility the real beneficiary whereof is a person other than the person to whom or in
whose name it was provided and”

Mr. Azizur Rehman states that finance includes “accommodation or facility”. According
to him an accommodation in terms of the Webster’s Dictionary means:---

“Accommodation ....1. Act of accommodating, or state of being accommodated; specific,

a act of fitting or adapting or state of being fitted or adapted; adaptation; adjustment:---
often followed by to. “The organization of the body with accommodation to its
functions.” Sir M. Hale: B Adaptation of conduct in order to comply or conform.

Page No. 16 of 66
obligingness Provision of what is needful or desirable for convenience; specif., the giving
of pecuniary aid.

According to him, the mark-up or interest that is accrued on a loan or finance is

capitalised and once it is capitalised it becomes a part of the loan and cannot be separated
or distinguished. Mr. Azizur Rehman refers to the meaning of the word capitalise as
contained in Webster’s New International Dictionary of the English Language, Second
Edition, 1937 which is as under:---

“Capitalise... 1. To convert into capital, or to use as capital; hence, to make use of for the
sake of profit; to turn to one’s immediate advantage.”

Mr. Azizur Rehman has also referred to the case of Hashwani Hotels Limited v.
Federation of Pakistan and others (PLD 1997 SC 315) in which it has been held:---

“One view can be that each amount of disbursement will constitute an accommodation or
loan agreement, the other view can be that the disbursements of the various amounts
made by the Banks were in performance of the above three loan agreements already
executed. If we were to prefer the above first view, it will affect the vested right of the
Banks to recover interest at the rate of 14% under the loans agreement and, therefore, the
construction which does not affect the vested right of a party is to be preferred. “

It has further been held:--

“A perusal of the above quoted definition indicates that it includes loan of money and,
therefore, it can be held that the word accommodation’ used in the above Circular of 15-
2-1981 refers to loan agreement...

Thus, according to Mr. Azizur Rehman, the agreement entered into between the plaintiff
and the defendant is one of accommodation where the loans have been re-structured and
upon re-structuring of loan the Banks have accommodated the defendant and, therefore, it
is obligatory upon the defendant to pay back the entire amount agreement agreed. upon.
According to Mr. Azizur Rehman. the word obligation has been defined in the Oxford
Dictionary to mean:---

“Obligation ..1. The act of obligating, or binding, one self to a course of action, a putting
under a promise, vow, or oath, as in initiation into an organization (see Obligate, v. 5)

2. The agreement, promise, contract, oath, or the like, by which one is obligated or
bound.

3. That which a person is bound to do or forbear; any duty imposed by law, promise, or
contract, by the relations of society, or by courtesy, kindness, etc.

4. That which obligates or constrains, the binding power of a promise, contract, oath or
vow, or of law; as, the obligation of conscience, of affection, or of ideals.

5. State of being bound ‘legally or morally’. Bound in filial obligation.

6. State of being indebted for an act of favour or kindness; also the act itself; as, to place
others under obligations.

7. Obs. a Binding tie. b Liability c Civility.

8. Law. A bound with a condition annexed, and a penalty or non fulfilment. In a larger
sense, it is a formal and binding agreement or acknowledgement of a liability to pay a
certain sum or do a certain thing. “

He sates that as there was an accommodation it was the obligation of the defendant to
have abided by the contract and promise made as, the oblieation is in fact a state of being
indebted for an act done by the plaintiff for him.

Page No. 17 of 66
16. Mr. Azizur Rehman further states that under section 25 of the Banking Companies
Ordinate, 1962, the State Bank has exceeded its authority to issue such directions.
According to him under section 25 of the said Ordinance, the State Bank of Pakistan
could have issued such a direction as legislation in respect of Islamic modes of financing
could only be done by legislation. He refers to section 21 of the Enforcement of Shariat
Act, 1991 and states that under the said provision all laws are to be enacted exclusively
by Mqjlis-e-Shoora (Parliament) and the Provincial Assembly as the case may be and no
law shall be deemed to have been made unless it is made in the manner laid down in the
Constitution. Mr. Azizur Rehman states that this is a deeming provision and in view of
the definition given of the word “deem” in the case of Sirajuddin v. Sardar Khan (1993
SCMR 745) a fiction of law has been created and that any law that is promulgated or
devised through a mode other than by an Act of the Parliament or the Provincial
Assembly shall be void and not liable to be acted upon. According to him, therefore, the
State Bank Circulars are invalid and void thus, incapable of being acted upon.

17. Mr. Aziz thus, concluded the arguments saying that in holding that the banks have
unlawfully re-scheduled/restructuned/renewed by entering into fresh agreement adding
mark-up the Batik shall collapse.

18. The defendants have argued and have filed their Written Arguments in which, they
have reiterated the contents of the Written Statement. It is stated that the plaintiff has
claimed that (1) N.I.C.F. (2) N.I.D.F. (3) P.A.D Finance Facilities were allowed/granted to
defendants Company. The defendants have summarized the claim as follows:---

(1) N.I.C.F In Million

(a) Principal 9.857} This liability is

(b) Mark-up 1.874} claimed on the

(c) Misc. Charges 0.088} basis of Finance

Total: 11.819} Agreement i.e.

9th May, 1993.
Annexures Z-5
and Z-34 of the
Suit i.e. A/C
No. 01-670
2164-6

(2) N.I.D.F.I

(a) Principal Amount Claimed on the

13.837} basis of

(b) Mark-up 3.691} agreement, dated

(c) Misc. Charges} 13-5-1993

and Exp. 0.141} Annexure Z-8

Total: 17.668} and Bank

Statement A/C
No.741-0256-8
Annexure: Z-35
(3) N.I.D.F.II

Principal 0.116} Annexure: Z-35

} Account
No. 741-0237-2

(4) P.A.D.

(a) Amount disbursed 0.581} Annexure: Z-36

Page No. 18 of 66
(b) Mark-up 0.158} Account No.775-

Total 0.739) 0035-9

Annexure:

19. The defendants claim that, the plaintiff claimed these outstanding liability on the basis
of above documents and prayed for the recovery of the finance by sale of mortgage
property, by defendant No.1, with Mark-up, relying upon the Judgment of Honourable
Lahore High Court reported as 2001 CLC 158 (Lahore) Muhammad Ramzan Versus
Citibank N.A.

20. It is stated that, the claim could only have been granted in light of Finance
Agreement, Annexure. ‘ V’ to the plaint, dated 1-1-1991 (N. I. C. F. Accounts) where the
purchase price is shown at Rs.9.893 (M) and Buy-back at Rs.12.453(M) and the
(Agreement, dated 9-5-1993 Annexure Z-5 where purchase price is RsA2.453 and buy
back price Rs.16.074(m). It is submitted that the amount was never disbursed to
defendant No. 1 under the said agreement. It is further stated, that the plaint also does not
disclose this fact.

21. It was further stated that, in the N.I.D.F A/C i.e. Agreement, dated 13-5-1993
Annexure Z-8, no disbursement is shown, but only execution of agreement is mentioned.
The plaintiff witness has not staid at any place in his evidence that there was any actual
disbursement. In fact, he has admitted that “---Nothing was disbursed in cash to the
defendant No. 1 excepting the amount of Rs.7500 million., No explanation has been
advanced for the other agreements and the claim.

22. The assertion of the defendants is that they had in their written statement, denied the
quantum of amount as claimed by Bank. The defendant’s witness in his evidence
Exh.No.6, has submitted the explanation regarding the Loan facility. It is stated’ by Mr.
Abid, that, in the cross-examination, the plaintiff admitted that “the date of execution of
Exh. “C” is earlier than the date of purchase of stamp on which letter has been written”. It
is also argued that the defendant has received the copy of debit note from the plaintiff
Bank which is for Rs.59,83,045, in excess and never deleted after.

23. It was argued that the plaintiff was entitled to recover Rs.1.2 million, being the
difference of selling and buy-back price but defendant has charged the mark-up
amounting to Rs.1,930,451 on N.I.C.F. and Rs.354,638 on U.S. Aid L.C. totalling to
Rs.2,285,089 on the following dates Annexure: Z-34 (Exh.6/24).

Date Amount

01-4-1989 Rs.5,97,840}

3-5-1989 Rs.2,15,297}

A. 31-7-1989 Rs.74,215} N.I.C.F.

15-8-1989 Rs.4,62,653}

30-12-1989 Rs.5,80,446}

Amount debited by the Bank to this N.I.C.F. A/c. on the following dates-

7-3-1989 Rs.45,895}

29-5-1989 Rs.46,362} Exh.6/24

26-6-1989 Rs.82;969} read

Page No. 19 of 66
 with Annex:

B. 7-9-1989 Rs.45,985}Z-34

29-11-1989 Rs.48,362

26-12-1989 85.82,696

Total of A + B Rs.22,85,089

24. It is stated that since the buy back agreements contained the amount of prompt
payment bonus, and that the bonus was nothing but penalty, the same could not be
claimed. The plaintiff bank, therefore, ought to have given the relief for Rs.0.258 being
the payment Bonus as per clause-3 of Annexure R to the Suit, but instead of allowing the
relief, (1) excess mark-up amounting to Rs.7,30,451 plus Rs.2,58,000 (being payment;
Bonus), making total of Rs.9,88,451 has been charged from defendant, by debiting it to
Account for the period 1-1-1989 to 31-12-1989. It was due to the excessive charge and
compounding mark-up, that the plaintiff claimed that there was a default in the huge
amount that is being claimed. The entire amount is thus liable to be deleted.

25. It was further argued that the second Agreement i.e. Annexure “R”, no fresh
agreement was executed for the year 1990 i.e. 1-1-1990 to 31-12-1990 and A/c remained
in operation upto 28-11-1990 when last cheque bearing No.00297915 was withdrawn for
Rs.2,50,000 and thereafter A/C was never allowed to operate, the cheques issued by
defendant were also dishonoured no loan facility or withdrawals allowed after that date.

26. It was argued that during the period 1-1-1990 to 31-12-1990, the plaintiff bank
charged a mark-up, amounting to Rs.16,63,308 on the following dates:

1-4-1990 Rs. 86,979

9-6-1990 Rs. 46,971

30-6-1990 Rs. 6,55,841

1-11-1990 Rs. 85,561

30-12-1990 Rs. 7,87,956

Total Rs. 16,63,308

27. It was alleged that, on the contrary the amount deposited by the defendant during this
period i.e. 1-1-1989 to 31-12-1990 is Rs.1,90,9,483 against the withdrawal of
Rs.1,81-,79,791 net positive deposits balance was Rs.8,29,692. This was stated to be the
period, when the plaintiff Bank started to debit the amount unauthorisedly without
issuing any debit voucher to defendant.

28. As to the N.I.C.F. agreement, dated 1-1-1991, it was shown that no transaction was
ever allowed by the plaintiff bank to be made and no disbursement had been made nor
shown. Annexure Z-34 which is the Bank Statement filed by the plaintiff in Opening
Balance is shown at Rs.98,93,834 and thereafter, for the entire period debits were created
by the Bank, however, no physical or actual disbursements have been shown. It was
further argued that even during the period from 1-1-1989 to 31-12-1990 the plaintiff bank
continued to charge excessive mark-up which was also compounded. This was done
despite the fact that the marked-up price was agreed to in the agreement. For the period
1-1-1991 to 30-6-1991 the plaintiffs charged Mark-up unauthorisedly in the Account. The
details of such are contained in Exh. 6/24 to 6/26 showing the unauthorized entries
N.I.C.F. A/c. These unauthorised amounts were again charged by Bank in its N.I.D.F. and
P.A.D. accounts thereby raising the liability from 65,66,401 to the suit amount in three
years compounding the mark up and also debited account with no explanation no debit

Page No. 20 of 66
voucher is issued by bank to defendant-company. The defendant approached the plaintiff
Bank vide Exhs. 6/29 to 6/42 and asked the plaintiff Bank to explain reconcile the
amount debited by them in the Account but the plaintiff Bank failed to reconcile the
same. Vide Exh.6/29 the defendant demanded the bifurcation of mark-up and principle
amount but there was no response as to such request. Vide Exh.6/30 the defendant
complained to the plaintiff that they were charging excessive mark, but again there was
no reply. Vide Exh.6/31, the defendant pointed out the discrepancy in the account and
submitted the calculation to the Bank by calculating the mark up, but again of no avail.
Vide letter, dated 24th November, 1993 Exh.6/32 the defendant informed, that the re-
scheduling intended to be made is incorrect, and denied to accept the liability. Vide letter
8th February, 1994 Exh. 6/33 the defendant requested the plaintiff regarding the
reconciliation of the amount vide letters, dated 16th February, 1994, 28th July, 1994 the
defendant again requested and shown their view regarding the quantum of excessive
liability continuously shown by the Bank.

29. It is argued that, finally on 4th July, 1994, the defendant again submitted the complete
working of N.I.D.F. and N.I.C.F. A/c to the plaintiff Bank. In this Statement the defendant
worked out the calculation of mark-up on Daily Product Basis. But the plaintiff bark once
again failed to delete or reconcile the entries unautorizedly/illegally debited to the
account. Thereafter the defendant vide their letters Exhs.6/38 to 6/43 reminded the
plaintiff Bank for the settlement of the Account but to no avail. The plaintiff’s claim
execution of the agreements only. On the contrary no disbursements were made as per the
agreements discussed above, hence the Agreements were without consideration and void.
Reliance has been placed on the case of UBL v. Chaudhary Ghulam Hussain reported as
1999 PTCLR 162 (Lahore) wherein it was held that “Agreement without consideration
would be treated as Void.

“(9) The appellant-bank has also placed reliance on two financing agreements:

(i) Agreement, dated 2-7-1986 (page 461) executed by the parties whereunder
respondents Nos. 1 and 2 were to be allowed financial facility of Rs.80,80,434 for a
period ending on 30-6-1987 and in terms thereof respondents Nos. 1 and 2 were required
to pay-back Rs.9,697 Millions.

(ii) Agreement, dated 22-9-1987 (page 465) according to which respondents Nos. 1 and 2
were to avail of facility of Rs.98,35.660. This facility was to come to an end on 21-9-
1998 and in terms thereof respondents Nos. 1 and 2 were required to pay the buy-back
price of Rs.11.803 Millions on or before 21-9-1988.

It is claimed that though respondents Nos. 1 and 2 had availed of the above-noted two
financial facilities as well, but they have defaulted to clear their dues, arising thereunder.

(10) From the perusal of the record, it transpires that there is no sanction advice available
for creation of these financial facilities. Significantly, the statement of account filed by
the appellant does not show any disbursement, whatsoever, under these two agreements
which have to be treated as void, being without consideration. The supporting material of
these agreements i.e. D. P. C. Notes etc. (pages 483,485,487 and 4891 also suffer from
the same fatal defect and cannot be looked into for holding that respondents Nos. 1 and 2
had incurred any financial liability thereunder. We hold accordingly.”

30. As for the agreement, dated 9-5-1993 Annexure: Z-5, it has been argued that the
Selling Price was Rs.12.223 (M) and its buy-back price was Rs.16.074 (M). The expiry
whereof was 31-5-1994. There was no disbursement against this agreement and also
remained unimplemented. The defendant in his evidence has clearly stated at page No-4
of his examination-in-chief “the defendant has not owned any further amount after 28-11-
1990”. Even in cross-examination, it is clearly stated on oath, that no loan was sanctioned
or disbursed to the defendant. The plaintiff has nowhere given details of the disbursement
of amount. The entire emphasize has been placed on .the fact that the agreements had
been signed, as such are liable to be acted upon.

31. My attention has been drawn to Exh.3/18, wherein at page No.2 it is stated that, “at
our request the Bank has rescheduled the limit by way of “Renewal and Enhancement”
and we, in consideration whereof have further agreed to increase the hypothecation
Page No. 21 of 66
charges over Goods and Stocks described in the Schedule. “ Similarly as per Annexure Z-
19 of the Suit, while signing agreement for creating floating charges and supplementary
Memorandum Deposit of Title, it was specifically mentioned that “the re-scheduling of
the limit by way of renewal and conversion and enhancement of facilities is made valid to
the agreement signed between the plaintiff and defendant.” Since the agreement; dated
9th of May, 1993 and 13th of May, 1993 were executed for the enhancement of the
facilities which have not been allowed by the plaintiff and remained unimplemented. The
plaintiff Bank has miserably. failed to produce any sanction advice to this effect, which
shows that the amount thus agreed to be enhanced was neither sanctioned by the Bank
nor ever disbursed.

32. It was thus argued that, under the circumstances the N.I.C.F. liabilities the defendant
is liable to make the payment is only upto 31-12-1990 only where the amount was
admitted in the following mariners:--

NICF

(1) Amount disbursed Rs.59,83,054

into Account
No.2164-6 from
I.I. Chundrigar
Road Branch to
Corporate Branch
on 21-1-1989
Exh.6/19

(2) Deposits made by Rs.1,90,09,483

the defendant
during the period
24-1-1989 to
28-11-1990

(3) Withdrawal during Rs.1,81,79,791

the period
21-1-1989 to
31-11-1990

(4) Excess deposit over Rs.8,29,692

withdrawal

Mark-up @ 43 Rs.15,72,896
Pasias per 1000 per
clay from 1-1-1989
31-12-1990

when the operation

of the account was
frozen as per
working given by
defendant to
plaintiff.

(5) Balance of out Rs.67,26,258

standing N.I.C.F
A/C as on
31-12-1990 after
appropriating the
mark-up and adjust
ment of excess
amount shown by
the defendant the
total comes to

Page No. 22 of 66
33. It has been argued by Mr. Abid that, in the N.I.D.F. account, the amount has been
claimed by the plaintiff on the strength of Annexure: Z-8 i.e. agreement dated 13-5-1993.

34. It is stated that since this agreement was never implemented and nothing was
disbursed to the defendant, and no transaction was ever made, therefore, the plaintiff
Bank is not entitled to claim any of the amount under this agreement. For this Account
the plaintiff has produced the Statement bearing Current Account No.7410256-8 wherein
the Opening Entries has been shown at Rs.77,88,123 but no cheque numbers have been
mentioned to show how the figure has been arrived at by the plaintiff. Nothing has been
explained by the plaintiff Bank, nor any evidence has been led.

35. It is further stated that the plaintiff Bank has also shown certain other debit entries
which have also not explained as to how they have been included and no evidence has
been led to prove their case. When in the agreement no disbursement has been made,
there would be no question of the Principal amount, Mark-up and Central Excise Duty at
all. In fact it has been submitted that there was only one N.I.D.F. A/c which was
transferred from I.I. Chundrigar Road Branch to Corporate Branch i.e. Account No.741-
237-2 wherein the amount transferred is shown at Rs. 10,99,325 as per Exh. 6/20 and
after including mark-up this comes to Rs.13,14,622. Except this amount the plaintiff has
not disbursed any amount to the defendant. The defendant admitted the liabilities of
N.I.D.F. as follows:---

(1) Sanctioned amount Rs.l.5 Million

(Exh. P/18 (Annexure: S)

(2) Amount disbursed/availed

as per Exh. 6/20 Rs.10,99,325

(3) Mark-up Rs.2,15,297

(4) Total Liabilities Rs.13,14,622

Per agreement for N.I.D.F. i.e. Annexure

S’ to the Suit, dated 25th January, 1989 the total sanctioned amount was Rs.1.500 million
and its buy-back price was Rs.2 million and the expiry whereof was 31-12-1990. The
plaintiff is entitled to recover the amount of Rs.15,55,220.36 on the basis of the
sanctioned advice which provides a mark-up @ 0.31/1000/day which comes to
Rs.2,40,598 upto 31-12-1990.

P.A. D./OUTSTANDING L.Cs INCLUSIVE US AID L.C.

I. L.C. Amount Rs.35,40,000

(Annexure “F” of the Suit)

(a) 10% Cash Margin Rs.3,55,000

Paid Vide Cheque
No. 070706, dated
16-5-1988 drawn at
BCCI

(b) 3-4-1990 Rs.9,19,705

debitedin
NICF A/C.
Annexure:
Z-34.

(c) 9-6-1990 Rs.9,67,248

Page No. 23 of 66
(d) Subsequent payments Rs.9,84,334 (which is shown in Annexure Z-34, when all the
facilities were frozen.

2. Total Rs.32,26,287

Principal Balance outstanding

for PAD comes to Rs.3,13,713

MARK-UP ON P.A.D.

(1) 1 st Shipment @ 11% Rs.92,915.29

for 18 months i. e.
8-9-1988 to 7-3-1990

(2) 2nd Shipment @ Rs.1,59,152.42

11% for 18 months
i.e. 18-11-1989 to
17-5-1990

(3) 3rd shipment @11 Rs.2,73,039,51

for 18 months i.e.
30-11-1988 to
29-5-1990

(4) Subsequent interest Rs.1,87,862.41

0 16.425% from
30-5-1990 to 31-12
1990

(5) Total Mark-up Rs.7,12,993.00

(6) Total of the principal Rs.10,26,646.63

and mark-up

36. The total liability for which the defendant is liable to pay comes to Rs.6,56,640 being
the principal amount due upto 31-12-1990 with mark-up for the period to arrive at the
Re-purchase Price is detailed below:--

PRINCIPAL MARK UP TOTAL

NICF A/C 51,53.363/24 15.72.896.20 64,26,259.44

NIDF A/C 10,99,325.45 4,55,895.36 15,55,220.81

P.A.D. 3.13,713.00 7,12.933.63 10,26.646.63

TOTAL 65,66,401.69 27.41,725-19 to 93.08.125.88

37. It has been stated, that as regard to the execution of Promissory Note the plaintiff
Bank got blank documents signed as a prerequisite for the purposes of sanction of the
loan amount. It was, therefore, argued, that when the amount was not disbursed the
negotiable instruments under section 9 cannot be held valid and such documents are also
liable to be avoided.

Page No. 24 of 66
38. Mr. Abid Hussain Shirazi, Advocate for the defendants summed up as follows:

(1) Annexures A, B, C and D of the suit are forged documents filled in, unauthorisedly, as
on the dates shown in these documents the present Management who are defendant Nos.
2 to 5 were neither the Directors or shareholders of defendant No.1 This according to him
is further proved from the evidence of -plaintiff, wherein he has admitted as regard to
Annexure “C”, that the date shown is earlier than the date of Purchase of Stamps.

(2) As regards to Annexure “E” of the Suit, itself will show, which is evident from the
original document in Court, that original entries have been removed by Blanco and
refilled in by Bank without any signature on the mutilated figures.

(3) Annexures F and G, Z-9 to Z-17 certain amount of these U.S. Aid L.C. has been
debited U.S. plaintiff in N.I.C.F. A/c in the years 1989 and 1990 as mentioned at pages
No.4 and 5 above (last para) of their written argument. For the balance the explanation is
given at page No. II under the Head P.A. D./outstanding L-C.

(4) Annexures H to T of the suit is admitted. This is the period where the plaintiff Bank
has charged excessive mark-up on various dates as submitted at pages Nos. 4 and 5
hereinabove and also charged the compound mark-up.

(5) Annexures U to Z- of the Suit: No loan was disbursed under these documents. The
account was stuck up/closed on 28-11-1990 when the last cheque was allowed by
plaintiff Bank to be withdrawn.

(6) Stock report as per Annexures Z-2 and Z-3 were submitted.

(7) Annexure Z04 to Z-8 i.e. the Finance Agreement pronotes are without consideration.
Z-6 is a proposal made by defendant for fresh loan.

(8) Annexures Z-18 to Z-23: These documents were signed by defendant for the purposes
of renewal and Enhancement but no enhancement/renewal was made. No amount was
disbursed to defendant company.

Therefore, the same cannot constitute Finance Agreement in the light of judgment
reported as NLR-1988 TD 403.

(9) Z-24 to Z-29. There are the letters written by the defendant for enhancement of Loan
Facility and nowhere acknowledged the claim of Bank.

(10) Z-29 to Z-36. There are the documents prepared by the plaintiff Bank at their own.
For the Bank statements filed by the plaintiff after 28-11-1990 when no amount was
allowed to utilize, therefore, all the amount after 31-12-1991 is the compound mark-up
charged by the Bank beyond the transaction period.

(11) Liquidated damages cannot be claimed in the light of judgment reported as PLD
1998 Kar. 199.

39. The defendants have relied on the judgment of this Court reported as PLD 1998
Karachi 199 UBL v. Messrs Novelty Enterprises 1993 MLD 1571 Habib Bank v. Farooq
Compost Fertilizer Corporation Limited.

40. It is thus, argued that the plaintiff is not entitled for relief as claimed.

41. The defendants have, in addition to the order in Qayoom Spinning (supra) relied on
various judgments and have submitted that, on the facts and circumstances it is a suit for
accounts to be determined, as the plaintiff has admitted in his cross-examination
disbursement of amount Rs. 7.500 million which is the figure of two sanction advices,
which are agreements dated 25-1-1998. Annexures R and S of the suit i.e.

(1) N.I.F.C SELLING PRICE BY BANK

6.00 Million 7.200 Million

Page No. 25 of 66
(2) N.I.D.F.

1.500 Million 2.00 Million

TOTAL 7.500 Million as on 31-12-1989.

42. I have perused the pleadings, the evidence and have heard the arguments. I have no
hesitation in agreeing with the arguments of the defendants for the reasons hereafter
given.

43. The arguments that were advanced by Mr. Aziz-ur-Rehman have been dealt with in all
details in the said case of Qayuum Spinning (supra) (2001 MLD 1351 at p.1377]. It was
held:

“With utmost respect to the learned counsel I disagree with the proposition in the first
instance that the said judgment of Dr. Aslam Khaki shall be operative from the date
mentioned in it as regards the banking transition. The laws .by which the Banking
Business was to be conducted was set moving from 1962, and a concrete law was
enforced from 1-1-1985. BCD Circular No.13 categorically states that a transitional
period is given to the Banks for the purposes of transition from the old system of the
banking into the Islamic system of Banking. There are two things that are enshrined in
the judgment of Dr. M. Aslam Khaki. First being the economy of the country and the
other being the financing system of the banks. The Shariat Board was to arrange for
exchange of information for the evaluation of the practice and for providing guidance of
successfully managing the Islamic economy. Islamic economy is, in its totality the
economy of the country, and laws in respect of not only the banking, but other aspects
which include interest being charged by other institutions, payment to various Banks and
other such-like transformation. The period of transformation has been given in the said
order which reads as under:--

“Keeping all these aspects in view, we have decided to appoint different dates for
different phases of the transformation. We, therefore, direct that:--

(1) The Federal Government shall, within one month from the announcement of this
judgment, constitute in the State Bank of Pakistan a High Level Commission fully
empowered to carry out, control and supervise the process of transformation of the
existing financial system to the one conforming to Shariah. It shall comprise Shariah
scholars, committed economics, bankers and chartered accountants.

(2) Within two months from the date of its constitution, the Commission shall chalk out
the strategy to evaluate, scrutinise and implement the reports of the Commission for
Islamisation of the Economy as well as the report of Raja Zafarul Haq Commission after
circulating it among the leading banks, religious scholars, economists and the State Bank
and Finance Division, inviting their comments and further suggestions. The strategic plan
so finalised shall be sent to the Ministries of Law, Finance and Commerce, all the Banks
and financial institutions to take steps to implement it.

(3) Within one month from the announcement of this judgment, the Ministry of Law and
Parliamentary Affairs shall form a taskforce, comprising its officials and two Shariah
scholars from the Council of Islamic Ideology or from the Commission of the
Islamisation of Economy, to:--

(a) Draft a new law for the prohibition of Riba and other laws as proposed in the
guidelines above.

(b) To review the existing financial and other laws to bring them into conformity with the
requirements of the new financial system.

(c) To draft new laws to give legal cover to the new financial instruments.

Page No. 26 of 66
The recommendations of the task force shall be vetted and finalised by the ‘Commission
for Transformation’ proposed to be set up in the State Bank of Pakistan, after which the
Federal Government shall promulgate the recommended laws. “

44. The said direction has to be read carefully. The requirement is that of the Federal
Government to constitute in the State Bank of Pakistan a Commission for transforming
the existing “financial system” to one conforming to the Shariah and thereafter a strategy
was to be chalked out to evaluate, scrutinise and implement the report of the Commission
for Islamising the economy. In addition, it was the banks who were to take steps to
implement it. Laws on Riba were required to be introduced and reviewed and existing
financial laws and other laws were to be made out for the purposes of bringing -into
conformity the requirements of the new financial system. It was, therefore, to be seen that
there was a distinction between the financial system and system of the Government
Financial Institutions. No doubt the financial system includes within it the system of
banking which is why a separate period has been given in the said order in respect of
preparation of model agreement etc. which reads as under:--

“(4) Within six months from the announcement of this judgment, all the banks and
financial institutions shall prepare their model agreements and documents for all their
major operations and shall present them to the Commission for transformation in the
S.B.P. for its approval after examining- them. (Underlining is mine)

(5) All the joint stock companies, mutual funds and the firms asking in aggregate finance
above Rs.5 million a year shall be required by law to subject themselves to independent
rating by neutral rating agencies.

(6) All the Banks and financial institutions shall, therefore, arrange for training
programmes and seminars to educate the staff and the clients about the new arrangements
of financing, their necessary requirements and their effects.

(7) The Ministry of Finance shall, within one month from the announcement of this
judgment, form a task force of its experts to find out means to convert the domestic
borrowings into project related financing and to establish a mutual fund that may finance
the Government on that basis. The units of the mutual fund may be purchased by the
public and they will be tradable in the secondary market on the basis of net asset value.
The certificates of the existing bonds of the existing Government Savings Schemes based
on interest shall be converted into the units of the proposed mutual fund.”

45. The financial system also includes intra-Government borrowing as well as borrowing
from the State Bank of Pakistan by the Federal Government and foreign debt. Such has
been separately dealt with in paras. 8 and 9 which read as under:--

“8. The domestic inter-Government borrowings as well as the borrowing of the Federal
Government from State Bank of Pakistan shall be designed on interest-free basis.

9. Serious efforts shall be started by the Federal Government to relieve the Nation from
the burden of foreign debts as soon as possible and to re negotiate the existing loans.
Serious efforts shall also be made to structure the future borrowings, if necessary, on the
basis of Islamic modes of financing.”

46. From the above, it will be seen that various aspects of law for transformation has been
given and it is for this, that the Hon’ble Supreme Court has given a specific time. Certain
laws in the judgment have been declared to be repugnant to the Injunctions of Islam and
ceased to have effect from 31st March, 2000, however, other laws or provisions of laws
to the extent that those have been declared to be repugnant to the Injunctions of Islam
would cease to have effect from 30th June, 2001. It will be noted that BCD Circulars
Nos. 13 and 32 have not been declared to be un-Islamic, the said Circulars do not cease to
have effect from 30th June, 2001. They were in force since 1-1-1985 and are valid
legislation and continue to remain in force. The concept of BCD Circular No. 13 is that it
was for the purposes of Islamisation of Banks which was a part of the global change in
Pakistan for Islamising the economy in generality. Banks were first to be placed in line
for their transformation. It is in line of this, that BCD Circular No. 13 came into
existence.
Page No. 27 of 66
47. For the purposes of looking into the concept as given by BCD Circular No. 13 we
may have to look into the history as to why and how such laws were required to be
enforced or made. It will not be out of place to mention that Pakistan itself was created to
be a Religious Islamic State. Quaid-e-Azam had expressed the desire to institute an
Islamic Financial System in his speech (July, 1948) at the inaugural ceremony of the
State Bank of Pakistan. From the Constitution of 1956 to the Constitution of 1973 an
express desire has been shown to get rid of Riba. In the Article 38(t) of the Constitution
of 1973 it has been categorically stated that the State shall eliminate Riba as early as
possible. Article 2 of the Constitution categorically states that “Islam shall be the State
Religion of Pakistan”. Article 2A was inserted to become a substantive part of the
Constitution by Presidential Order No. XIV of 1985 with effect from 2nd March; 1985.
All these put together categorically showed and it was in the knowledge of all, that
primarily Islam was the guiding factor. The Islamic Advisory Council created in 1962 in
its various opinions till 1969 has time and over again stated that the Riba must be finished
in its every form and a system that would work under the Islamic principles to be
enforced. It seems that initially such was not enforced. The Council of Islamic Ideology
was, therefore, created with the assignment to formulate an interest free system for
banking. The Council in cooperation with its various financial and banking experts
initially presented its interim report in November, 1978 and completed their report in
June, 1980. It is in the light of this report that the Government took the first practical step
to purge three financial institutions of interest system on 1st of July, 1979. From 1980
onward other reforms were introduced till 1984 but such could not be properly handled.

48. The Constitution of Islamic Republic of Pakistan in Article 227 clearly provides that
all existing laws are to be brought in conformity with the Injunctions of Islam as laid
down in the Qur’an and the Sunnah. The important aspect, therefore; is that there are only
two modes in which the laws have to be brought in conformity with, namely, the Holy
Qur’an and Sunnah. Under Article 228 it had become mandatory upon the Government to
constitute a Council of Islamic Ideology which was constituted in 1974, thus, it was a
clear intention of the legislature and the maker of the Constitution that all laws that are
made shall be in the tine of and exactly what the Qur’an and Sunnah states. In fact, in the
case of Commissioner Income Tax Peshawar Zone v. Simen A.G. reported in PLD 1991
SC 368 it has been held that so long as the existing statutes were not brought in
conformity with the Injunctions of Islam, their interpretation application and enforcement
where discretionary judicial elements are involved, only that course would be adopted
which was in accord with the Islamic Philosophy, its common law and jurisprudence. In
another case of Kaneez Fatima v. Wali Muhammad reported in PLD 1993 SC 901, it was
held that the principles of law and Injunctions of Islam have to be kept in view while
interpreting the statute and more so in the case where administrative decisions affecting
individual’s rights and liberties have been challenged. In the case of Maple Leaf Cement
Factory Limited v. Collector of Excise and Sales Tax reported in 1993 MLD 1645 it was
held that the provisions of Articles 2A and 227 of the Constitution postulate that the
existing laws must be interpreted, as far as possible keeping in view the Islamic
principles of interpretation, especially in fiscal statutes Courts are bound to apply Islamic
rules of interpretation unless excluded otherwise in preference to the contrary accepted
rules of interpretation under other jurisprudential concept and fiscal laws are not
exception in that behalf. The functions of Council of Islamic Ideology have also been
detailed in Article 230 of the Constitution. One of which is “to make recommendations as
to measures for bringing existing laws into conformity with the Injunctions of Islam and
the stages by which such measures should be brought into effect. “ The introduction,
therefore, of the aforesaid BCD Circulars Nos. 13 and 32 was in fact upon
recommendations of the Council of Islamic Ideology. In the case of Pakistan v. Public at
Large reported in PLD 1986 SC 240, there is a detailed discussion on the meaning of
term ‘Injunctions of Islam’. It has been held that the scope of expression ‘Injunctions of
Islam’ has not been left to the discretion of the Courts and notions of the individuals but it
has been clearly spelt out that, as only those Injunctions which have been laid down by
the Holy Qur’an and the Sunnah of the Prophet (p.b.u.h.). In this celebrated judgment of
the Shariat Appellate Bench of the Supreme Court it was held that:--

“We do feel that while expounding the Injunctions of Islam a possibility of some
marginal so-called divergences might be visualised. It is a very difficult and perilous
exercise. I can lead to proper and improper consequences. Be that as it may, no such
Page No. 28 of 66
expounding of the Injunctions of Islam will be permissible which does not pay attention
to the statement of the text of the Holy Qur’an and Sunnah and to its interpretation
together with its Khamir and Zamir. Within this framework while ‘expounding’ the
Injunctions the Court will remain under a duty in case of need during a new approach or
to meet a new situation to keep in view the following essentials, o: course, amongst
others:--

Whether instead of attempting a relaxation of an Islamic rule, the relaxation may not be
made in the required need for which the relaxation is intended to be made. A very simple
exercise preliminary though, will be of great advantage to ask oneself: Cannot the society
exist or progress without the relaxation and where the answer is negative to ask the
further question: cannot it be done with a temporary and mildest one?

(ii) It is often said that modernism (even when used in good sense of: achievement,
progress and high attainment for the Ummah), Ijtihad is essential. There can be no cavil
with the proposition, but before doing the same within accepted spheres and under well-
recognised rules it should also be asked. Whether the same objects cannot be achieved
without doing it; and, whether purpose would not be served by doing the similar Ijtihad
or making a deviation in the demands of modernism; in other words, cannot the society
change to word Islam?

(iii) Whether a relaxation is approvable on the accepted rules and principles of Ijtihad and
Ijmah, old or new; Zaroorat or Zarar; Tawil or Takhsis; Urf and other recognised methods
like Qiyas, Ihsan, Istehsan, Masalah-Mursalah etc.?

(iv) Whether in a case a new principle like the foregoing, is visualised there is support for
the same in the Holy Qur’an and the Sunnah?

(v) Whether there has been a need similar to the one in issue earlier if so, whether
attempts were made by those who were qualified to do the exercise and with what result;
the same would apply to attempts made in all other lands?

(vi) Whether there are precedents for guidance in the well-known authentic works--if so,
what are the reasons for not following them. It is pertinent to note here that the Pakistani
Courts when interpreting and applying laws do follow the precedents if they are by law,
binding. And even when not so binding, help is always sought from good precedents. Not
only this but also it is well-known, the judgments and opinions of foreign Judges and
jurists are accepted as legitimate guide or support for resolution of controversies. If that is
treated as permissible, (rather indispensable by some at least for the time being) there
should be no hesitation in examining the judgments and precedents from our own masters
including Sahaba, Aimma and Ulema, old and new.

(vii) When examining, views and opinions of the old, special place is to be given to the
Khulafa-e-Rashideen and Companions and Tabaeens in accordance with the Holy Qur’an
and Sunnah. It is high time, we reduce the dangers of sectarianism and make masterly
combination of both (old and new) with gradual elimination of uncalled for criticism and
Taboos against the so-called Taqleed and so-called Tajdid, when looking for and
following the precedents.

(viii) It would also be necessary when rendering an answer for a new situation to see
whether the interests of Islam and Muslim Ummah are advanced in Islamic way. The
collective conscience of the Islamic Ummah, past and present, is also to be kept in view
in making the answer.

(ix) Whether after doing the necessary exercise and after going through the above stages
and others which might be spelt out later, the question when asked from the spiritual and
mental faculties of oneself through Nafs Baseera, Nafs Lawwamah and Nafs Mutmainnah
and notthe Nafs Ammarah (14) 75---(Nafs Baserera) (53) 12 (Nafs Ammarah) (27), 89
(Nafs Mutmainnah) (2) 75 (Nafs Lawwamah) the answer comes in the clear affirmative
for the intended attempt or step. (See Foot-notes Nos.5810 and 5819 of Text Translation
and Commentary on the Holy Qur’an by Abdullah Yusuf Ali (Vols. II, III). If not, it must
be given upon. If it is in doubt even then it must be given up. In other words, it must be
beyond all doubts of reason, intellect and spirit.
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(x) In unoccupied field, the precedent of Hzr. Moaz Bin Jabbal (r.) should be applied with
full consciousness of its limitations which can in the present day context, be spelt out
from the foregoing points.”

It will, therefore, be seen that no such act of violating the Injunctions of Islam will be
permissible which does not pay attention to the text of the Holy Qur’an and Sunnah and
its interpretation together with its ‘ Khamir’ and ‘ Zamir’.

49. In the present case the Council of Islamic Ideology has given the report which
enumerates in details as to which financing has to be entered into under the Islamic
system which had to be acted upon by the Banks on the instructions of State Bank of
Pakistan given under its authority under the Banking Companies Ordinance, 1961. The
said report is based on the Qur’an and Sunnah and for the purposes of interpreting the
said existing laws its ‘Khamir’ and ‘Zamir’ has to be looked into and cannot be deviated
from. The Hon’ble Supreme Court of Pakistan in the case of Pakistan v. Public at Large
(supra) has held that while expounding the Injunctions of Islam and the Court will remain
under the duty in case of need, during a new approach or to meet a new situation to keep
in view a number of essentials, which essentials have been narrated above. It is clear that
this Court will also have to look into whether, when there was a proper Ijtehad for the
purposes of arriving at a certain principle of law under the Islamic system, could this
Court take a view different with the Ijtehad that has already been taken place. The Ijtehad
was by way of consultation, finalised and published as a report of the Council of Islamic
Ideology and thereafter, when the judgment was announced by the Federal Shariat Court
being PLD 1992 FSC 1. There can be no cavil with the proposition that the position that
has been detailed and accepted by the Council of Islamic Ideology acted upon by the
Federal Government and State Barik of Pakistan giving direction to the Banks to finance
under the modes prescribed and thereafter confirmed by the Federal Shariat Court and
eventually by the Shariat Appellate Bench of the Supreme Court in the case of Dr. M.
Aslam Khaki.

50. It is in pursuance to the longstanding act in attempting to change the old banking
system into a system of banking, to operate and run on the lines as provided by Qur’an
and the Sunnah. The Banks, State Bank of Pakistan and all other were duly connected and
were party in the transformation of the Banks by the introduction of the Islamic
Financing to be governed by BCD Circular No.13. The ‘Modes of Transaction’ were
categorically mentioned wherefore the whole system commenced.

51. It will, therefore, be seen that a lot of work had been put in for the purposes of the
system to be transformed from the usual interest bearing system and un-Islamic modes,
into financial system based on the Injunctions of Islam, the Islamic Banking System. As I
have already stated, the Government felt it proper that the entire system could not be
transformed in one go, but chose to break it up into different sectors and the banking
being the first of them.

52. Various Islamic Councils that have been formed including the Council of Islamic
Ideology, were always of the unanimous on the opinion that Riba in its every form wash
forbidden and the increase or decrease of the rate of the interest did not effect it being
otherwise. It is well-known that the committee of bankers that worked under the
Chairmanship of the Governor State Bank of Pakistan in their report in 1980 also took the
similar stand. Scholars of the country, economic expert and bankers were agreed with the
same. This was all taken into account in the case of Dr. Mehmoodur Rehman Faisal and
others v. The Secretary, Ministry of Law, Justice and Parliamentary Affairs, Government
of Pakistan and others reported as PLD 1992 FSC 1.

When the concept of Islamic Banking with its ethical values was propagated, financial
circles the world over treated it as a utopian dream. Having lived for centuries under the
valueless capitalist economic system, they asked what ethics had to do with finance?

53. Attitudes are changing gradually and in the last few years value neutral conventional
banking has begun to trouble the conscious of an increasing number of people. There is a
reluctance to hand over the funds to banks and financial institutions that invest in
companies engaged in unethical and socially harmful activities. The emerging Islamic
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banking scene has succeeded in achieving general acceptance. Today, Islamic Banking is
estimated to be managing funds to the tune of US $100 billion. Its clientele are not
confined to Muslim countries but are spread over Europe, United States and the Far East.
Islamic Banking continues to grow at a rapid pace because of its value-orientated ethos
that enables it to draw finances from both Muslims and non-Muslims alike. Islamic
bankers, keeping pace with sophisticated techniques and latest developments have
evolved investment instruments that are not only profitable but are also ethically
motivated. Today, more than one hundred and fifty Islamic financial institutions are
operating world-wide.

The basic principle of Islamic Banking is the prohibition of Riba-(Usury -or interest):--

“While a basic tenant of Islamic Banking--the outlawing of riba, a term that encompasses
not only the concept of usury, but also that of interest--has seldom been recognised as
applicable beyond the Islamic world, many of its guiding principles have. The majority of
these principles are based on simple morality and common sense, which form the basis of
many religions, including Islam.

The universal nature of these principles is immediately apparent even at a cursory glance
of non-Muslim literature. Usury was prohibited in both the Old and New Testaments of
the Bible, while Shakespeare and many other writers, particularly those writing in the
19th Century, have attacked the barbarity of the practice. Much of the morality
championed by Victorian writers such as Dickens ranging from the equitable distribution
of wealth through to man’s fundamental right to work is clearly present in modern
Islamic society.

Although the Western media frequently suggest that Islamic Banking in its present form
is a recent phenomenon, in fact, the basic practices and principles date back to the early
part of the seventh century.” (Islamic Finance: A Euromoney Publication, 1997).

54. It is evident that Islamic finance was practiced predominantly in the Muslim world
throughout the Middle Ages, fostering trade and business activities. In Spain and the
Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for
trading Activities. It is claimed that many concepts, techniques and instruments of Islamic
finance were later adopted by European financiers and businessmen.

The revival of Islamic Banking coincided with the world-wide celebration of the advent
of the 15th Century of Islamic Calendar (Hijra) in 1976. At the same time financial
resources of Muslims particularly those of the oil producing countries, received a boost
due to rationalisation of the oil prices, which had hitherto been under the control of
foreign oil Corporations. These events led Muslims to strive to model their lives in
accordance with the ethics and philosophy of Islam.

Disenchantment with the value neutral capitalist and socialist financial systems led not
only Muslims but also others to look for ethical values in their financial dealings and in
the West some financial organisations have opted for ethical. operations.

Islam not only prohibits dealing in interest but also in liquor, pork, gambling,
pornography and anything else, which the Shariah (Islamic Law) deems Haram
(unlawful). .Islamic Banking is an instrument for the development of an Islamic
Economic Order. Some of the salient features of this order may be summed up as:--

(1) While permitting the individual the right to seek his economic well-being, Islam
makes a clear distinction between what is Halal (lawful) and what is Haram (forbidden)
in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic
activity, which are morally or socially injurious.

(2) While acknowledging the individual’s right to ownership of wealth legitimately

acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and
not to hoard it, keep it idle or to squander it.

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(3) While allowing an individual to retain any surplus wealth, Islam seeks to reduce the
margin of the surplus for the well-being of the community as a whole, in particular the
destitute and deprived sections of society by participation in the process of Zakat.

(4) While making allowance for the ways of human nature and yet not yielding to the
consequences of its worst propensities, Islam seeks to prevent the accumulation of wealth
in a few hands to the detriment of society as a whole, by its laws of inheritance.

(5) Viewed as a whole, the economic system envisaged by Islam aims social justice
without inhibiting individual enterprise beyond the point where it becomes not only
collectively injurious but also individually self-destructive.

55. Islamic Financial System employs the concept of participation in the enterprise,
utilising the funds at risk on a profit and loss sharing basis. This by no means implies that
investments with financial institutions are necessarily speculative. This can be excluded
by careful investment policy, diversification of risk and prudent management by Islamic
Financial Institutions. It is possible, that investment in Islamic financial institutions can
provide potential profit in proportion to the risk assumed to satisfy the differing demands
of participants in the contemporary environment and within the guidelines of the Shariah.
The concept of profit and loss sharing, as a basis of financial transactions is a progressive
one as it distinguishes good performance from the bad and the mediocre. This concept,
therefore, encourages better resource management. Islamic Banks are structured to retain
a clearly differentiated status between share-holder’s capital and client’s deposits’ in
order to ensure correct profit sharing according to Islamic Law.

56. Ar-Riba consists of several types of transactions which have been forbidden by Allah.
Dealing in Riba is one of the greatest sins a Muslim can commit. The greatest sin
according to Imam Malik.

All forms of Riba fall into two basic categories.

A. Riba An-Nasee’a.

This is the most pervasive and well-known. It includes several kinds of transactions.

The “classic” one which was described by the Companions of the Prophet (s.a.s.) was
where someone owes another money for whatever reason (purchase, loan, etc.) which is
due at a certain time. When the time comes, the creditor would say to the debtor: “a
taqdhee am turbee?” (Will you Day up or accent an increase?). It seems that there was no
fixed rate set at the beginning of the transaction, rather it was set by “custom” and
expectations and what the creditor felt he could demand from the creditor who was
unable to pay. In this way, the original debt could easily expand to many times its original
size. Allah said:

{Ya ayyuhaa alladhina aamanoo la ta’kuloo ar-riba adh’aafan mudhaa’afatan wa ittaqoo

Allaha la’allakum tuflihoon.}

{O you who believe do not consume interest doubling and multiplying and beware of
Allah that perhaps you may succeed.} Aal-’Imraan: 130

The question of Exchange of currency for currency or food for food with one side being
delayed is explained by the following hadith which explains this and several other issues:

“Gold for gold either ore or pure, silver for silver either ore or pure, wheat for wheat
measure for measure, barley for barley measure for measure, dates for dates measure for
measure, salt for salt measure for measure whoever increases or seeks an increase has
committed Riba. There is nothing wrong with selling gold for silver and the silver is more
as long as it is hand to hand as for deferred payment, no. And there is nothing wrong with
selling wheat for barley and the barley is more as long as it is hand to hand, as for
deferred payment, no. ‘In another version, he (s.a.s.) said:’ When the items are different
in those categories, then sell, however, you wish as long as it is hand to hand. Abu Daud
and both narrations are Sahih.

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Two sales in a sale. The Prophet (s.a.s) forbade a transaction which was ‘two sales in a
sale’. This means that at the time of the sale, the two parties agree to different prices
corresponding to different times of payment. For example: 90 days like cash but after
that, the price goes up by 1% for every month of delay. This transaction is illegal and if a
Muslim has engaged in such a transaction before knowing, they only have a right to the
least of the prices.

‘Whoever transacted two sales in a sale has a right only to the lesser of the two or he
commits Riba’.”

A loan which benefits the lender. As we saw in the first point, money cannot be
exchanged for money with a delay no matter what the values. There is no “business”
transaction where money is given and returned later. A “loan” is NOT a business
transaction, but is a form of “Sadapa” or charitable transaction and the money returned
must be the same as the money given.

“The Prophet (s.a.s.) forbid “kulla qardhin yajurru manfa’atan” --any loan which returns
a benefit (i.e. to the lender).

B. Riba Al-Fadhl.

It is forbidden in Islam to exchange currency for currency unless it is done real time --
i.e., no currency “futures” market. It is also forbidden to exchange food items for the
same kind of food unless is both real time and in equal measure. It is forbidden to
exchange food items for other food items unless it is real time. Obviously measures do
not have to be the same. Exchange of items in different categories, e.g., food for money,
money for goods, etc. can be done in any quantities per the rule of supply and demand
and with or without delay of one of the two sides of the transaction. This category of Riba
is explained in the Sahih Hadith from Abi Daud above.

We should note that Islam forbids Ihtikaar (monopoly) in foodstuffs and all necessities. In
this case, the ruler has the right to interfere with the normal functioning of the “market”
(supply and demand) in order to protect the peoples’ necessities of life. A monopoly in
other necessities say for example diamonds is of no consequence and the ruler is not
allowed to interfere with the market.

No dealing in these interest transactions of any kind is allowed. The Prophet (s.a.s.) has
invoked Allah’s “la’na” upon five individuals for a single transaction: the payer of
interest, the receiver of interest, the scribe (probably computer programmer in our day)
who records it and the two witnesses. The word “la’na”, usually translated as “curse” is
much more than that. It means distance, i.e. that Allah will put you at great distance from
Him on Qiyama. Similarly, Allah said about those who consume people’s property with
falsehood that He will neither look at them, speak to them nor cleanse them on that day.
This is the most severe punishment from Allah and those subjected to it will wish they
could be punished by Allah in his fire rather than to be ignored and put away from Him.
Also, as Allah said in Sura Taha:

(And whoever turns away from my reminder will surely have a miserable life and we will
resurrect him blind. He will say: Lord! Why have you resurrected me blind though I used
to see? He said: Likewise my signs came to me and you neglected them and in the same
way you, on this day, are neglected).

Riba may appear to be in increase and a benefit, but it will never bring any benefit and
will only bring those who deal in it the wrath of Allah, a declaration of war from Him and
His punishment in the Hereafter. Allah said:--

(And whatever interest transactions you have made that they may grow in other people’s
wealth will not grow with Allah. And whatever zakat you have given desiring only
Allah’s countenance, these surely are the ones whose returns are multiplied). Ar-Rum:39

Riba is one of the seven mubiqaat (sources of ruination) which the Prophet (s.a.s.) told us
about in the Hadith:

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“Stay far away from the seven destroyers.” They said: O Allah’s Messenger, what are
they? He said: “Associating partners with Allah, sorcery, killing the one protected by
Allah except by right, consuming riba, consuming the wealth of orphans, fleeing from
battle and slandering chaste and innocent believing women.” Muslim Bukhari and others.

And never forget the “la’na” of Allah invoked by the Prophet (s.a.s.) on the five parties
involved in any riba transaction.

“The Prophet (s.a.s.) invoked la’na on the receiver of interest, the payer of interest, the
scribe and the two witnesses. And he said: “They are the same.” Muslim

Some people are under the misconception that only high rates of interest are prohibited
and that low rates are permissible. This delusion comes from misunderstanding the verse
of the Qur’an, (translated), “O you who believe! Do not consume riba, increased
manifold.” [Qur’an, 3:130] This verse, however, does not mean that if the increase is
small it is permissible; it is merely describing the common or usual state of affairs.
Interest, as a rule, will be increased and compounded several times, as the debtor
repeatedly fails to pay up. This is similar to the statements, “Do not sell My signs for a
small price,” meaning’ at any price, for any price is too small to sell the signs of Allah
for; and “Do not kill your children out of fear of poverty,” which clearly cannot be taken
to mean that it is permissible to kill them for any reason besides fear of poverty. Further
confirmation that all interest is prohibited is in another verse of the Qur’an. “But, if you
repent [from ribal then for you is your princi2al.” [Qur’an, 2:279] So, those who repent
may keep only their principal (i.e. the initial amount loaned), and not even one penny or
1% more. Aside from all of this, “little” and “much” are subjective. What one person
regards as “a little” interest may be considered “a. lot” by someone else. So, the truth of
the matter is that a small amount of interest is prohibited just as is a large amount.

Similarly, the hadith literature confirms this understanding: “If a man extends a loan to
someone, he should not accept a gift.” [Bukhari] Abu Burdah ibn Abi Musa said, “I came
to Medina and met ‘Abdullah Ibn Salam, who said, ‘You now live in a country where riba
is rampant. Hence, if anyone owes you something and presents you with a loan of hay, or
a load of barley, or a rope of straw; do not accept ii, for it is riba. “ [Bukhari]

The unbelievers made a very similar claim. They said, “Trade is just like riba.” However,
this is an absurd analogy. It is like saying that there is nothing wrong with prostitution,
because it is the use of the body to earn money, just like any other kind of work.
Moreover, the claim that it is beneficial is invalid. In reality, it brings only a limited,
temporal, material benefit to only a certain category of people. On the larger scale, it
harms the debtor, especially in the case of his business running into loss. It restricts the
wealth among the wealthy and impedes its free circulation. It can lead to inflation and
other economic woes. It is selfish and unfair.

The Prophet (p.b.u.h.) said in the Farewell Pilgrimage, “Every riba of Jahilivvah is
abolished under these feet of mine, and the first riba I abolish is that of ‘Abbas.” It was
around this time that Allah revealed the verse, (translated) “This day have I perfected for
you your religion, completed My favour upon you and chosen Islam for you as your
religion.” [al-Ma’idah] The religion was completed and all the regulations (including
riba) had been legislated by that time.

But, this was not the last revelation. A few ‘days after that, approximately nine days
before the Prophet (p.b.u.h.) left this world, some further verses were sent down. “O you
who believe! Fear Allah, and give up whatever remains of Riba. If Indeed You Are
Believers. {my emphasis} And, if you do not do [so], then receive news of a war from
Allah and His Messenger. [On the Day of Judgement, the consumer of riba will be given
weapons and asked to prepare for war with Allah and whoever has Allah as an adversary
shall surely be overcome]. But, if you repent, then for you is your principal; do not wrong
[by taking interest], and you will not be wronged [by deprivation of the principal]. And, if
[the debtor] is in dire circumstances, then [give him] reprieve until ease. And, it would be
better for you that you [remit the debt as] charity, if only you knew. And, fear a day in
which you will be returned to Allah. Then, every soul shall be paid for what it has earned,
and they will not be wronged.” [Qur’an, 2:278-281] (my emphasis).

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This is something for us to ponder over. The last revelation of the Qur’an -- at almost the
last possible time for revelation is on riba. This must be to reiterate its severity and to
issue a dire warning to us against it. Not even the dhimmis (non Muslim citizens) are
allowed to deal in riba in the Islamic State. The Prophet (p.b.u.h.) wrote to the Christians
of Najran,’ The person amongst you who deals in interest is not under our protection.’
[Kanz al-Ummal].

“On the night I was transported (i.e. the night of Isra and Mi’raj), I was brought to a
people whose stomachs were [large] like houses, with snakes inside them which were
visible from outside their bellies. I said, ‘Who are these, O Gabriel?’ He said, ‘Consumers
of riba,’ “[Ibn Abi Hatim, Ahmad]

(part of a long Hadith of a dream) ...then we came to a river,” I (the narrator) think he
said: red like blood, “and there in the river was a swimming man, and on the bank of the
river was a man who had collected a lot of stones by him. The swimmer would try to
emerge [from the river], whereupon the one who had gathered the stones would throw a
stone into his mouth [forcing him back in]. “The Prophet (p.b.u.h.) conveyed that the
swimmer was the consumer of riba. [Bukhari]

“Allah has cursed the consumer of riba, the one who gives it for consumption, the two
witnesses [to the contract] of [riba], and the scribe thereof. “[Ahmad, Abu Ya’la, Ibn
Khuzaymah, Ibn Hibban; Muslim, Nasa’i, Abu Dawud, Tirmidhi, Ibn Majah; Bukhari].

“On account of the wrong doing/oppression of the Jews, We made prohibited for them
good/wholesome things which had been lawful for them and [this was also] for their
abundant hindering from the path of Allah, their taking riba although they had been
prohibited from it, and their wrongfully consuming the property of people.” [Surah al-
Nisa’]

“The nation amongst whom adultery and interest become common definitely bring the
punishment of Allah upon themselves.” [Abu Ya’la] According to a narration with
Ahmad, interest brings upon drought.

“By He in Whose control is my life! Some people of thy Ummah will spend the night in
the state of pride, haughtiness, play and amusement and in the morning, they will be
disfigured as apes and swine, because they made the unlawful lawful, kept (employed)
singing girls, drank liquor, consumed interest and wore silk clothes.” [‘Abdullah Ibn
Ahmad] (emphasis is mine).

“When you trade in al-’eenah [a round-about transaction intended to circumvent riba, but
ending in the same result. A man would buy an article from a needy person at a low price,
stipulating that he should buy it back at a future date for a higher price], take hold of the
ears of cows, become contented with agriculture and abandon Jihad, Allah will impose
upon you a humiliation which he will not remove until you return to your religion.”
[Ahmad]

It should be quite clear by now that the interest obtained nowadays from banks and the
like is Haram without any doubt. The three councils of jurists that meet regularly to
discuss contemporary issues, have all declared, with a unanimity of all of their members,
that this interest is prohibited by the texts of the Qur’an and Sunnah (i.e. it is not merely a
matter of Ijtihad), and that it is the very riba which Allah and His Messenger have
prohibited. One of the former Shaykhs of al-Azhar (ra Himah Allah) observed, ‘This has
become a matter which is necessarily known to be part of the religion, and so it drowers
above any disagreement.’

“So, whoever receives an admonition from his Lord, then for him is what has passed and
his matter is with Allah. But, (as for) whoever returns (to dealing in interest, even after
learning of its prohibition and after” hearing the serious and dire warnings against it) --
they are the inmates of the Fire; they shall abide therein.’ ‘Say: O My servants who have
committed excesses against their own-selves! Do not despair of the mercy of Allah!
Indeed, Allah forgives all sins. Indeed, He is the Most Forgiving, the Most Merciful’.”

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If you have been guilty of consuming riba, then you should repent to Allah sincerely. You
should feel regret over your sin, cease it immediately, and resolve never to return to it
again. The interest which you have from the past must be disposed of. You cannot keep it,
for it is Haram money. [Qur’an, 2:279]. You may not destroy it, because the Messenger of
Allah (may Allah bless him and grant him peace) forbade the destruction of money
[Muwatta’]. Nor should you give it back to the Bank, for that would only strengthen it
and further the institution of riba. Hence, you should give it away for general projects of
good, but with the intention of getting rid of Haram money, not with the intention of
charity.

57. Having discussed the concept of ‘Riba’ existent from the earlier days of Islam
distorted by the western banking system, I shall proceed to discuss the various aspects
that have been stated and detailed in the said judgment of Dr. Mehmood-ur-Rehman
Faisal (supra). It is important to narrate some facts which will show that not only the
bankers but the entire country as also the international banks remained involved in the.
transformation and to say, that today, they have been taken by surprise by the judgment of
Dr. M. Aslam Khaki is incorrect. Such a stand is taken for the purposes only that having
done an act knowingly that the accrued mark-up became the banks profit and the same
was reflected in the balance-sheet. The mark-up, thus, charged continually by elapse of
time was reflected as income. This deemed income showed the huge profits of banks,
which was due to the re-scheduling and roll over, where the mark-up on mark-up was
charged.

58. The discussion on charge of interest/mark-up that is, in the nature of Riba has been in
light all over the world in the various Islamic Fiqah Conference. In the assembly of the
Islamic Fiqah of India in its seminar of the top scholars were -of the opinion that “Interest
whether received on the loans for personal expenditure or on commercial and business
loans, is in the eyes of Islamic Shariah, forbidden.” Additionally, Islamic Fiqah Academy
established at the official level by the Organisation of the Foreign Minister also
considered this matter in December, 1985 and arrived at the same conclusion. In the
official document of the “ IMF the position of the Muslim Ummah described it as
follows:--

“It seems appropriate that the beginning of the study of Islamic Banking System should
be made from the definition of its basic terminology. Riba is an Islamic legal term which
is tantamount to an accepted addition before the use of money. Controversy is found in
the past whether Riba means interest or usury but now there is a consensus of opinion
among the Muslim scholars that this technical term is applicable to every form of Interest
and its corroboration is not merely excessive interest. Therefore, in the forthcoming
discussions riba and interest will be used as synonyms and the Islamic Banking System
will mean the system in which the payment or receipt of Interest will be prohibited,
whereas an interest giving or conventional bank will mean an institution in which interest
is received or given on the use of monetary fund-(International Monetary Fund Staff
papers, Vol. XXXIII No. 1 March, 1986. Islamic Interest-free Banking, a Theoretical
Analysis by Mohsin S. Khan pp.4-5).

The dispassionate analysis of the academic discussions of half a century absolutely lays
bare the fact that the questions and doubts raised about Interest (Ribs) are unreal and the
Qur’an and Sunnah have prohibited Riba in its every form, be it the ancient banking form
or the modern banking, be it related to the consumption loans of the needy or commercial
and production loans, may they fall within the sphere of private limits or Government,
semi-Government limits and whether provided at a lesser or exorbitant rate. The second
great success achieved in the last thirty years covers the principles and rules, way of
working, financial Instruments of interest-free banking and the proposal and drafting of
the strategy of investment. In this connection investigations have been made with great
endeavours and a chart of alternative system has been prepared with deep foresight. At
least two dozen Research books have been published in which the features of the new
system have been explained. Among them some of their authors have received the
Islamic Development Bank and the King Faisal Awards.

In Pakistan the report of the Council of Islamic Ideology (1980), which is based on the
report of the economic and banking experts, occupies the position of a mile-stone. In this
report, a very realistic blue-print has been presented to purge Pakistan’s domestic
Page No. 36 of 66
economy of interest. A Committee of the Central Bank also worked on this subject in
1981 under the Chairmanship of the Governor of State Bank and the blue-print provided
by it is also very close to the blue-print of the Council of Islamic Ideology. The Report of
the Council of Islamic Ideology was discussed in an international Seminar and its
recommendations were, on the whole ratified. Moreover, some additional
recommendations were made, which were published under the title of ‘Money and
Banking in Islam, by the International Institute of Islamic Economics (Islamabad) and
Institute of Policy Studies (Islamabad). In 1989 the International Institute of Islamic
Economics held a Workshop on the subject as to how interest can be eliminated from
Government dealings. The Report of this Workshop (Elimination of Interest on
Government Transactions) has also been published. After that in June, 1992 the
Commission for Islamisation of Economy submitted its interim report, which has,
however, not been published so far. It was even not presented in the Senate and National
Assembly as required under the law. The Institute of Policy Studies held a Seminar in
1993 which was attended by about one hundred experts. Two editions of its proceedings
have been published in 1994 and 1995 entitled ‘Elimination of Riba from the Economy.’
The whole of this work presents a vivid outline of an alternative system in the light of
conditions prevailing in Pakistan. Regarding the foreign loans, clear guidance exists in
the abovementioned reports of the Institute of Policy Studies and the Self-Reliance
Committee. Even an outline exists in the Self-Reliance Report (1991) which tells how to
execute this job and on the other hand with the help of a proper economic model a
complete programme has been given to eliminate Riba from the economy in three years.
The difficulty is that those demanding an alternative system neither study these reports
nor intend to act upon them. It seems that because the recommendations made in this
whole assignment, are not in accordance with their taste or desire, they, therefore, refute
the existence of these documents and are continuously harping upon, ‘where is the
alternative?’ The matter is not limited only to academic exercise and drawing a sketch of
the alternative system. No doubt much work has yet to be done and many stages have to
be covered, but whatever has been attained by way of implementation is sufficient to bow
before the prowess of Islamic Banking System.

The work of accumulating the savings and provision of resources has always been carried
out at the lowest and public levels C individual and institutional. After the first World
War, Dr.. Muhammad Hamidullah had carried out research work and had shown how
investment to the extent of billions of- rupees was being carried out through equity-based
venture system. During the last forty years the experiments include the Mit Ghamr Bank
of Egypt, which had been working from 1963 to 1967 and after that it adopted a new
form in the shape of Nasir Social Bank (1971). These institutions continued to work very
successfully for ten to twelve years on which studies were carried out which declared
them to be successful preliminary experiments (vide: The Research Report of T. Wholus
Scharf: Arab Islamic Banks: New Business Partners for Developing Countries, Paris,
OECD, 1993).”

59. In pursuance to the international discussion of the Muslims all over the world in
1975, Dubai Islamic Bank was formed to perform the work under the Islamic System.
Two major Financial Groups namely Darul Mal Islamia (DMI) and Al-Barka Groups
were also formed for the purposes of interest free banking. The Islamic Development
Bank formed in Jeddah in 1975. All these Banks are continuing to work under the system
of Islamic Banking.

60. For the purpose of understanding the law in force for the time being and for the
purpose of understanding the two important judgments, i.e. the cases of Dr. Mehmood-ur-
Rehman Faisal (supra) and Dr. M. Aslam Khaki (supra), it will be important to reproduce
the two most important circulars that have been continued to be relied upon in this
respect. The first being BCD Circular No. 13, dated 20th June, 1984 which reads as
under:--

“STATE BANK OF PAKISTAN

Banking Control Department
Central Directorate
Karachi.

BCD Circular No. 13 20th June, 1984

Page No. 37 of 66
All Banks,
Dear Sirs,

Elimination of ‘RIBA’ from the Banking System.

As has been announced by the Finance Minister, it is the intention of Government that the
Banking System should shift over to Islamic modes of financing during the course of the
next financial year. These modes of financing have been described in Annexure I. This
shift will take place according to the following programme.

(i) As from the 1st July, 1984, all banking companies will be free to make finance
available in any of the modes of financing listed in Annexure I. However, as a transitional
arrangement, they will also be free to lend on the basis of interest, provided that no
accommodation for working capital will be provided or renewed on interest basis for a
period of more than six months.

(ii) As from the 1st January, 1985, all finances provided by a banking company to the
Federal Government, Provincial Governments, public sector corporations and public or
private joint stock companies shall be only in any one of the modes indicated in
Annexure I.

(iii) As from the 1st April, 1985, all finances provided by a banking company to all
entities, including individuals, shall be on the same basis as mentioned in (ii) above.

(iv) The appropriate mode of financing to be adopted in any particular case will be settled
by agreement between the banking company and the client. Some possible modes of
financing for various transactions have been shown in Annexure II.

(v) As from the 1st July, 1985, no banking company shall accept any interest-bearing
deposits. As from that date, all deposits accepted by a banking company shall be on the
basis of participation in profit and loss of the banking company, except deposits received
in Current Account on which no interest or profit shall be given by the banking company.

2. The instructions contained in items (i), (ii) and (iii) above shall, however, not apply to
on-lending of foreign loans which will continue to be governed by the terms of the loans.
Likewise, the instructions contained in item (v) above shall not apply to foreign currency
deposits.

3. The above instructions are being issued under the Banking Companies Ordinance,
1962. Further instructions, where necessary, will follow.

Please acknowledge receipt.

Yours faithfully,
(SIBGHATULLAII)
Director”

ANNEXURE -- I

Permissible Modes of Financing

(A) Financing by lending:--

(i) Loans not carrying any interest on which the banks may recover a service charge not
exceeding the proportionate cost of the operation, excluding the cost of funds and
provision for bad and doubtful debts. The maximum service charge permissible to each
bank will be determined by the State Bank from time to time.

(ii) Qard-e-Hasana loans given on compassionate ground free of any interest or service
charge and re-payable if and when the borrower is able to pay.

(B) Trade-related modes of financing including the following:--

Page No. 38 of 66
(i) Purchase of goods by banks and their sale to clients at appropriate mark-up in price on
deferred payment basis.

In case of default, there should be no mark-up on mark-up.

(ii) Purchase of trade bills.

(iii) Purchase of movable or immoveable property by the Banks from their clients with
Buy-Back Agreement or otherwise.

(iv) Leasing.

(v) Hire-purchase.

(vi) Financing for development of property on the basis of a development charge.

The maximum and the minimum rates of return to be derived by the Banks from these
modes of financing will be as may be determined by the State Bank from time to time.

(C) Trade-related modes of financing including the following:--

(i) Musharika or profit and loss sharing.

(ii) Equity participation and purchase of shares.

(iii) Purchase of participation term certificates and Modaraba Certificates,

(iv) Rent-sharing.

The maximum and minimum rates of profit to be derived by the Banks from such
transactions will be as may be prescribed by the State Bank from time to time. However,
should any losses occur, they will have to be proportionately shared among all the
financiers.

ANNEXURE -- II

Permissible modes of financing for

Various Transactions

Nature of Business Basis of Financing

I. Trade and Commerce Fixed investment

(a) Commodity opera- Mark-up in price.

tions of the Federal
and Provincial
Governments and
their agencies.

(b) Export Bills pur- (i) Exchange Rate

chased/negotiated differential in the
under Letters of case of foreign
Credit (other than currency bills.
Those under (ii) Commission or
reserve). mark-down in the
case of Rupee bills.

(c) Documentary Mark-down in

Inland Bills drawn price
against Letters of
Credit purchased/
discounted.

Page No. 39 of 66
(d) Import Bills drawn Mark-up in price.
under Letters of
Credit.

(e) Financing of Service charge/

exportsunder the Concessional
State Bank’s Export Service charge.
Finance Scheme
And The Scheme
For Financing
Locally Manufac
tured Machinery.

(f) Other items of trade Fixed investment.

and commerce. Equity partici
pation, P.T.Cs.,
Leasing or hire
purchase.
Working Capital
Profit and loss
sharing or mark
up.

II. Industry Fixed investment

Equity participation,
P.T.Cs., Modaraba
Certificates, leasing,
Hire-purchase
or mark-up.

Working Capital
Profit and loss
sharing or mark-
up.

III. Agriculture and Fisheries

(a) Short-term Finance. Mark-up. In the

case of small
farmers and small
fishermen who
are at present
eligible for
interest free loans
finances for the
specified inputs
etc., upto the
prescribed
amount may
be
on mark-up
basis. The mark
up amount may,
however, be
waived in the
case of those who
re-pay the
finance within, the
stipulated period
and payment of

the mark-up
Page No. 40 of 66
 made by the State
Bank to banks by
debit to Federal
Government
Account.

(b) Medium and long-

term Finance.

(i) Tubewells and Leasing or hire

other wells. purchase. In
addition to
ownership of
machinery, banks
may create
charge on the
land in their
favour as in the
case of other loan
to the farmers
under the Pass
book System.

(ii) Tractors, traitors Hire-purchase or

and other farm leasing.
Machinery and
transport (including
fishing boats, solar
energy plants etc.)

(iii) Plough-cattle, Mark-up.

Mitch Cattle and
other livestock.

(iv) Fairy and Poultry. PLS/mark-up/

hire-purchase/
leasing.

(v) Storage and other Leasing or rent

farm construction sharing basis with
(viz. Sheds for flexible weight
animals, fencing age to the bank’s
etc.) funds.

(vi) Land Development. Development

charge.

(vii) Orchards, including Mark-up, de

nurseries. velopment charge
or PLS basis.

(viii) Forestry. Mark-up, de

velopment charge

or PLS.

(ix) Watercourse. Development

charge

And the other being BCD Circular No.32 dated 26-11-1984 which reads as under:--

Page No. 41 of 66
“STATE BANK OF PAKISTAN
Banking Control Department
Central Directorate
Karachi.

BCD Circular No.32

26th November, 1984.

All Banks and Development Finance Institutions.

Dear Sirs,

Elimination of ‘RIBA’ from the Banking System Bank Charges.

Please refer to BCD Circular No. 13, dated the 20th June, 1984.

2. Vide BCD Circular No.7, dated the 28th March, 1984 Bank charges except charges for
home remittances, have been deregulated. The schedules of Bank charges received from
the Banks show that the following items of Bank charges are based on interest:--

(i) Mark-up in the case of import bills under import letters of credit.

(ii) Mark-down in the case of documentary bills drawn against inland letters of credit.

3. The schedules also provide for levy of overdue/penal interest in case of non-
retirement/non-payment of inland cheques, bills etc., purchased.

4. In exercise of the powers vested in it under the Banking Companies Ordinance, 1962,
the State Bank of Pakistan is pleased to direct that as from the 1st January, 1985, interest,
wherever charged by a banking company/development finance institution in any of the
items of Bank charges, shall be replaced by a non interest mode considered appropriate
by it. Moreover, overdue/penal interest or mark-up on mark-up shall not be charged by a
banking company/DFI as from that date. Instead, it may take legal steps for recovery of
the overdue finance.

5. Please acknowledge receipt.

Yours faithfully,

(SIBGHATULLAH)

Director”

61. An analysis of the said BCD Circular No. 13 is required to be done in the light of the
aforestated discussions that a complete conscious effort was put in by the Government
which included the bankers to bring about the transformation in the existing system in the
Banks for shifting to the Islamic modes of financing. The first paragraph of said BCD
Circular No.13 states that, it was the Government which acted through its Finance
Minister, showing the intention of the Federal Government, to transform the banking
system into the Islamic mode whereby, the financing done would be in the manner as
provided in the Annexures to the said Circular. It was not an abrupt transformation. The
transformation had actually commenced from 1962 and various committees had been
formed. Discussion at the highest level had taken place and naturally upon discussion
after numerous position a settled formula came in by way of this Circular. No doubt, this
circular does not mention the name of the transaction i.e. whether it is Morabaha
transaction, a transaction by Bai or by Ijarah, Modaraba or any other such means but the
Annexure to the said notification categorically spelt out, what was to be done and that,
these in fact reflected the various transactions that are and continued to be in vogue in
other Islamic Banks. Though no names were given but it will be seen that these
permissible modes were nothing but specified transaction allowed by the Islamic
Scholars. BCD Circular No.13 also speaks of “transitional management” and, after the
first of January, 1985 as provided in clause 2(i) of the said circular of finances provided
Page No. 42 of 66
by a banking company, Federal Government, Provincial Government, public sector
corporation and public or private joint sectors companies could only be done in the
modes indicated in the Annexure-I to the said circular.

62. It cannot by any stretch of imagination be presumed that the meaning of the words
‘interest’, ‘mark-up’ or ‘ Riba’ were not understood. When this notification was issued all
the transactional aspects had been discussed at the top level by the Government which is
why the Finance Minister announced the public of transformation. This announcement
was also in the line with the Constitutions of the Islamic Republic of Pakistan.

63. In Annexure-I to the said circular namely BCD Circular No. 13 there were three basic
forms of transaction that were allowed viz. the first being, ‘Financing by Lending’. From
the title, it is clear that though, otherwise in the usual parlance ‘financing’ and ‘lending’
would have in fact meant the same, but when ‘financing’ is used with ‘lending’ saying,
that there is lending, it would mean that there is a ‘loan’ given to finance some person.
The word ‘finance’ will have to be given a separate meaning and is to be treated to be
‘lending’ simplicitor. ‘Lendings’ are loans i.e. the delivery .of the money to another
person. The money, therefore, being a ‘debt’ created by way of lending. In such a
situation the question that will arise is that, whether such debt created by lending could
attract a levy of further sums on elapse of time for re-payment, as would be done under
the normal banking system on any money lent which would carry interest. Under this
circular there is a categorical stipulation, that, where there is a ‘lending’ the ‘debt’ so
created by giving ‘money’ to another person or financing to other person by way of
lending, such would not carry any interest or mark-up. It is, therefore, provided in sub-
clause (i) of clause (A) to Annexure-I that such ‘loans’ shall not carry interest or mark-up.
The banks were only allowed to recover ‘Service Charges’ which were not to exceed the
proportionate costs of operation. The important aspect that needs to be noted in the first
permissible mode, is the use of the words ‘excluding cost of funds and provision of bad
and doubtful debts’. This phrase needs to be explained. The Shariat Appellate Bench of
the Supreme Court in the case of Dr. M. Aslam Khaki has held, that money is not the
commodity and in fact, is only a medium of exchange’. It has also been held, that in view
of it being the medium of exchange and cannot be treated as a commodity wherefore it
cannot be traded. It can only be used for the purposes it is for, namely the exchange for
commodity. The value of the money cannot change, that is, if a currency note is for
Rs.100 it can only be exchanged with a hundred rupees or for various notes of the value
of the Rs.100, but no addition can be made thereto. Such medium of exchange can get the
commodity of the value of Rs.100 but, the money cannot be traded. It will be important
to note that that in the modern world, money is obtained from various sources, which
involve cost. If such cost is taken into account, and if that money which is lent, the usual
course would have been that the bankers would have charged interest, which would carry
his own spread alongwith the cost of funding and provision of bad and doubtful debt, to
arrive at a rate of interest that, till such time the money is repaid, the debtor shall continue
to pay an additional sum for utilising the money. Such has been categorically restricted
by the said BCD Circular No. 13 in Annexure-1. The said judgment of Dr. M. Aslam
Khaki only reaffirms the same and categorically states that nothing can be added for the
purposes of utilisation of ‘money’. Notwithstanding what has been stated by the Hon’ble
Supreme Court, even if BCD Circular No. 13 is, therefore, seen, it is clear that by
inclusion of this particular phrase, the banks are prohibited to charge except for the
service charges, any other amount on a debt, to the extent that the cost of obtaining funds
by the lending agency and provision by such lender of his bad debt and charging interest
has categorically been done away with. The service charges are only the cost of the actual
banks operation and the maximum of which was to be determined by the State Bank of
Pakistan from time to time. This shows the importance that has been attached to the fact
that no ‘increase’ or ‘addition’ by elapse of time could be made on a ‘debt’ or ‘loan’, i.e.
‘on money lent’.

64. The other manner of loans allowed is the ‘finance by the lending’ as ‘Qard-i-Hasana’
which is a loan given on compassionate ground, free from ‘interest’, ‘mark-up’ or
‘service charges’ and repayable, ‘if’ and ‘when’ the borrower is able to pay, I am not
aware whether this has even been acted upon.

65. The next mode of financing that has been dealt with in Circular No. 13 is the ‘Trade
Related Modes of Financing’, which type is in fact, the basic earner for banks. Various
Page No. 43 of 66
modes have been provided, one of which is, purchase of goods by banks and their sale to
the clients at an appropriate mark-up in price for deferred payment and which is the most
utilised manner of ‘financing’. We need to analyse this aspect also. It is important to first
note that the term ‘loan’ or ‘lending’ is missing and it is ‘financing’ that is being used.
The absence of the term ‘lending’ has to be given a meaning. As discussed above, there
was ‘Financing by Lending’, is a ‘loan’ of money, which may be re-payable at a certain
time. ‘Financing’ is not ‘lending’. It is a form of a business activity, which has been
termed in the title as ‘Trading’. Thus, the finance is earned by trading, and cannot be
termed as a ‘Loan’ of money. The permissible mode allows the purchase of ‘goods’ or
various commodities by banks. The purchase of goods has to be given a proper meaning.
Purchase will never mean purchase of ‘money’. As discussed, this would amount to
‘lending money’, which is not allowed by the said BCD Circular and even if allowed, no
addition can be made to it. It is the ‘goods’ or ‘commodity’ that have to be purchased.
‘Money’ is neither ‘goods’ nor ‘commodity’. It is, therefore, a categorical stipulation in
sub-clause (i) of clause (B) of Annexure-I. The banks are allowed to sell. goods that are
required by their clients. It is the ‘sale price’ of these ‘goods’ that shall be the financing. I
have already discussed that there is ‘financing by lending’ and this mode is the other
mode i.e. financing by sale or ‘Bai’. Therefore, money or the ‘sale price’ fixed and agreed
between the ‘Seller’ and the ‘Buyer’ is what is payable for the goods purchased. There
could be various types of purchase, however, the most common being, that the client of
the bank sells ‘goods’ to the bank for a value or the ‘purchase price’, which is the amount
that is actually paid by the bank to the customer. The customer simultaneously agrees to
repurchase the same goods for a ‘marked-up price’, which is the agreed ‘sale price’ or the
‘re-purchase price’. Thus, the purchase and sale is by the same person (though some
writers say that this would also amount to ‘Riba’, but the law for the time being in force,
permits such sale and purchase), the money i.e. ‘the sale price’ or the ‘re-purchase price’
is payable on deferred payment basis. It is categorically provided in the said Circular, that
in case of default there shall be no mark-up on mark-up. Thus, delay in payment will
under no circumstances cause any addition of any sums. This is because of the categorical
fact that the ‘re-purchase price’ becomes a ‘loan’ or ‘debt’ and nothing could be added
thereon. We now also analyse this clause keeping in view judgment in Dr. M. Aslam
Khaki’s case. In the order of the Court it is observed that ‘the Holy Qur’an says: ‘and if
he (the debtor) is poor he must be given respite till he is well-off’ (2:280). It is further
held in the order, that if the purchase delays the payment despite his ability to pay, he
may be subjected to different punishment, but it cannot be taken to be a source of further
return to the seller on per cent, per annum basis as contemplated in section 79 of
Negotiable Instruments Acts. The permissible mode of financing by sale and purchase,
therefore, could not carry any mark-up on mark-up and that, such was also not allowed in
the event of default. Thus, the comparison of the Circular and the judgment of the
Supreme Court has the same end result.

66. The sale price of the goods purchased by the client from the bank will, therefore, be a
determined price namely, a price on which certain profits by way of addition of mark-up
would also be included. Such price could be arrived at, as also observed by the Supreme
Court in the aforestated case, on any sums that may be agreed between the parties, but
after the ‘purchase price’ has been agreed to between the ‘bank’ and the ‘customer’ such
amount will only become a ‘debt’ and would, therefore, be nothing but ‘lending’. The
transaction of sale and purchase is complete, and the bank becomes an ‘unpaid seller’, i.e.
is only liable to be paid the re-purchase price or the amount of ‘debt’ created by the sale
by the bank to the customer. The payment to be made is at a date in the future. Such will
only be a ‘loan’ or ‘debt’ re-payable at a future date. If payment is not made on that future
date, it is the money due that is recoverable only and per the said Circular, no mark-up on
mark-up or addition thereto can be made. After it becomes ‘loan’, such amount will be
dealt with in the manner as provided in clause (A) of Annexure-I and would, therefore,
only become loan payable by the purchaser to the bank. Such loan will not carry any
interest or mark-up. Only services charges, therefore, could be recovered. The usual
method being applied by the bank for the purposes of recovery of this interest, is the
indirect mode and method. What is being done is, that another ‘agreement’ is entered into
under clause (B)(i) and the said ‘loan’ or ‘debt’ recoverable is translated into the said
agreement as the ‘purchase price’ of the goods and commodity. On this purchase price is
added a mark-up in the agreement which will, therefore, become the ‘sale price’ or ‘re-
purchase price’ i.e. sale by the customer to the bank and an addition of further mark-up is
made to the said existing sale price to arrive at a further marked up price. In the
Page No. 44 of 66
subsequent agreement there is no transaction of sale or purchase of goods but a fictitious
act is done, whereby notional Foods are transacted and not detailed in the agreement and
a sale and purchase price is agreed upon. This is nothing but a fraud on the Constitution,
the law and the people of this country. It is a mockery of Islam and the Islamic Modes of
Transaction approved by law. In the case of Mian Muhammad Nawaz Sharif v. The
President of Pakistan PLD 1993 SC 473, it has been held that, ‘what cannot be done
directly cannot be done indirectly’. This is also a very well-settled law, that no one can be
allowed to circumvent the law, no one can be allowed to act otherwise than what is
provided. It is also settled law, that if a thing has to be done in a specific manner, it has to
be done in that manner alone and none else. No one can be allowed in the name of their
own profitability to cause the existing law to be bypassed, avoided or interpreted, or
usage or customs to be developed which are contrary to an existing unequivocal and
exact law. BCD Circular No. 13 is very categorical. It clearly states that no mark-up on
mark-up shall be charged. There is not ambiguity surrounding this issue. In the garb of
the other agreement such will not be allowed to be taken. Mr. Azizur Rehman has
referred to the following cases:--

(i) Unreported judgment being Spl. H.C.A. No.187 of 1998, M/s. Hardware
Manufacturing Corporation (Pvt.) Limited and 5 others v. United Bank Limited.

(ii) Banque Indosuez v. Banking Tribunal for Sindh and Balochistan and others 1994
CLC 2272.

In which according to him, the two Division Benches of this Court have held that ‘roll
over’ being a ‘custom’ and ‘old practice’ can be allowed. According to him and that has
been discussed above, this Court shall be bound by the judgment pronounced by the
Division Bench. No doubt, all judgments that are not distinguishable do bind on any other
Court which may be subordinate to it. I, sitting in the original side as a Single Judge will
be bound by the judgment of Divisional Bench. I have, therefore, perused the said
judgment in some detail. The principle expounded by my brothers is not incorrect. The
facts of the said case are, however, distinguishable from the present case and I say this
with all respect and humility at my command. It is apparent that all the facts, details and
law were also not discussed by the Hon’ble Judges of the Division Bench. The case of
Mehmoodur Rehman Faisal (supra) was also not considered which was a judgment of
Federal Shariat Bench and binding on the Court. The Hon’ble Judges of the Federal
Shariat Appellate Bench in the aforestated judgment which was the judgment of the Full
Bench held that: ‘in view of the above discussion, the rule of Maslaah cannot be invoked
in aid to permissibility of ‘bank interest’. It was also held that:

“ 153. For consideration of the other point, whether an increase to offset the depreciation
in the value of currency can be justified and considered as an alternate and substitute for
interest, in the eye of Shari’ah, we may quote first from the well-known works of
Economics as to the theory of inflation and indexation, purely from economic point of
view and then we would examine the same on the anvil of the Qur’an and Sunnah.

154. ‘Inflation is a persistent tendency for the prices of most of the goods and services of
rise over time. Inflation has been a worldwide problem throughout, much of the 20th
century. Nonetheless, inflation has proved to be extremely difficult for economists to
define or to distinguish from related problems.”

The learned Judges after having discussed the various possible reasons for rise in the
price, including inflation and keeping in view the indexation have come to the conclusion
that all increase in any manner whatsoever is Riba. It was held that:--

“169. Guided by the Hadith the Fiqaha have opined that in case’ dirhams or dinars are
lent out by counting, they will be paid back by counting not by weight. Similarly in case
these are lent out by weight they will be returned by weight not by counting. In respect of
the loan of a commodity it is further provided by the Fuqaha that it should be returned in
the same kind and quantity irrespective of any change in its price at the time of return of
the loan.”

67. Once it is held that loan of a commodity has to be returned in the same kind and
quantity irrespective of any changes in its price, the concept of ‘roll over’ will also have
Page No. 45 of 66
changed. I am, therefore, of the view that the concept of ‘roll over’ though, dominant and
an easy method of earning money, had actually been done away with, by the introduction
of BCD Circular No. 13 providing that no mark-up on mark shall be charged. The
argument that mark-up on mark-up would actually mean that no mark-up could be
charged on the mark-up levied on the principal amount in the first instance has been
made, it has been argued that the words ‘mark-up on mark-up’ will only be read as if
there shall not be charged any further sum on the mark-up that was added to the first
agreement for the purposes of arriving at a repurchase price, but it could be charged on
the actual purchase price namely, the purchase of the goods from customers. I am afraid, I
shall also not subscribe with this view. The position is very clear that the mark-up is
charged for the purposes of arriving at a repurchase price and as discussed above, the said
mark-up is merged and becomes a part of the debt. Such amount cannot be dealt with
separately as, the entire amount will form a debt and it is this debt that shall be payable
by the borrower. The practice of keeping mark-up in a separate account and principal on
the separate account and charging mark-up on the principal and not the mark-up is not
contemplated by the said Notification namely BCD Circular No. 13. Once the principal
debt is determined as discussed above, the debt becomes a finance by lending and no
mark-up, by whatever name called, can be charged. If one were to presume that such
mark-up on the mark-up could not be charged, but could be charged on the principal
money lent, the outcome would in fact be the same. All payments made would be, (in fact
are) adjusted towards mark-up and then mark-up would be charged on the principal. This
will be purposively avoiding the law. Interest has been defined as an increase on money
by elapse of time i.e. that a sum that is continued to be paid till such time the debt
remains in place at a certain rate and for utilisation of the monies that may have been
given to another person. In the instant case also the arguments, therefore, that mark-up on
the principal can be charged also held no ground. The charge of mark-up on mark-up will
mean an addition in the existing marked-up price. Mark-up is charged only for the
purposes of arriving at a price sale of a commodity, and the addition to arrive at a price is
the profit in trade and which is the only amount a bank can gain. There would be no
commodity to sell after the agreement-of sale has been acted upon. The bank, as
aforestated shall only be an unpaid seller. In the subsequent agreement it will only be the
money (the debt) that is being re-sold and which cannot be done. In fact, if the said
subsequent agreements are read, it will be clear that the said agreements are in fact sale
and purchase of ‘goods’ and not of ‘money’, but there are no ‘goods’, and is a garb to
overcome and avoid an existing law.

68. Great emphasis has been placed on the fact that, in the event an order is passed, that
all monies that have been charged under the various financing given by the banks to the
customers are stated to be unlawfully done, the banks shall collapse. This may be true
but, the question of charging mark-up on mark-up is not one which is new. I have
discussed above, that this was being in light and was/had been taken up and discussed at
some length from 1962. Presuming that the bankers did not know of such also and
presuming that they had acted bona fide in entering into subsequent agreements and
presuming that they were under a bona fide belief that mark-up on mark-up was only the
charge on the mark-up and could be added to the principal by subsequent agreement.
They will, however, have to consider that the matter had been taken immediately
thereafter and the first judgment of this Court that was in place was the case of Bank of
Oman Limited v. East Trading Company PLD 1987 Karachi 404. In this case, it was held
that the Courts in Pakistan are bound by the Constitution and any law repugnant to the
Constitution is void. It was further held that the principle and the provisions of the
Objective Resolution by virtue of Article 2A are now a part of the Constitution and
justiceable subject, however, to limitation imposed by Articles 203-A, B(c), 203-D, 203-
G and 203-GG of the Constitution whereby special and specific jurisdiction has been
conferred on the Federal Shariat Court to declare the law as defined by Article 203-B(c)
read with Article 203-G or any provision thereof as repugnant to the Injunctions of Islam
laid down in the Holy Qur’an and Sunnah of the Holy Prophet (p.b.u.h.) and that the said
law and any provision thereof so declared by it. In another case of Habib Bank Limited v.
Muhammad Hussain reported as PLD 1987 Karachi 612 whilst dealing with the provision
of the Banking Companies (Recovery of Loans) Ordinance, 1979 i.e. before the issuance
of BCD Circulars Nos.13 and 32, it was held that, such interest cannot be awarded but,
because of binding view in the case reported as Muhammad Bachal Memon v.
Government of Sindh PLD 1987 Karachi 296 interest was allowed.

Page No. 46 of 66
69. In the case of Aijaz Haroon v. Inam Durrani PLD 1989 Karachi 304 the entire
position was again discussed agreeing with the position of Dr. Justice Tanzil-ur-Rehman,
J. in the above referred cases:--

“I am of the view that all laws whether they be Constitutional or sub-Constitutional must
yield to the Sovereignty of Allah as reflected in the Holy Qur’an and Sunnah and if there
be a clear commanding that behalf it is that command alone which has to be given effect
to and all other legislation applicable in this Islamic Republic of Pakistan must be
construed as subordinated thereto. Sovereignty over the entire universe vesting, as it
does, in Almighty Allah, is the cornerstone of the Constitutional edifice of this Republic
and the Injunctions of Islam, meaning thereby Injunctions of Qur’an and Sunnah, as
interpreted by a particular sect in Islam in relation to the personal law of that, sect and
subject to the status and personal laws of non-Muslims, are enforceable, as such.”

In this case it was also held that:

“The Law of Allah does not brook injustice of any kind and, therefore, whenever a case
for payment, for refund or return of money, comes before a Court of law in Pakistan it
has to be the endeavour of that Court to order the payment, refund or return, as the case
may be, of so much of current legal tender to the person entitled as is equal, in terms of
buying power or other intrinsic value, to the amount initially, loaned out contracted to be
paid or deposited. “

However, Mr. Wajihuddin Ahmed, J. held that as the legal tender had lost value, the
amount to be paid would be calculated based on the depreciation of the value of the
Rupee as compared with a basket of foreign currencies.

It was further observed:--

“63. This brings me to the crucial question as to how equity is to be done between the
parties. For obvious reasons no rule of thumb is available to determine the extent of
erosion, which the principal sum due, and earlier decreed in this case, has suffered till the
date of payment, if any, or the decree. Such matter, as a rule involves application of
detailed accounting procedures, based on official data on the subject. Simple decree on
the basis of the aforequoted statistics may not do. The case, therefore, in principle, calls
for a Preliminary Decree, if one can be passed under law. This, however, does not imply
that where smaller amounts or periods are involved a given case cannot be disposed of on
approximations.

64. The relevant provision regarding Final and Preliminary Decrees is contained in
section 2(2) of the Code of Civil Procedure, 1908, which provision defines such decrees.
It is true that there are specific provisions for Preliminary Decrees in Order XX, rules 12
to 16 and 18 and in Order XXXIV, rules 2 to 5 and 7 to 8, C.P.C., but the same, in my
view contain only examples in which Preliminary Decrees may be passed and such
Decrees can be passed, wherever the requirements of a case so dictate, under section 2(2),
C.P.C., which is the basic provision in the Code in that behalf. I am fortified in this view
by the decisions in Dattatraya Purshotam Parnekar and others v. Radhabai Balkrishna
AIR 1921 Bom. 220, (Raja) Peaty Mohan Mookerjee v. Manohar Mookedee AIR 1924
Cal. 160 and a Travancore Full Bench decision reported in AIR 1953 T.C. 220.

65. I would, therefore, grant in this case to the plaintiff a decree of a preliminary nature
for assessment as to what was the equivalent real worth of the money which was initially
borrowed that is to say of the sum of Rs.5,00,000 as payable on 20-5-1984, the amount
and date reflected, as they are, in the Promissory Note in suit. For this purpose and in
order to make accurate assessment I would appoint a Commissioner to do the needful and
for that purpose the Commissioner would be entitled to seek assistance from the relevant
functionaries of the State Bank of Pakistan. Mr. A.K.M. Idris, Advocate, of this Court is
appointed such Commissioner and his fees, tentatively, shall be Rs.5,000, which would
be included in the Bill of Costs. The Commission shall be returnable within three months
from the date this Preliminary Decree is transmitted to the learned Commissioner. “

Page No. 47 of 66
70. Subsequently, however, a Division Bench of this Court, one of the members of which
was Mr. Wajihuddin Ahmad, J. in the case of Habib Bank Limited v. Messrs Farooq
Comport Fertilizer Corporation Limited and 4 others 1993 MLD 1571 held that:--

“Word ‘finance’, within the meanings of section 2(e) of the Banking Tribunals
Ordinance, 1984 does not involve any equivalent of interest and by its own force does not
carry returns beyond the stipulated period unless emanating in due course of law or
expressly covenanted, again within the framework of law. In the relevant agreement,
envisaging sale and purchase of goods, no such term (finance) nor perhaps a term to that
effect could be improvised, the reason being that such an improvisation may have
exposed itself as a degenerative, relegating the transaction to one, carrying interest.
Patently, a provision for sale/and re-purchase of the goods within period specified (Bai
Muajjal), culminating on re-purchase, was calculated to advance the concept of trade and
to forestall the extension of interest. Such agreements were to be construed in the light of
Islamic Fiqh. The enforcement of Shariah Act, 1991, lends support to such observations
because that legislation declares the Qur’an and Sunnah as the Supreme Law of the land
and, if more than one interpretations be possible, enjoins upon all Courts to interpret
statute-law in a manner consistent with Islamic principles and jurisprudence. Relevant to
the present case trade and commerce is to be encouraged and Riba, correspondingly,
eliminated. Banking Tribunal, thus, acted in accordance with law and within the
parameters of the agreed stipulations, when it disallowed any mark-up beyond the period
of the contract, extending it only for the cushion period of specified days, which covered
the period between demand and default as well as period likely to be consumed in the
institution and conclusion of proceedings for recovery.”

71. The next question that has been raised is that BCD Circular No.32 does not strike
down BCD Circular No.13. This was never the case of any other person. However, Mr.
Azizur Rehman tried to distinguish the two whereby, he states that Circular No. 32 relates
to charges by the Bank. He states that the said Circular speaks of charges and that,
therefore, there is no nexus between BCD Circular No.13 and BCD Circular 32. He
states, that it is stated therein that interest shall not be charged on bank charges. I do not
agree with the proposition of Mr. Azizur Rehman. A careful perusal of the said Circular
shows that it is in addition and furtherance to BCD Circular No. 13, dated 20th June,
1984. There is a clear stipulation in the preamble to BCD Circular No.32, that “Please
refer to BCD Circular No. 13, dated the 20th June, 1984. “ The only thing that it changes
is in clause (3) of Circular 13 which gives the date of 1st April, 1985 to be a cut-off date
for financing to individual whereas such date had been modified to 1st of January, 1985
in para. 4 clause (4) of the Circular No.32. The power has been exercised by the State
Bank of Pakistan under the Banking Companies Ordinance, 1962 stating that, from the
1st of January, 1985 interest wherever is charged by a banking company/Development
Financial Institutions in any of the item of the bank charges would be replaced by non-
interest mode considering to be proper. It is this, ‘bank charges’ that Mr. Azizur Rehman
contends is to be ‘other charges’. The entire clause has to be read for the purposes of
understanding the provision. The bank charges has been used in conjunction with
replacement of an interest free mode, here the bank charges would imply, all amounts
charged to the account which also included interest. It is, thus, that the subsequent portion
of the said notification says, that overdue or penal interest or mark-up on mark-up shall
not be charged by a banking company as from that date instead the bank shall take legal
steps to recovery the finance. There are two implications of this notification, first being
that of mark-up on mark-up and interest in any form charged by a banking company shall
cease from the 1st January, 1985, the cut-off date. Secondly, that no future mark-up on
mark-up would be charged. The effect of this is that, where a default has been made, the
bank was required to take legal steps. A co-relation has been developed between not
charging mark-up and proceeding to recover money instead. Therefore, there was no
question of renewal of a debt by addition of mark-up. It is important, therefore, to note
that the State Bank of Pakistan has taken a categorical view in this regard and which is in
fact a correct issue, that the banks in financing and where debt is created, cannot take any
additional amount on such debt. In taking additional amount it shall be deemed to be Riba
which is prohibited. It is, thus, that the State Bank of Pakistan instructed to the banks to
institute proceeding for recovery. If the banks choose to give additional time then, it will
do so without charging any amounts. The law when promulgated was very clear. Mr.
Azizur Rehman says if this Court were to take a view that all mark-up on mark-up
charged from the first day has been unlawfully done, it shall be detrimental to the banks.
Page No. 48 of 66
No doubt, such difficulty may arise, but then once the banks are required to act in
accordance with law, specially when the change of law is so great that the entire system
has been modified and that, numerous discussions had been taken place which included
banks to arrive at the notification issued it will not .lie in their mouth to say that they
were unaware of the correct prospect of the law. Even if they were not aware from 1987
onwards the Court had otherwise held that such, transactions to be unlawful. The banks
should have been taken cognizance of the judgments. Mr. Azizur Rehman has referred to
the S.B.P. Circular No. BID(Gen)2470/ 601-04-90 and said that BID Circular No.3, dated
20-2-1989 regarding Prudential Regulations for loan classification etc. was taken into
account and that in connection with treatment that was to be given to re-scheduled loans-
and capitalization of mark-up, the State Bank had given guidelines. Instead in the
guidelines the mark-up on mark-up, according to him were required to be capitalized and
such is provided according to him in section 6.2.4 of the re-scheduling and re-structuring
debts. Mr. Azizur Rehman has, however, chosen not to read the first paragraph of the said
guidelines. The entire regulation has to be read to understand the import of the regulation.
It reads as under:--

“6.1

Introduction

The bank’s borrowers may, at times, face financial distress due to a number of reasons.
This, in turn, may lead to a situation where they are unable to service their debt
obligations as they fall due. In instances of this manner, the Bank may, at its sole
discretion, decide to offer financial reprieve to such customers, with the sole aim of
safeguarding its (the Bank’s) own best interests.

After evaluation of available options, it may be decided to grant reprieve in the form of
re-scheduling or restructuring of the financial obligations of customers. One of the prime
considerations should be that:--

‘The discounted expected monetary value (EMV is the amount of cash flow times its
estimated probability) of inflows accruing to the Bank, in the event that financial reprieve
is granted, significantly exceeds the net (i.e. net of legal and other expenses) present
value of cash flow arising from liquidation of available securities.’

The reprieve (or accommodation) referred to, hereinabove, may involve modification of
the terms of the loan by:

Extending/amending the re-payment schedule

Reducing the rate of mark-up

Reduction the amount of accrued mark-up and/or principal

Extending further credit

And/or settlement of part of debt outstanding by foreclosing on or transferring certain

assets to the Bank.

Normally such accommodation/ deprieve would be considered (by the Bank), if the
borrower and/or sponsors offer additional security, thereby strengthening the Bank’s
position.”

72. It will be seen from these guidelines that the banks were allowed to re-schedule or
restructure of financial obligations and the method was given i.e. extending or amending
the re-payment schedule, reducing the rate of mark-up reducing the amount of agreed
mark-up and/or principal and extending the correct facility. Nowhere in the said circular
has it been stated that an additional mark-up could be charged on a debt for extending the
time for payment. It is the mark-up that has’ already been charged for the purposes of
arriving at a marked-up price which was allowed to be capitalized. Capitalization only
brings it in the line of the accounting system. Such was advised to the banks only for their
accounting purposes and nothing else. This circular has been issued by the Central
Page No. 49 of 66
Directorate and relates only for the purposes of classification of account else, if it is not
allowed to be capitalized a provision will be required to be made by the bank, that may
cause further loss to the banks. In the same guidelines, the re-structured loan has been
defined as under:--

“2.1 A ‘re-structured’ loan is one whose terms and conditions of loan have been modified,
principally because of a deterioration in the borrower’s financial condition, to provide for
a reduction in interest rate or principal, or a capitalization of interest accrued.

2.2 A ‘re-scheduled’ loan in which effective interest rate terms remain unchanged from
original terms, but principal re-payment terms have been extended because of project
delays, is not considered a ‘restructured’ loan, as loan as interest continues to be serviced
on time.”

73. A careful analysis of this will also show that it provides a reduction in rate or
capitalization in the interest accrued. Accrual of interest is in relation to the agreement
entered into and nothing can be read beyond such position. A perusal of clause (2.3) will
show that a troubled debt re-structure has also been defined and various situations have
been catered for. In this also, there is no increase in the sums. Reliance, therefore, by Mr.
Azizur Rehman on this aspect will be a farce. Had the State Bank not intended and the
Government not wanting to proceed under the Islamic System of Banking, the choice was
open. If they had opted to proceed, they cannot be allowed to beat about the bush.
Reliance, therefore, on the said regulation of the State Bank is not only incorrect but
seeking an interpretation which otherwise is not available. Mr. Azizur Rehman also refers
to BPRD Circular No.9, dated 27th April, 2000 namely the Prudential Regulations. He
has referred to clause (3) of the same stating that the re-scheduling/re-structuring of non-
performing loans shall not change the status of classification of a loan/advance etc. unless
the terms and conditions of re-scheduling/restructuring are fully met for a period of at
least one year (excluding grace period, if any) from the date of such re-scheduling or re-
structuring. This is only in respect of placing a defaulter on the list of CIB and is nothing
to do with the increase or decrease modes. Mr. Azizur Rehman has placed reliance on the
case of Hardware Manufacturing Corporation (Pvt.) Limited v. United Bank Limited in
the Special High Court Appeal No. 187 of 1998 in which it has been held that:--

“By execution of the finance agreement dated 30-6-1994 original appellant’s liability on
the basis of original contract/agreement was extinguished and the same was substituted
by another finance agreement/contract through the valid documents wherein the
appellants acknowledged the stated sum, therefore, under the new finance agreement the
appellants would be liable under the law of contract. Reference may be made to Abdul
Qayoom v. Ziaul Haq and another PLD 1962 (W.P.) Karachi 334 and Gauri Dutt Ganesh
Lall Firm v. Madho Prassd and others AIR 1943 P.O. 147).”

74. This position has been discussed by me above, in which I had said that this judgment
is distinguishable from the. present case. The facts of the case no doubt relate to a ‘roll
over’ of the facility but there is no discussion as to whether the said agreements were in
respect of sale and purchase of commodity and if it were whether such subsequent
agreements carried a clause of such extension. Mr. Azizur Rehman referred to the
discussion in the said judgment stating that where the arguments were that roll over was
in practice on interest base banking and prohibited by BCD. Circular 13, dated 20-6-1984
issued by the State Bank of Pakistan, the Court had held that the parties having agreed or
entered into an agreement, the terms of the subsequent agreement will be applicable
notwithstanding the fact that it was a roll over and roll over in fact, is an accepted
custom.

75. In another unreported case which has been cited by him is in the Special High Court
Appeals Nos. 186 and 187 of 1998, Mr. Azizur Rehman stated that the same position was
taken up and the Division Bench of this Court and had decided the matter that the old
method of roll over was in practice and, therefore, allowed. I am otherwise bound by tire
judgment of the Federal Shariat Court as also the Appellate Bench of the Supreme Court
notwithstanding the distinction that I have drawn, and, therefore, hold otherwise. In this I
may refer to a judgment of a Division Bench of the Lahore High Court being United
Bank Limited v. Ch. Ghulam Hussain 1998 CLC 816 where it has been held that:--

Page No. 50 of 66
“Significantly, the statement of account filed by the appellant does not show any
disbursement, whatsoever, under these two agreements which have to be treated a void,
being without consideration. The supporting material of these agreements i.e., D.P.C.
Notes etc. (pages 483, 485, 487 and 489) also suffer from the same fatal defect and
cannot be looked into for holding that respondents Nos.1 and 2 had incurred any financial
liability thereunder. We hold accordingly.”

76. Mr. Azizur Rehman has referred to a judgment in the case of United Bank Limited v.
Central Cotton Mills Limited 2001 MLD 78 where according to him, the said judgment
allowed the interest. Mr. Azizur Rehman probably has not understood the import of the
said judgment. The import of the said judgment is that all transactions that were entered
into prior to the first day of January, 1985 were, required to be converted into Islamic
Mode of Financing as such, the same was allowed. Mr. Azizur Rehman has referred to the
discussion on the subject were Mr. Mushtaque Ahmed Memon, J. (as he then was) had
stated that the renewal of loans subsequently also cannot attract the applicability of the
above referred circular issued by the State Bank of Pakistan since renewal merely
amounts to extension and the continuation in force of the earlier agreement. No doubt
such could be correct. This does not say ‘increase in the quantum of loan’, but is an
extension in the time for payment of the initial agreement. He also places reliance on this
judgment to say that BCD Circular No .32 does not strike done BCD Circular No. 13. Mr.
Azizur Rehman should have read the last portion of that notification where Mr.
Mushtaque Ahmed Memon, J. (as he then was) has held that “in the circumstances, the
contention to the effect that the fixed loan was granted on mark-up basis does not inspire
confidence.” Likewise the assertion that the interest based facility could not be continued
or renewed after BCD Circular No. 13, is equally without force. True, that the interest
based facility could be renewed and such is provided in Circular 13 but this judgment
does not say that an amount could be added to the said debt that is, due and payable. The
contention, therefore, also does not have any force. In fact the same learned Judge in an
Order passed in Suit No.1659 of 1999 observed:--

“Having considered the submissions of the learned counsel, I cannot resist expressing
doubt about the validity of the fresh agreement between the parties as is asserted by the
learned counsel for defendant on the basis of correspondence. Even if the parties had
settled fresh terms innovation of agreement dated 23-5-1996, the same appear, tentatively
speaking, to be violative of the Qur’anic Injunctions restraining a creditor from taking
advantage of a debtor to make repayment within the agreed time.”

77. Mr. Azizur Rehman has referred to the novation of the contract. The contract stands
novated according to him after a new contract has been entered into. There is no cavil to
this proposition, but in the present case this is not what is being sought. What actually has
been sought is that whether such an agreement could at all be entered into and if so
whether any amount could be added. In my view it is only the extension by addition of
mark-up by the bank to arrive at a restructured document. Mr. Azizur Rehman has relied
on the judgment of Bank Indosuez v. Banking Tribunal for Sindh and Balochistan and
others reported in 1994 CLC 2272 and states that when there is a novated contract, that
contract has to be looked into as a fresh contract to determine whether the same was in
conformity with the definition as given under section 2(c) of the Banking Tribunal
Ordinance, 1984. He refers to the following passage of the said judgment:--

“...A fresh agreement was entered into by a document whereby the defendant
acknowledged that a sum of Rs.10,000 was due from him to the said firm which formed
the consideration of the agreement entered into between him and the plaintiff. It was held
by a Division Bench of this Court that under the new agreement the liability of the
defendant under the original contract was completely extinguished and there was a fresh
contract substituting the old contract by introducing new business and it was in the nature
of novtion of a contract within the meaning of section 62 of the Contract Act. In S.
Sibtain Fazli v. Star Film Distributors PLD 1964 SC 337 the above principle was re-
affirmed by Hamoodur Rehman, J. In the following words:--

‘It is an essential element of novation, when new contracting parties are substituted, that-
the rights and obligations of original contractors shall be extinguished and the right and
the liabilities of new contracting parties accepted in its place’.”

Page No. 51 of 66
He states that the old contract by introducing the new agreement was in the nature of
novation of contract within the meaning of section 62 of the Contract Act. There is no
cavil to this well-established principle but the question that has to be looked into, is
whether any act has been done by the bank whereby, an existing law has been avoided.
Where the rights of parties have altered, and a valid contract alters rights of a previous
agreement, the arguments would have been valid. This is not the case here. Subsequent
agreements do not change the previous agreements. There is no mention or reference of
the previous agreements. The only document shown is a Sanction Advice, which is an
internal document of the bank. The document could be seen only to what was approved
by the bank. The agreement overrides all arrangements. The sanction advice, in the
presence of the agreement, visa-vis the customer cannot be construed to be adverse
disadvantage to the customer. The agreement is the document signed by both, the
contents of which have to be seen. The question whether where a law categorically
disallows mark-up on mark-up, can an agreement cause it to be charged, or could any act
be done by the parties to the agreement by which mark-up is added, or mark-up on mark-
up is included to a marked-up price. If not, could this agreement be a valid contract. Mr.
Azizur Rehman has referred to the Prudential Regulation in Regulation No. XVI
prohibits window dressing which reads as under:--

“Regulation-XVI

Window Dressing

1. All banks are directed to refrain from adopting any measures or practices whereby they
would either artificially or temporarily show an ostensibly improved position of banks
accounts as given in their Balance Sheets and Profit and Loss Accounts specially in
relation to its deposits and profit. Particular care shall be taken in showing inter branch
and inter-bank accounts accurately and strictly according to their true nature.”

78. A careful perusal will show that the banks have been restrained from adopting any
measures or practice whereby they, either artificially or temporarily show an ostensibly
improved position of the bank account. The addition of mark-up is added towards the
assets of the bank which gives an ostensibly improved position of the bank accounts
which cannot be allowed. Otherwise also, it is established principle of law that what
cannot be done directly cannot be done indirectly. It is also a very established principle of
law that any contract which is of such a nature that, if permitted it would defeat the
provisions of any law, or which is contrary to public policy is a void agreement.

79. It will thus, have to be seen as to what provisions of law would be defeated if such an
agreement is entered into. The law in the notification by way of circulars, being BCD
Circulars Nos. 13 and 32 issued in 1984. The Circulars have been discussed above.
Suffice to mention that the agreement which seeks to add and cause an additional amount
to be paid in respect of some previous agreement is nothing but a manner to avoid the
restrictions imposed by BCD Circulars Nos. 13 and 32. It is clear that no mark-up on the
marked price could be charged on the said agreement entered into initially. If it could be,
the banks could have utilised the provisions of section 79 of the Negotiable Instruments
Act. The same has since 1985 never been invoked. The new documents approved and
utilized by the bank, utilize the D.P. Note where no rate of mark-up is mentioned. It is
only the re-purchase price that is stated. The new subsequent agreement is nothing but to
avoid the restriction imposed by law. The other question which needs to be elaborated is
the validity of subsequent contracts that have been entered into where the actual sale has
not been made. I shall discuss this subsequently herein.

80. The other question is as to what is the ‘public policy’, and such will have to be looked
into. The Constitution of the Islamic Republic of Pakistan is the basic document on the
touchstone of which all laws have to be looked into. The Preamble of the Constitution’
whereunder “the principles of democracy, freedom, equality, tolerance and social justice
as enunciated by Islam shall be fully observed. “ Article 2 states that Islam shall be State
Religion of the Pakistan. Article 2A incorporates Objectives Resolution as reproduced in
the Annexure to the Constitution. Article 38 also clearly stipulates that the State shall
eliminate Riba as early as possible and Article 227 clearly states that the existing laws
have to bring in conformity with the Injunction of Islam as laid down in the Qur’an and
the Sunnah. In view of the provisions of the Constitution in fact, even prior to this, right
Page No. 52 of 66
from the days when this country achieved independence that it was clear that all laws
were liable to be promulgated which were and ought to have been in accordance with the
Holy Qur’an and the Sunnah. I have already dilated at length on this issue and shown the
quantum of work that has been carried out for such purposes. The policy has always been
that, all laws, practices and procedures would be in accordance with what is provided in
the Qur’an and Sunnah. In fact, BCD Circular No. 13, the preamble also states that the
banking system was to shift over to the Islamic Modes of Financing, such is the public
policy. After the law has been brought in conformity with the Holy Qur’an and Sunnah,
way and methods are being employed by the Bank to continue the previous usurious
Banking Practice, despite the fact that the law has been Islamised in accordance with the
Constitution of the Islamic Republic of Pakistan. Such a practice that is sought to be
developed by the banks is a fraud on the Islamic provisions. No one can be allowed to
play a fraud on the existing law by trying to avert the existence of such law that
prescribes that mark-up on mark-up cannot be charged. The act of entering into a future
transaction admittedly is in respect of renewal of financing and does not contain any
aspect of actual disbursement or payment. Such contracts are contracts that are against
the public policy.

81. When one is talking of novation of contract it will be seen as to what is the aim for
novating the same. The position will have to be seen in its true, proper and correct
perspective. The agreement for financing up as is termed by the banks is nothing but an
agreement of sale and purchase of tangible properties, goods or commodities. Once the
goods are purchased by the bank, the bank makes a payment for the purchase of the
goods which according to the agreement is termed as the ‘sale price’. The goods are
thereafter sold to the customer and such sale is the re-sale/re-purchase on a marked-up-
price. There are, therefore, two distinct transactions under the said single agreement. The
first being the purchase by the bank for consideration. It is at this juncture that the ‘sale
price’ is disbursed to the seller namely, the customer. This is the amount that the bank say
is the ‘finance’ or the amount to be paid to the customer. The second is in respect of
resale by the Bank to the customer but such is the actual Murabaha transaction/Bai
Muajjal. Thus, before entering into this transaction, the bank has to be the owner of the
goods/property being sold to the customer. It is, thus, the first transaction ‘that is entered
into. After, sale to the Bank, and the bank paying the sale price, being the ‘consideration’
of purchase by them of a defined good/property/commodity, they can by the ‘Bai
Muajjal’ transfer that title to the customer, that they have acquired by purchase of the said
property. It is a well-established principle of law that no one can transfer a title, better
that what he has. Thus, the sale is concluded between the bank and the customer upon
such purchase price as may be agreed, the re-purchase price. It is this price, which is
liable to be paid by the customer on deferred payment. After the second transaction, i.e.
the sale by the bank to the customer is concluded, the contract of sale and purchase is
finalised. the bank becomes an unpaid seller whereby the purchaser is liable to pay the re-
purchase price. This the purchaser (customer) is indebted to the bank for the repurchase
price payable within the period prescribed. Thus, re-purchase price becomes the debt.
Thus, the only thing required under the said agreement is recovery of debt, the goods
having been sold and consumed by the customer. Such is the loan or debt. Therefore, a
clear distinction between the agreement entered into and the debt paid or payable
therefore, is to be looked into. Once the debt has been determined the contractual
obligation under the agreement is concluded and it is the debt now that becomes payable.
The amount will be the liability of the customer and such cannot be increased by addition
of any mark-up. A perusal of section 23 of the Contract Act categorically states that
consideration or object of an agreement is lawful unless it is of such a nature that if
permitted, would defeat to provision of any law. A subsequent agreement whereby, there
is a settlement of previous debt or is renewal thereof shall in fact amount to defeating the
provision of the specific law available. Such will not be novation but an independent
agreement contemplating an actual sale and purchase. Such an agreement entered into
only for renewing the previous debt shall be a void agreement. The position in law is
absolutely clear. I had also referred to the clear instructions of the State Bank in
Regulation XVI above. Such renewal will only be Window Dressing and that all profits
shown will be nothing but added mark-up. Mark-up cannot be allowed to be added on an
‘existing debt’, as there can be no agreement between the parties in respect of that
‘specific debt’ except that there could be enlargement of time, and that too without
increase in the debt payable.

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82. The subsequent agreement technically would have no nexus with the previous
agreement in which a debt had been created. It is a fresh agreement. An agreement by
which fresh commodities, goods or articles are to be sold or purchased, therefore, when
goods are sold under the fresh contract there shall be consideration by actual and physical
payment in the statement of account and not merely adjustment stating that an amount is
due and, therefore, the bankers can exercise lien. A lien can only be exercised on a credit
in the account of the bank to set off a liability and not by additional credit to set off to the
previous debt. A debit will not be a credit of the customer and where it is not a credit of
the customer, section 171 of the Contract Act shall not apply. Section 171 clearly
stipulates that a banker in the absence of a contract shall have right to retain a security for
such balance goods (bailed to them). A loan or finance or debt given to a customer shall
not be an amount or goods bailed to the banking company as such, no right can be
claimed.

83. The subsequent agreement does not have any stipulation that there could be a set off
by a subsequent finance. Even if it were there, the question would be that such an amount
could be where a mark-up has been added thereon for the purposes of adjustment of
marked-up price. I am of the considered view that such cannot be done. The argument,
therefore, that the subsequent agreement is a novation and that once a contract is novated
the previous contract cannot be looked into is hot correct in the present scenario.

84. If it is presumed for the sake of argument that the last agreement that had been
entered into is the agreement on the basis of which the amount due is payable by the
defendants/customers then we will have to look into the contract itself. Admittedly, the
contract is one of sale and purchase of commodities. In the circumstances it shall be
governed by the Sales of Goods Act, 1930. Sale is defined in section 4 which reads as
under:--

“4. Sale and agreement to sell.---(1) A contract of sale of goods is a contract whereby the
seller transfers or agrees to transfer the property in goods to the buyer for a price. There
may be a contract of sale between one part-owner and another.

(2) A contract of sale may be absolute or conditional.

(3) Where under a contract of sale the property in the goods is transferred from the seller
to the buyer, the contract is called a sale, but where the transfer of the property in the
goods is to take place at a future time or subject to some condition thereafter to be
fulfilled, the contract is called an agreement to sell.

(4) An agreement to sell becomes a sale when the time elapses .or the conditions are
fulfilled subject to which the property in the goods is to be transferred. “

It will be seen that a distinction is created in ‘Sale’ and ‘Agreement of Sale’. A contract of
sale is, where the seller transfers or agrees to transfer the property in die goods for a price
and such could be absolute or conditional. Subsection (4) of section 4 of the Sales of
Goods Act above states, that the ‘Agreement of Sale’ becomes a ‘Sale’ when the time
elapses or conditions are fulfilled subject to which the property in the goods has to be
transferred. It clearly implies that there has to be conclusion as to the transfer of property
in the goods which is the principal element of sale. This Act also came under scrutiny by
the Shariat Appellate Bench of the Supreme Court in the case of Islamic Republic of
Pakistan v. Public at Large (supra) and in the judgment in the case of Federation of
Pakistan v. Awamunnas 1988 SCMR 2041 that, a contract of ‘Sale’ or ‘Ijarah’ of a
commodity shall only be valid where the ‘commodity’ is in existence and that there has to
be a transfer of such property. Whilst dealing with the concept of ‘agreement of sale’ it
was stated that where the goods did not exist, the Islamic Injunctions do not recognise
such agreement. Sale cannot take place, but an Agreement of Sale can be entered into and
this agreement is not a complete ‘Sale’ of ‘Goods’. The sale will only accrue when the
commodity is transferred to the purchaser or consideration thereof has been paid. From
the principle laid down we see that the agreement which is a subsequent one does not
have the ingredients of a sale and at best be treated an ‘Agreement to Sell’. Such
agreement can possibly be specifically enforced whereby the purchaser may seek
direction against the seller upon payment of actual consideration to sell his property, but
if such is not done the purchase price/re-purchase price mentioned in the said agreement
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will not be taken to be a debt payable by the purchaser. If money has actually been
transferred or handed over to him there are only two possibilities, one is the transfer of
the property for which money had been given, or the return of the money that had been
given to him. The customer will, therefore, only be liable to the extent that was actually
paid to him. If there was damage caused due to the refusal to sell the commodity if there
was one, then such shall be required to be proved. The judgment of the Supreme Court
was delivered in 1988 has also been reaffirmed in the judgment of Dr. M. Aslam Khaki. I
am also of the same view and either where the resultant would be that it is the principal
amount that was actually paid would become due but where there is a sale, the sale price
has been transmitted and re-sale is made, the resale price will be payable by the
defendants to the plaintiff. It is well-settled principle of law that parties cannot contract
out of the provisions of the Act. See in the case of Woman Shriniwas Kini v. Ratilal
Bhagwandas & Co. AIR 1959 SC 689 it has been held that an agreement to waive an
illegality is void on the ground of public policy. Similar views have been taken in the
case of Anayat Ali Shah v.` Anwar Hussain 1995 MLD 1714.

85. We now come to another question, i.e. whether an agreement without consideration is
a valid agreement. Section 25 of Contract Act reads as under:--

“25. An agreement made without consideration is void unless:--

(1) it is expressed in writing and registered under the law for the time being in force for
the registration of documents and is made on account of natural love and affection
between parties standing in a near relation to each other, or unless

(2) it is a promise to compensate, wholly or in part, a person who has already voluntarily
done something for the promisor, or something which the promisor was legally
compellable to do, or unless

(3) it is a promise made in writing and signed by the person to be charged therewith, or
by his agent generally or specially authorised in that behalf, to pay wholly or in part a
debt of which the creditor might have enforced payment but for the law for the limitation
of suits.

In any of these cases such an agreement is a contract.”

The subsequent agreements of finance are not covered by the exception to the general
principle, that an agreement without consideration is void. Section 24 of the Contract Act
reads as under:--

“24. If any part of a single consideration for one or more objects, or any one or any part
of any one of several considerations for a single object, is unlawful, the agreement is
void.”

It will be seen that if any part of a single consideration is unlawful the agreement is void.

86. I have discussed the unlawful act. Thus, the agreements made subsequently with an
aim to avoid and defeat the provisions of the law of not charging mark-up on mark-up are
void.

87. The question of disbursement has also been dealt with ‘above. It was argued that there
is no need of actual disbursement and that debt could be deemed to be disbursement.
Reliance is placed on the judgment of Moudood Ahmed Farooqui v. Ameen Fabrics PLD
1983 Karachi 176, in which it has been held that ‘debt’ means an obligation and liability
to pay or return something owed by one person to another. There is no cavil to this very
settled principle that a debt is liability of the person and the reliance on this judgment is
not incorrect. The position is what has been stated is that such is liable to be paid to the
creditor as such a fresh loan which is given will be that of the customer and from which
he clears a previous debt. One is amazed at this argument. This is nothing but a fraud on
the statute. Once it is a debt in respect of one agreement it will be a debt in respect of the
other agreement also and a liability, therefore, saying that from a finance obtained, it
being a debt, a previous debt can be set off has no place. In the said judgment the
question was in respect of the dividend declared and not paid to the shareholder, dividend
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declared becomes the property of the debtor. Debt does not become the property of the
shareholder. In the circumstances the case is distinguishable from the present case.

88. The last point that was argued by Mr. Azizur Rehman was that the judgment in the
case of Dr. M. Aslam Khaki v. Muhammad Hashim reported in PLD 2000 SC 25 is
operative from 30-6-2001 and1the present laws will continue to be valid till that date.
There can be no cavil to the proposition that all -laws that are in conflict with the Islamic
provisions shall remain valid only upto 30-6-2001. BCD Circulars Nos.13 and 32 have
not been declared to be in conflict with the Islamic provisions. What has been said by the
said judgment of the Hon’ble Shariat Appellate Bench of the Supreme Court of Pakistan
is that all laws or part thereof that have been declared to be against the Injunctions of
Islam shall be changed and modified by 30-6-2001 whereafter they shall become invalid
and not be acted upon.

89. Further to the question that has now been raised is that the judgment of Dr. M. Aslam
Khaki shall apply prospectively and not retrospectively. High Court is bound by the
decision of the superior Courts under Article 189 of the Constitution of the Islamic
Republic of Pakistan which reads as under:--

“ 189. Decision of Supreme Court binding on other Courts. Any decision of the Supreme
Court shall, to the extent that it decides a question of law or is based upon or enunciates a
principle of law, be binding on all other Courts in Pakistan.”

Thus, it is clear that the decision of the superior Courts namely the Supreme Court is
binding on the High Court. In fact, the order of the Shariat Court is also, under Article
203-GG subject to Articles 263-D and 203-F binding. The judgment by the Federal
Shariat Court was announced in 1992, however, such remained stayed during the period
of appeal which was finally decided in 2000. The argument is that as the appeal had
remained stayed, therefore, it is the judgment by the Supreme Court from which date, it
shall be acted upon. What the learned counsel have not looked into is that there are two
specific points in the said judgment, be, it before the Federal Shariat Court or the Hon’ble
Supreme Court. One is that reliance to the specific laws that were being discussed and
admittedly, the - laws of banks except section 79 of the Negotiable Instruments Act,
section 25 of the Banking Companies Ordinance, Rule 9(2) and (3) of the Banking
Companies Rules, section 22(1) of the State Bank Act, 1956 and section 8(2)(a) and (b)
of the Banking Companies (Recovery of Loans) Ordinance, 1979 were before the Court.
None of these except Banking Companies (Recovery of Loans) Ordinance, 1979 related
to the charge of mark-up and mark-up on mark-up. In that law namely, the Ordinance,
1979 there was only the charge of ‘interest’ and was prior in date when the BCD
Circulars Nos.13 and 32 came into existence. In fact, BCD Circulars Nos.13 and 32
changed the entire law, its perspective and modes and methods of banking converted
them into trade-related modes. Loans were only treated to be given without any mark-up
and increase except for service charges. BCD Circular No.13 categorically states that no
mark-up on mark-up shall be charged and it is well-settled principle that nothing can be
done indirectly what cannot be done directly. In this regard, Mr. Azizur Rehman had cited
two latest judgments that this indirect process namely, entering into future mark-up in the
case of Mst. Aisan v. Manager, Agricultural Development Bank of Pakistan, Chunian
2001 CLC 57 and Muhammad Ramzan v. Citibank N.A. 2001 CLC 158. The first one
being the judgment of the learned Single Judge of the Lahore High Court and the other
being a judgment of a Division Bench one of which Judge was the same as who delivered
the first judgment. Both the aforesaid judgments are in fact distinguishable in that, they
are dealing with section 15 of the Barking Companies (Recovery of Loans, Advances,
Credits and Finances) Act, 1997 which provides for mark-up on decree from the date of
the institution of the debt till payment. What their lordships had observed is that the
judgment of the Supreme Court in the case of Dr. M. Aslam Khaki will for that purpose
act retrospectively. In fact a history of the introduction of the provisions of mark-up
during the period it remained in the Court it seems would be, that such was in Court and
the delay, could not be ascribed to the creditor who could not be penalised because of
delay of the Court. Such had not been considered by the Council of Islamic Ideology as
such, it was not provided in BCD Circulars Nos.13 and 32 these provisions not being
there, their lordships were absolutely correct in holding that the provisions of section 15
in the Act, 1997 will only be applicable from the date of the judgment and not
retrospectively. The difference and distinct feature in the application of the judgment of
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the Supreme Court to the present case is that, the said two Circulars having not been
declared to be void or ultra vires they, therefore, having been held to be intra vires, will
remain in force from the date they were promulgated. According to the doctrine of stare
descisis the precedent in the case of Dr. M. Aslam Khaki gives the authority of
established law. The cases earlier decided by the High Court and upon application of the
same doctrine would result into the effect that it would be presumed that the Courts gave
decisions with all possible care and consideration and had not acted per incuriam. What is
binding on the other Courts under the present Article 189 is the ratio of the decision of
the Supreme Court and not any finding or conflict of opinion of the Court or any question
which was not required to be decided in a particular case. In the present case also a
similar situation has occurred whereby the decision of the Court is in respect of certain
laws that have been specified and will not effect the laws that are in existence but the
ratio of the decisions which is based on the Qur’an and Sunnah and its application will
remain binding. For the purposes of looking into as to what is the scope of the
jurisdiction of the Federal Shariat Court we need to read sub-Article (a) of Article 203-D
which reads as under:--

“203-D. The Court may, either of its own motion or on the petition of a citizen of
Pakistan or the Federal Government or Provincial Government, examine and decide the
question whether or not any law or provisions of law is repugnant to the Injunctions of
Islam as laid down by the Holy Our’an and Sunnah of the Holy Prophet (p.b.u.h.)
(hereinafter referred to as the ‘Injunctions of Islam’).”

Thus, the Federal Sharait Court will examine only such question of law or provisions of
law that are repugnant to the Injunctions of Islam. Reasoning or ratio for arriving at the
same will, however, remain applicable. The banking system had been converted into
Islamic form in 1985. It was not held to be against the Injunctions of Islam. This Court
has to only see that whether the manner in which an agreement had been entered into or
otherwise is within four corners of laws laid down by the BCD Circulars Nos.13 and 32.
This Court for the purposes of looking into the law which is valid and existing shall
remain bound by the ratio given’ in the case of Dr. M. Aslam Khaki. It shall not be that
such case is being acted upon retrospectively. In -the case of Sakhi Muhammad v. Capital
Development Authority PLD 1991 SC 777 it was held that “decision would not have the
effect of altering the law from the date of its announcement/ commencement so as to
render void all decisions made by the subordinate Courts or authorities made in the light
of the earlier interpretation.” The position is that application of interpretation continues to
be on the basis of earlier judgments which were announced as early as 1987. Dr. M.
Aslam Khaki’s case (supra) confirms the earlier view.

90. The position is that BCD Circulars Nos.13 and 32 are the consequences of the reports
of the Council of Islamic Ideology provided for the furtherance of Islamic financing
where mark-up on mark-up has been stated to be un-Islamic and usurious. Riba was
disallowed and that because of such disallowance it was in the line with the arguments
put forward for the purposes of Islamic financing. In fact, the judgment of the FSC as
also the Hon’ble Shariat Appellate Bench of the Supreme Court of Pakistan have not in
any manner held that the law as was enacted is against the Injunction of Islam. What has
been said is that the bankers have not acted in accordance with law in force. It has also
been said that the manner in which Murabaha/Bai Muajjal transaction though lawful
transaction have been misapplied by the banks. Misapplication of the law was by the
banks. Even if it is held that the said judgment shall be applicable from the date provided
therein, the ratio of the case for the purposes of determined and deciding cases shall be
applicable on a valid and operative law from the date of the enactment. The definition
shall remain applicable from the date when the law came into force. It is not a case where
any law has been declared to be ultra vires. I am aware of the well-settled principle that
where a law has been declared to be ultra vires, the declaration shall act prospectively and
not retrospectively. This is a case where the law has been held to be valid, proper and
intra vires. In such a’ situation where a law has been declared to be intra vires, it is only
the interpretation of the specified law that has to be taken into account. It cannot be said,
therefore, that this judgment will act prospectively. This judgment only acts to clarify an
existing valid law. Even otherwise, this appeal is from the judgment in the case of
Mehmoodur Rehman Faisal (supra). This case decided alongwith many other cases the
point in issue. However, in the Supreme Court the leading case came to be the case of Dr.
M. Aslam Khaki as such there the case is known by that name. The banks should have
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anticipated actions and should have protected themselves after the earlier judgment.
Appeals may be filed, but any decision could have been forthcoming. The banks were
aware of the factum from 1987 onwards when mark-up on mark-up was declared against
the Injunction of Islam by the High Court. Taking refuge, therefore, behind the judgment
that it shall be applicable from June, 2001 is not correct. No one can be allowed to make
a mockery of a legal process, the Islamisation and the provisions of the Islamic modes of
transactions/financing. It seems that the law introduced in 1985 was taken by the banks as
only a change in the name and as such, continued as if they were charging interest. ‘The
banks had thus, made a mockery of the law by avoiding and creating legal fictions. The
concept never changed. Even today during the course of arguments the question of
lending on mark-up basis is being spoken. From this it is clear that even today the law is
being utilised only ‘as a garb or screen to protect themselves. Laws having been
Islamised one needs to understand that they have to be interpreted and acted upon in the
manner as they are. They have to be acted upon in the manner they are required to be
acted upon and cannot be extended or transformed. In fact it has been observed that “the
Superior Courts of Pakistan have in large number of cases applied the Islamic teachings
and philosophy, when the statute law is silent about a situation, the field is unoccupied, so
to say, a statutory void is to be filled, or the Court has discretion to follow one of the
several courses, one of which is more in accord with Muslim jurisprudence. Such was
held by the Hon’ble Supreme Court has held in the case of Muhammad Bashir v. The
State PLD 1982 SC 139, that such a void has to be filled up by Islamic Common Practice
and provisions. The banks chose otherwise. In the case of Fazal Ghafoor v. Chairman
Tribunal Land Disputes 1993 SCMR 1.073, it has been held “when there is a vacuum on
question of law left by statutory silence, the prevailing mode having full Constitutional
support, would be that of Islamic Common Law”.

91. Mr. Ejaz Ahmed has also argued in detail, most of which have been dealt with and
covered by the discussion above. However, the important aspect that needs to be seen is
with regard to the argument that has been advanced by Mr. Ejaz Ahmed about the concept
of mark-up on mark and the renewal. Mr. Ejaz states that the marked-up price is an
agreed consideration and that if such price is not paid the remedy available to the bank to
seek recovery. This is a correct proposition. He further says that mark-up on marked-up
amounts to recovering the opportunity cost of money which is not permissible under the
Islamic Mode of Financing. This is also correct. On the basis of this, subsequently, Mr.
Ejaz Ahmed dealt with the question of renewal and distinguished the renewal by way of
adjustment and continuing facility on a revolving basis. As far as the adjustment is
concerned, he states that the amount of sale price is credited to the customer’s account
and is set-off against the existing liability of the customers on account of the facility
originally granted and, therefore, accounts operates on a revolving basis. As far as
continuing facility, he states that the adjustment as stated above, does not take place and
the account continues to operate on a revolving basis and in fact, he states that this is an
established practice in the banking industry and the customer are aware of this
mechanism. He states that such a mechanism is beneficial for customers and it allows to
customers to withdraw the amount within the amount of facility at any time and re-pay
the sale as and when the excess money is available to him during the currency of the
facility. He states, therefore, customer benefits from the fact that the mark-up is charged
only on the outstanding. He states that if the mark-up facility is strictly construed to mean
that the bank is only obliged to disburse once, then according to him the finance becomes
more expensive for the customers as, once the full amount of finance facility is availed
the customer will be charged mark-up on the full amount. The excess liquidity of the
customer will remain lying in the current account with no profit. I do not agree with this
proposition. This proposition presupposes dealing in money and mark-up on the money.
The concept that has been evolved is that the purchase is made by the bank and it is the
sale price which is actually disbursed, the re-payment is the repurchase price and it is the
price that is fixed. There is no concept of addition of further sums by elapse of time. The
consideration for the actual sale has to be made by the bank to the customers and has to
be done so in its entirety. The customers will be in his right to withdraw the entire amount
or to leave any sum in his account. He will be in his right to transfer this amount to
saving account or otherwise. Money being the consideration for sale would, therefore be
required to be transferred to the customer. The second portion of the agreement as
discussed above, is the actual finance agreement which in fact is a Bai Muajjal. ‘Bai’
meaning sale and ‘Muajjal’ meaning upon deferred payment. This Bai Muajjal or
Murabaha transaction is that, the bank having purchased as resold this commodity at a
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higher price to the customer. At this point, the customer is not required to pay the sale
consideration but what is required is to do so within the specified period at an agreed re-
purchase price. The consideration for the sale of the commodity by the bank to the seller
cannot be adjusted against this re-purchase price as it is Bai Muajjal the payment is
deferred. The consideration for the resale by the bank to the customer is a contract
between the two and such becomes a debt. This debt is, therefore, only liable to be paid
by the customer. There is, therefore, no question of a revolving facility. It is the amount
that is available with the customer being the sale consideration of the sale made to the
bank. This amount can be utilised at the wish and whims of the customer. I am, therefore,
not convinced that the transactions as stated by Mr. Ejaz are in true spirit the financing as
provided under BCD Circulars Nos. 13 and 32.

92. The next question, therefore, is whether the purchase price can be increased and
which has been answered by Mr. Ejaz saying that it depends on the meaning ascribed to
the word ‘increase’ and accordingly the increase in the purchase price has been classified
as (a) where the increase is not permissible; (b) where increase has been permissible. In
the first classification he states that mark-up on overdue instalment where the finance
facility is payable in installment and due dates of installments are specified in the
agreement and where mark-up on overdue amounts in the cases of lump sum payment
agreements no increase can be allowed. He states that, however, increase would be
permissible in specific transactions namely the mark-up is to be booked by the banks on
accrual basis or where there is a fresh sanction or the renewal of the working capital or
where there is a re-structuring or re-scheduling of liability. I will also not subscribe to this
view. What cannot be done directly cannot be done indirectly. It is also a well-settled
principle that if a certain thing has to be done in a certain manner it has to be done in that
manner and no other. I have already discussed above, that mark-up in itself is only
restricted for the purposes of arriving at the re-purchase price and once such is arrived at
the amount of re-purchase price becomes the debt, therefore, there could be no question
of separation of mark-up. The mark-up has to be capitalized which is also provided in the
Prudential Regulation. Unless such mark is capitalised the re-purchase price cannot be
determined. Thus, if the mark is capitalized and added to the principal amount (principal
meaning the sale price) and having arrived at the re-purchase price any increase by way
of renewal, capitalisation, booking on accrual basis or by any means will be nothing but
addition of mark-up on mark-up.

93. In a Hadis narrated by Abdullah Ibn Abu Qatadah reported in Book 9, Number 3295
of Sahih Muslim the following was said:

“Abu Qatadah demanded (the payment of his debt) from his debtor but he disappeared;
later on he found him and he said: I am hard up financially, whereupon he said: (Do you
state it) by God? By God. Upon this he (Qatadah) said: I heard Allah’s Messenger
(p.b.u.h.) said: He who loves that Allah saves him from the torments of the Day of
Resurrection should give respite to the insolvent or remit (his debt).”

The concept of increase money rational to time cannot be allowed. In another Hadis
narrated by Uthman ibn Affan reported in Book 8, Number 3849 of Sahih Muslim the
following was said:

“Allah’s Messenger (p.b.u.h.) said: Do not sell a dinar for two dinars and one dirham for
two dirhams. “

In another Hadis narrated by Abu Sa’id al-Khudi in Book 9. Number 3854 of Sahih
Muslim the following was said:

“Allah’s Messenger (p.b.u.h.) said: Gold is to be paid for by gold, silver by silver, wheat
by wheat, barley by barley, dates by dates, salt by salt, like by like, payment being made
hand to hand. He who made an addition to it, or asked for an addition, in fact dealt in
usury. The receiver and the giver are equally guilty.”

In another Hadis on this subject narrated by Abu Hurrah in Book 9, Number 3856 is as
follows:

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“Allah’s Messenger (p.b.u.h.) said: Dates are to be paid for by dates, wheat by wheat,
barley by barley, salt by salt, like by like, payment being made on the spot. He who made
an addition or demanded an addition, in fact, dealt in usury except in case where their
classes differ. This Hadith has been narrated on the authority of Fudayl ibn Ghazwan with
the same chain of transmitters, but he made no mention of (payment being) made on the
spot. “

94. From the above, it will be clear that any increase or difference in the value thereof
will be usurious and will come within the definition of ‘Riba’. I am not inclined to grant
such increase.

95. In view of the above, I am of the considered opinion that once the agreement has been
entered into and the re-purchase price determined there can be no renewals by increasing
the debt. If there is a renewal or re-structuring nothing can be added to arrive at extended
figure. The question that needs, therefore, to be answered is what will be the amount
payable by the defendant/customer of the banks. If they have entered into a subsequent
agreement or addition of mark-up thereon, I have already held that subsequent
agreements are void. The bank can only seek I recovery of the amounts of the marked-up
price under the first agreement. However, if the bank is able to establish the fact that the
amount has been actually disbursed under the subsequent agreement and it is not for the
purpose of adjustment of the previous debts and that there has been a de facto sale and
purchase in commodity in that situation all agreements that may have been entered into
for such purposes and independent of the previous agreements can be looked into and
money shall be recoverable there against. Every agreement will, therefore have to be
proved. For this evidence needs to be led. If the bank has chosen to extend the time for
repayment of the amounts given it cannot increase the sum. Naturally if extension is
given there is a consideration that he is unable to pay at that point of time. If there is
delay in the re-payment of the debt, the banks shall be free to proceed to recover the
amount of loss caused to them by such delay. This, however, shall be required to be
proved. In the case of Dr. M. Aslam Khaki the Hon’ble Shariat Appellate Bench of the
Supreme Court of Pakistan has observed that:--

“...If the purchaser could not pay at the due date because of his poverty, the Qur’anic
command is very clear that he should be given more time till he is able to pay. The Holy
Qur’an says:

And if he (the debtor) is poor, he must be given respite till he is well-off. (2:280).

“However, if the purchaser has delayed the payment despite his ability to pay, he may be
subjected to different punishments, but it cannot be taken to be a source of further ‘return’
to the seller on per cent per annum basis as contemplated in section 79. “

96. What has been stated is that agreements that have been entered into on a subsequent
date will be the only agreements that can be looked into and all agreements that have
concluded by elapse of time shall be deemed to be past and closed transactions. I do not
agree with this view. Admittedly, the bankers have chosen to reform or re-name the
transactions though, it continues to emanate from one single account. If the account is the
same it will be seen that the certain amount was due and payable on a certain date and
remained unpaid. It is this debt that continues in the subsequent agreements. The sanction
letters clearly show that they are renewal of facilit and such renewal of facility by way of
subsequent agreement is only a garb to get out of the legal restrictions imposed on them
by BCD Circulars Nos.13 and 32. Such cannot be allowed. A valid law being acted upon
shall have to be acted in the manner as it prescribes. When it says mark-up on mark-up
cannot be charged, the same cannot be charged in any form or manner whatsoever. When
it says that in the event of a default being committed, recovery has to be made and no
mark-up on mark-up or penalty can be charged, it specifically implies and assumes
without ambiguity that no mark-up even if restructured can be allowed. It is my
considered view that the first agreement continues to be effective for the recovery of the
debt by the unpaid seller, the Bank, despite the fact that new agreement may have been
entered into. The said agreements are nothing but a continuance of the first agreement
and only for the purposes of enhancement and charge of mark-up by elapse of time. I am,
therefore, of the view that such will not be deemed to be a past and closed transaction and
shall continue till such time the payment of the debt caused by the first agreement is
Page No. 60 of 66
made over or the agreement is extinguished by being fully acted upon or that by a
concluded case decided by any Court of law. All pending proceedings in respect of any
finance on the basis of the ‘Murabaha’ or ‘Bai Muajjal’ shall continue to be current.

97. On this question of ‘finance’, ‘accommodation’ and ‘obligation’, I do not agree with
the arguments of Mr. Azizur Rehman. The definition of ‘finance’ as contained in the
Banking Tribunals Ordinance; 1984 categorically states that “Finance includes an
accommodation or facility under a system which is not based on interest but provided on
the basis of participation in profit and loss, mark-up or mark-down in price. “The word
accommodation or facility has to be read in conjunction with the words “not based on
interest” and in reading the fact that it is not based on interest, reference will have to be
made to the provisions of BCD Circular, No. 13 issued by the State Bank of Pakistan in
respect of the finances to be granted in terms of the Islamic System of Banking.

98. It will be of importance to note that the Banking Tribunals Ordinance, 19$4 was a law
promulgated by the ‘Parliament and the word ‘finance’ was defined to mean an
accommodation or facility under a system not based on interest. By Ordinance LVII of
1984 the Banking Companies Ordinance, 1962 was amended and the definition of “loans
advances and credits included finance and the definition as contained in the Banking
Tribunals Ordinance, 1984. Thus, by incorporation the ‘finance’ was brought within the
purview and scope of sections 24 and 25 of the Banking Companies Ordinance, 1962. In
addition to the above, by the promulgation of the Ordinance LVII of 1984 being the
“Banking and Financial Services (Amendment of Laws) Ordinance, 1984 many other
amendments were brought about, so that the State Bank of Pakistan could enforce the
Islamic System of Banking in Pakistan. In section 7 of the Ordinance of 1962, the words,
“participation term certificates, term finance certificates, and such other instruments-as
may be approved by the State Bank’ were inserted. In section 7 a new clause (aa) was
inserted,

“(aa) the providing of finance as defined in the Banking Tribunals Ordinance, 1984;”

It is, thus, clear from the insertion., that the Act was amended to bring in the Islamic
provisions of law. The State Bank of Pakistan in terms of section 25 of the Banking
Companies Ordinance, 1962 issued directions giving details as what is, ‘finance in the
system not based on interest’. In view of the above, under section 3-A of the Banking
Companies Ordinance, 1962 and in view of Hashwani’s case afore referred the provisions
contained in section 25 allows the State Bank V of Pakistan to give directions to the
Banking IV Companies and the non-Banking Financial Institutions (NBFIs) also to act in
accordance with such directions. Such directions are binding on all the banks NBFIs. In
view of the above, it is clear that the directions are as a consequence of promulgation of
the Statute or an. Act of the Parliament. Otherwise also under section 25 the State Bank
can give directions to the bank whenever it is satisfied that it is necessary or expedient in
public interest. It has done so therefore. In fact the agreements entered into subsequently
by banks are the sale and purchase of commodities. The concept is one which is
contemplated by BCD Circular No.13 of 1984. The Banks can, therefore, not take a place
otherwise. The State Bank have acted within their authority in issuing the said Circulars. I
do not, therefore, agree with the proposition of Mr. Azizur Rehman in this respect also.

99. It has been argued with some vehemence that as the levy of interest has continued and
that, if such levy that has already been made is not allowed such shall amount to in fact
serious loss and prejudice to the bank. I have already said that no doubt there may be a
loss, but then, the law that had been settled in fact has been that the banks were required
to proceed in the manner that, V they would not charge any interest and will act in
accordance with law, i.e., banking in the Islamic System of Financing.

100. In the case Zaheeruddin and others v. The State and others (1993 SCMR 1718)
which appeal was dismissed by a majority view. In the majority judgment it has been
observed:---

“The contention, however, has not impressed as at all. The term ‘positive law’, according
to Black’s Law Dictionary, is the law actually enacted or adopted by proper authority for
the Government of an organized jural society. So, that term comprises not only enacted

Page No. 61 of 66
law but also adopted law. It is to be noted that all the above-noted cases were decided
prior to the induction of Article 2A in the Constitution, which reads as under:---

“2-A. Objectives Resolution to form part of substantive provisions.---

The principles and provisions set out in the Objectives Resolution reproduced in the
Annexure are hereby made substantive part of the Constitution and shall have effect
accordingly.”

It was for the first time in the Constitutional history of Pakistan, that the Objectives
Resolution, which henceforth formed part of every Constitution as a preamble, was
adopted and incorporated in the Constitution, in 1985, and made its effective part. This
was an act of the adoption of a body of law by reference, which is not unknown to the
lawyers. It is generally done whenever a new legal order is enforced. Here in this country,
it had been done after every martial law was imposed or the Constitutional order restored
after the lifting of martial law. The legislature in the British days had also adopted the
Muslim and other religious and customary laws, in the same manner, and they were
considered as the positive taws.

This was the stage, when the chosen representatives of people, for the first time accepted
the Sovereignty of Allah, as the operative part of the Constitution, to be binding on them
and vowed that they will exercise only the delegated powers, within the limits fixed by
Allah. The power of judicial review of the superior Courts also got enhanced.

The abovementioned Constitutional change has been acknowledged and accepted as

effective by the Supreme Court. Mr. Justice Nasim Hasan Shah, considering the changed
authority of the representatives of the people, in the case. Pakistan v. Public of Large,
(PLD 1987 SC 304 at p.356), stated as follows:--

“Accordingly unless it can be shown definitely that the body of Muslims sitting in the
legislature have enacted something which is forbidden by Almighty Allah in the Holy
Qur’an or by the Sunnah of the Holy Prophet (p.b.u.h.) or of some principle emanating to
be un-Islamic. “

Mr. Justice Shafiur Rahman, in his judgment in the same case, also relied on the Article
2A (Objectives Resolution), in forming his view at pages 361 and 362 of the above
judgment, as follows:---

“The concept of delegated authority held in trust enshrined in verse 58 has invariably and
consistently been given an extended meaning. Additionally all authority being delegated
authority and being trust, and a sacred one for that matter, must have well-defined limits
on its enjoyment or exercise. In the Holy Qur’an moreso, but also both in the Western and
Eastern jurisprudence delegated authority held in trust has the following attributes:---

(i) The authority so delegated to, and held in trust by, various functionaries of the State
including its Head must be exercised so as to protect, preserve, effectuate and advance
the object and purpose of the trust.

(ii) All authority so enjoyed must be accountable at every stage, and at all times, like that
of trustee, both in hierarchical order going back to the ultimate delegator, and at the other
end to the beneficiary of the trust.

(iii) In discharging the trust and in exercising this delegated authority, there should not
only be substantive compliance bur also procedural fairness.”

This aspect was made absolutely clear by the Supreme Court in Federation of Pakistan v.
N.W.F.P. Government (PLD 1990 SC 1172 at page 4175) in the following words:--

“It is held and ordered that even if the required law is not enacted and/or enforced by
12th of Rabi-ul-Awwal 1411 A.H. the said provision would nevertheless cease to have
effect on 12th Rabi-ul-Awwal. In such state of vacuum, vis-a-vis, the statute law on the
subject, the common Islamic law the Injunctions of Islam as contained in Qur’an and
Sunnah relating to offences of Qatl and Jurh (hurt) shall be deemed to be the law on the
Page No. 62 of 66
subject. The Pakistan Penal Code and the Criminal Procedure Code shall then be applied
mutatis mutandis, only as aforesaid.”

“It is thus clear that the Constitution has adopted the Injunctions of Islam, as contained in
Qur’an and Sunnah of the Holy Prophet (p.b.u.h.) as the real and the effective law. In that
view of the matter, the Injunctions of Islam as contained in Qur’an and Sunnah of the
Holy Prophet (p.b.u.h.) are now the positive law.

The Article 2A, made effective and operative the Sovereignty of Almighty Allah and it is
because of that Article that the legal provisions and principles of law, as embodied in the
Objectives Resolution, have become effective and operative. Therefore, every man-made
law must now conform to the Injunctions of Islam as contained in Qur’an and Sunnah of
the Holy Prophet (p.b.u.h.). Therefore, even the Fundamental Rights as given in the
Constitution must not violate the norms of Islam” .

101. I am also of the same view. The BRD Circulars (supra) are also on the same term
and cannot be deviated from. Interest is un-Islamic and cannot be allowed. Roll over, as
discussed is also un-Islamic and cannot be allowed. The discussion in the case of Qayum
Spinning (supra) is the reply the arguments of Mr. Aziz. I have given an anxious thought
and re-considered my earlier view in light of the argument of Mr. Aziz, but have been
unable to convince myself otherwise. I, therefore, hold that all agreements that have been
entered into and not be acted upon, as he disbursements have been made, are void. No
claim can be made by the banks on the basis of the said agreement. All documents,
whether negotiable instruments or otherwise are as a consequence are also void. I also
hold that no rollover can be allowed, and that the amount payable shall be the amount on
the basis of the agreement against which disbursement has been made. The
statement/Break-up of liability filed by the plaintiff is from 9-5-1993 and not from the
date of the actual disbursement. I, do not find force, in the argument of the plaintiff. I find
force in the arguments of the defendants.

102. Having gone through the pleadings I agree with the accounts filed by the counsel for
the defendant No. I as under:--

Page No. 63 of 66
A. NICF

1. Amount transferred Rs.59.83.054.00

into A/c 2164 from
I.I. Chundrigar Road
To Corporate Branch
On 24-1-1989 Exh.
6/19

2. Deposit made by Rs.1,90,09,483.00

defendants during the
Period 24-1-1989 to
28-11-1990 i.e. Last
Date of Operation of
A/Cs. Thereafter
plaintiff-Bank did not
allow any operation.

3. Withdrawals during Rs.1,81,79,791.74

the period 24-1-1989
to 31-11-1990.

4. Mark-up @ Rs.15,72,896.18
0.43/1000/ Day from
1-1-1989 to
31-12-1990 upto the
date when operation
of Account was
frozen.

5. Balance of outstand- Rs.67,26,258.00

ing N.I.F.C. A/C as
on 31-12-1990 (After
appropriating Mark
up)

B. NIDF

1. Sanctioned amount as Rs.1.5 Million

per transferred date
25-1-1989
Annexures: “S:
(Exh.P/19) Expiry on
31-12-1990

2. Actual amount
disbursed/availed Rs.10,99,325.00
Evident from Exh. Rs.2,15,297.00
6/20 P-131 (Inclusive Rs.13,14,622.00
M-Up Amount)

3. Mark-up from 25-1- Rs.2,40,598.36

1989 to 31-12-1990
0/31/1000/ Day
(Sanction Rate)

C. PAD/Outstanding L.Cs.
Inclusive US Aid L.C.

(i) L.C. Amount (Annexure F of Suit)

(ii) Less: 10% Cash

Margin Paid Vide
Page No. 64 of 66
 Cheque No.070706, Rs.35,40,000
dated Drawn at BCCI
Rs.3,55,000
Less: Payments

(i) 3-4-1990 Rs.9,19,705

(ii) 9-6-1990 Rs.9,67,248

(iii) Subsequent payments Rs.9,84,334

Total Rs.32,26,287

Principal Balance Outstanding Rs.3,13,713

Mark-up for the purposes of

Re-purchase Price:

(1) 1st shipment@ 11%

for 18 months
i.e 8-9-1988 to 7-3-1990 Rs.92,915.29

(2) 2nd shipment @ 11 %

for 18 months i.e.
18-11-1988 to 17-5-1990 Rs.159,152.42

(3) 3rd shipment @ 11 %

for 18, months
i.e. 30-11-1988
to 29-5-1990 Rs.273,039.51

(4) Subsequent interest

16:425 % from
30-5-1990 to 31-12-1990 Rs.187,862.41

(5) Total Mark-up Rs.712,993.00

Total Liability of A.B.C. is summarized as follows:

Principal Mark-up Total

NICF 51.53,363.24 15,72,896.20 67,26,259.44
NIDF 10-99-325.45 4,55,895.36 15,55,220.81
PAD 3,13,713.00 7,12,933.63 10,26,646.63
Total 65,66.401.69 27,41,725.19 93,08,125.88

103. Having agreed with the contention of the defendant No. 1, the amount admitted by
them being a sum of Rs.9,308,125.88 is liable to be paid by the defendant No. 1 to the
plaintiff.

104. I now come to the question whether the defendants Nos.2 to 5 are liable as
guarantors. It is the case of the plaintiff that the defendants Nos.2 to 5 are guarantors.
Whereas in the written statement the same has been denied that, the defendants Nos.2 to
5 never executed any guarantee as annexed with the plaint and that, the property shown to
be mortgaged with the Bank belongs to the defendant No. 1 and not defendants Nos. 2 to
5. It is stated that the signatures on the guarantee are not the signatures of defendants and
that no document was executed by the defendants Nos.2 to 5 by themselves or on their
behalf. It is also stated that on the dates mentioned on the guarantee the defendants Nos.2
to 5 were not directors of company in 1987. There being a categorical denial, the onus lay
on the plaintiffs to prove that the guarantees were signed by the defendants Nos.2 to 5.
No evidence has been led by the plaintiff to prove that the signatures contained on the

Page No. 65 of 66
guarantee is, in fact, the signatures of the said defendants Nos.2 to 5. In view of the
above, I hold that the defendants Nos.2 to 5 are not liable. The suit is dismissed as against
the said defendants.

105. The suit is, therefore, decree against the defendant No. 1 in the sum of
Rs.9,308,125.88 with costs. Suit is also decreed for sale of the mortgaged properties. The:
suit is decreed with mark-up on the decretal amount at the rate of 11 % chargeable once
and shall not be compounded in any manner whatsoever.

Q.M.H./M.A.K./U-15/K Order accordingly.

Page No. 66 of 66
2001 Y L R 1955 or 1855

[Quetta]

Before Raja Fayyaz Ahmed, C. J. and Tariq Mehmood, J

Messrs QASIM & CO. and 2 others---Appellants

versus

Messrs BOLAN BANK LIMITED through Manager, M.A. Jinnah Road Branch,
Quetta---Respondent

Regular First Appeal No.58 of 1999, decided on 4th June, 2001.

(a) Contract Act (IX of 1872)---

----S. 171--Term ‘lien’---Connotation---Lien is a right in one man to retain that which is

in his possession, but belongs to another till certain demands of the person in possession
are satisfied.

(b) Contract Act (IX of 1872)---

----S. 171--Banker’s lien---Setting of demand---Adjustment of joint and several accounts

operated by two or more persons against one individual deposit of one of them---For
validity of banker’s lien, there should be a mutuality of claim between Bank and the
depositor---In order that it should be permissible to set off one demand against another
both must mutually exist between the same parties---Joint and several accounts operated
by two or more persons cannot be adjusted against the individual deposits of one of
them---Not open to the Bank to claim the deposit of one partner made on his separate
account in order to utilize other deposit against the debt due from the firm--Partnership
deposits cannot be applied to the individual indebtedness of one of the partners---Bank
can exercise right of set off only when money owed by it is a sum certain, which is due,
against his same customer, and where there is no agreement, expressed or implied, to the
contrary---Banker should always be guided by his knowledge of circumstances, and
should be conscious in exercising right of set off in such cases.

PLD 1982 Kar. 200; PLD 1980 Kar. 115; Hussain Khan v. Barkat Ali and others PLD
1967 Kar. 829; Punjab National Bank Ltd. v. Arura Mal Durga Das AIR 1960 Punj. 632; .
1997 SCMR 1849; Bran-dao v. Barnett (1846) 12 CI & Fin. 787; N. Muhammad Hussain
Sahib v. The Chartered Bank and another AIR 1965 Mad. 266; AIR 1956 Mad. 570; AIR
1928 Lah. 316 and AIR 1945 Mad. 447 ref.

(c) Banker and customer--

---- Contract between banker and customer--Nature---Such contract is between a debtor

and creditor.

Practice and Law of Banking by Sheldon and Fidler 11th Edn., p.31 ref.

(d) Contract Act (IX of 1872)---

----S.37---Pecuniary obligation arising out of contract---Effect on legal representative of

deceased party---Such contract binds legal representative of deceased party to the extent
of the estate of the deceased coming to his hands.

A.D.B.P. v. Sanaullah Khan PLD 1988 SC 67 and Keith do Elements of Law of Contract
ref.

(e) Contract Act (IX of 1872)---

----S. 171---Banker’s lien---Adjustment of amount without consent of account-holder---

Plaintiffs were maintaining and operating account with defendant-Bank in their own
Page No. 1 of 9
right---Amount of Rs.5.5 million was received by the plaintiffs in their own right and the
same was remitted by plaintiffs themselves to the credit of their
account---Defendant-Bank adjusted some amount towards a guarantee executed by father
of the plaintiffs in his lifetime---Contention of the plaintiffs was that the defendant-Bank
had wrongly adjusted the amount and the same was done without their consent---Trial
Court on the basis of opinion expressed in letter by some official of State Bank of
Pakistan dismissed the suit--Validity--- Where mutuality was essential to the validity of a
set-off but the same was lacking, question of banker’s lien over the amount in dispute did
not arise and defendant-Bank could not claim it as a set-off of the amount---Approach of
Trial Court was totally illegal as the Court was under a legal obligation to decide the
validity of action of the defendant-Bank with reference to law and not to base its
decision, on the opinion expressed in the letter by some official of State Bank of
Pakistan---Action of defendant Bank was illegal and the plaintiffs were entitled to the
amount claimed and transferred from their account---Judgment and decree passed by
Trial Court were set aside by High Court---Suit of the plaintiffs was decreed against the
defendant-Bank with interest at the rate of 10% per annum from the date of institution of
suit till the date of decree and from the date of decree till its realization.

Syed Ayaz Zahoor for Appellants.

H. Shakeel Ahmed for Respondent.

Date of hearing: 28th May, 2001.

JUDGMENT

TARIQ MEHMOOD, J.---Facts, in brief, are that Qasim Khan had opened an Account
No.251 with the respondent-bank on 25th March, 1992. It appears from record that on
27th May, 1992, Azam Khan was allowed to operate the account. Further that on 21st
January, 1995, Qasim Khan had executed an unlimited letter of authority in favour for his
sons Muhammad Azam and Mir Alam to operate the account and also to deal with bank
on all matters, relating thereto. Exhs. D/4 and D/6 also reflect that on 19th November,
1996, the title of account was changed to that of Qasim Khan Muhammad Azam Khan.

Further facts are that Messrs Tameer-e-Nau Engineers and Contractors (hereinafter
referred to as the “Principle Debtor”) were awarded a contract by Lahore Development
Authority for the work “Development of Subzazar Housing Scheme Phase-II” on 27th
May, 1995. As per terms and conditions, principal-debtor furnished a performance
guarantee to L.D.A. on 1st December, 1994, issued by the respondent bank. Record
reflects that due to alleged default by principal-debtor, L.D.A. vide their letter, dated 14th
September, 1995 made a request through their bank for encashment of performance
guarantee. It’ is the case of respondent-bank that they had to own the commitment and
made payment. In the circumstances, principal-debtor approached to respondent-bank
vide their application, dated 26th November, 1995 and requested that the amount paid to
L.D.A. be converted into running finance, after adjustment of 10% cash margin. In order
to secure such finance, in addition to securities already given by them at the time of
issuance of guarantee, Qasim Khan allegedly, stood guarantor and executed a document
(Exh.D/13). The request was entertained and running finance was allowed. Qasim Khan
died on 28th June, 1996.

Record reveals that Mir Alam and Muhammad Azam are running their business in the
name and style of Messrs Qasim Khan and Company. And that Account No.251 was
being maintained by them. It also appears from record that appellant (Qasim Khan & Co.)
received a sum of Rs.55,00,000 from National Highway Authority, Islamabad and
remitted the same through telegraphic transfer in their aforementioned account. The
appellants produced memorandum issued by Islamabad Branch of respondent-bank about
the telegraphic transfer, commission and cost charged to the appellants for the aforesaid
transfer. The amount was actually credited in their account with Bolan Bank, Jinnah
Road, Quetta, but when the appellants issued cheques, the same were referred to drawer,
although some of the cheques were honoured. When appellants approached the
respondent bank, they were informed that sum of Rs.38,88,721.65 have been deducted
from their account to adjust the liability of principal-debtor, as their predecessor stood
guarantor.
Page No. 2 of 9
In the events of the background, the appellants instituted a suit on 4th June, 1998 seeking
recovery of Rs.38,88,721.65 alongwith interest at the prevailing State Bank rate with
effect from 28th March, 1998 till the realization of decretal amount. It was the case of
appellants that bank had no authority to debit their account in the manner done by them.
They also disputed the correctness of guarantee allegedly executed by their predecessor
or later father Qasim Khan. The defendant-bank contested the suit and it was mainly
contended that the bank had a lien or more appropriate a right to set-off against all money
of the customer in its hand and bank was at liberty to transfer the deposit to set-off and
liquidate debts due from principal-debtor.

The trial Court framed following issues on the pleadings of the parties:---

“(1) Whether the suit of plaintiffs is not maintainable in view of preliminary objections
raised in the written statement?

(2) Whether the late Qasim Khan stood guarantor for Messrs Tameer-e-Nau Engineers
and contractors, for the construction work of Sabzazar Housing Scheme, Phase-11,
Lahore who did not complete the work in time?

(3) Whether transfer of Rs.38,a8,721.65 from the account of late Qasim Khan to another
account is according to the banking procedure?

(4) Whether the plaintiffs are entitled for relief claimed for?”

Both the parties led evidence in support of their respective contentions. The trial Court
held that Qasim Khan had executed the guarantee (Exh D/13) in his life time. Also that he
was holder of Account No.251, which was being operated by the appellants in his lifetime
and even now, after his death. On the issue, whether the amount could be transferred, the
trial Court while deciding the issue in affirmative, simply relied upon a letter (Exh. D/15)
addressed to appellants, in reply to their complaint filed with the State Bank of Pakistan.

Syed Ayaz Zahoor, learned counsel for the appellants vehemently argued that;

(i) the respondent-bank was not competent to make payment to Lahore Development
Authority on the basis of guarantee (Exh.D/7) and since it was an illegal act on the part of
the respondent-bank, therefore, it alone was responsible.

(ii) the guarantee was issued after obtaining security of hypothecation of stock of
construction material and equitable mortgage of bungalow worth million of rupees but no
action was taken by the bank either against principal-debtor or their guarantor,

(iii) that no lien was marked in the account of the appellant, and therefore,
adjustment/deduction by the bank was illegal,

(iv) no security was furnished by late Qasim Khan whereof bank could claim lien,

(v) the alleged guarantee (Exh. D/3) was forged documents and it was for such reason
that it was never enforced in the lifetime of Qasim Khan,

(vi) the trial Court was under legal obligation to compare admitted signature of Qasim
Khan on record with his disputed signatures and in absence of such exercise, it could not
be validity held by the trial Court that guarantee was executed by late Qasim Khan,

(vii) the amount could not be recovered from the appellants without instituting a suit for
recovery against the principal-debtor and the guarantors, who had furnished security at
the time of issuance of bank guarantee or sanction of running finance,

(viii) the judgment of trial Court is result of misreading of evidence.

Support was sought from judgments reported in PLD 1982 Karachi page 200, PLD 1980
Karachi page 115 and PLD 1967 Karachi 829.

Page No. 3 of 9
On the other hand, Mr. H. Shakeel Ahmed, learned counsel for the respondent bank
contended that;

(i) appellants cannot challenge the action of the bank in making payment to L.D.A., in
that, Qasim Khan stood guarantor after making payment to L.D.A. and at the time of
sanction of running finance;

(ii) the signature of Qasim Khan has been proved on-record, inasmuch as, the Bank
Manager posted at the relevant time has appeared in Court and deposed that Qasim Khan
signed in his presence and further that even the trend of cross-examination suggest that
execution of guarantee by late Qasim Khan has not been disputed by the appellants;

(iii) and that action of respondent-bank is protected by section 171 of the Contract Act, in
that; it had a lien over it. He referred PLD 1982 Karachi 200, PLD 1980 Karachi 115 and
AIR 1960 Punjab 632.

Although, lengthy arguments were addressed from both the sides, it appears to us that the
real point involved in the controversy has been ignored not only by the learned counsel
for the parties but also overlooked by the Court below, The real point for controversy is
whether in the facts and circumstances of the case, bank could claim a set-off in the
amount lying in appellants’ account and it is important to point out that both the parties
advanced lengthy arguments on the matter nor relevant including question of Bank’s lien,
although bank in its written statement filed before the trial Court actually claimed a
set-off. The other point for determination is whether Qasim Khan executed alleged
guarantee in his personal capacity or otherwise. In case, it was executed in personal
capacity, whether bank could at all adjust the account of principal debtor on the basis of
its right of set-of and to what extent against his successors. As there is sufficient evidence
on record to decide the points of determination, therefore, we proceed to finally decide
the controversy on the basis of available record, particularly when nobody requested for
leading any additional evidence and otherwise there is sufficient evidence on record
(Refer 1997 SCMR 1849). It may not be irrelevant to point out that admittedly appellants
were running and maintaining an account and the amount in dispute was deducted from
their account, to adjust the liability of principal debtor but without any notice. So, very
heavy burden was upon respondent-bank to defend their action, particularly when they
themselves produced documentary evidence to show the nature of account being
maintained by the appellants.

However, since Mr. H. Shakeel Ahmed, learned counsel for the respondent bank while
defending the action of bank, heavily relied upon section 171 of the Contract Act,
therefore, it would be appropriate to reproduce section 171 of the Contract Act and to
consider the judgments cited at the bar by learned counsel for the parties. The others we
noted at our own to highlight the difference between Banker’s right of lien and set-off
and the circumstances in which bank can claim such right and against whom;--

171. General lien of bankers factors, wharfingers attorneys and policy-brokers.

---Bankers, factors, wharfingers, attorneys of a High Court and policy-brokers may, in the
absence of a contract to the contrary, retain as a security for a general balance of account,
any goods bailed to them; but no other persons have a right to retain, as a security for
such balance, goods bailed to the unless there is an express contract to that effect.”

In simple words, a lien is a right in one man to retain that, which is in his possession, but
belongs to another, till certain demands of the person in possession are satisfied.

(i) Fancy Investment Ltd. Karachi v. United Bank Ltd. and 2 others (PLD 1982 Karachi
200). Although both the learned counsel have relied upon this judgment, but in our view
the same is not relevant in the facts and circumstances of the case. In context of banker’s
it was held in the said case that:--

“Where security is delivered to a banker for a specific purpose it is inconsistent with right
of lien and impliedly there is an agreement to contrary, and therefore, a banker cannot
exercise lien over such property. Before lien is exercised by a banker he has to establish
that he has taken possession of security as a banker and secondly there is no contract to
contrary.”
Page No. 4 of 9
Also, for determining the nature of lien, following passage was quoted from Bran-dao v.
Barnet (1846) 12 Cl & Fin. 787, which is being consistently followed:--

“Banker most undoubtedly have a general lien on all securities deposited with them as
bankers by a customer, unless there be an express contract, or circumstances that show an
implied contract inconsistent with lien. “

(ii) Farooq v. Messrs Eastern Banking Corporation Ltd. Karachi (PLD 1980 Karachi
115).

Incidentally this judgment has also been relied upon by both the learned counsel but is
not relevant. In this case, the claim of a banker for lien under section 171 of the Contract
Act was repelled on the ground that the bank had not proved that there was any general
balance outstanding against the customer in his account, and secondly that no goods were
pledged to the banker over which he could exercise lien.

(iii) Hussain Khan v. Barkat Ali and others (PLD 1967 Karachi 829).

The judgment is also not relevant as in this case it was held that a building contractor has
no lien on constructions made by him for the payments of his bills. This kind of lien is
not recognized by section 17 of the Contract Act. No lien can arise from building
contract, whether by operation of law or under the terms of the contract. The rule is that
property in materials built into a building ceases to the property of the contractor and
becomes that of the owner. The contractor, in the circumstances, could not lay any claim
to the property and was not entitled to proceed against the same in execution of the
decree which he had obtained against the owner.

(iv) Punjab National Bank Ltd. v. Arura Mal Durga Das (AIR 1960 Punjab 632).

It was held in this case that a bank has no lien upon the deposit of a partnership for a
balance due by one of the partners. Although this judgment has been cited by learned
counsel for the respondent-bank, it appears to us that same goes against him but since it is
relevant, therefore, we found it appropriate to reproduce relevant portion of the
judgment:--

“ 14. The rule, of English law that the Bank has a lien or more appropriately, a right to
set-off against all monies of his customers in his hands has been accepted as the rule in
India. According to this rule when monies are held by the Bank in one account and the
depositor owes the Bank on another account, the Banker by virtue of his lien has a charge
on all monies of the depositor in his hands and is at libel to transfer the monies to
whatever account, the banker may like with a view to set-off or liquidate the debts.----

15. In order to create Banker’s lien on several accounts it is necessary that they must
belong to the payer in one and in the same capacity: Where the person has two accounts,
one a trustee account and another private account at a Bank, deposits in the two accounts
cannot be set-off, the one against the other.----

16. Bankers have a right to combine one or more accounts of the same customer. But it
cannot combine the account belonging to another or to himself alone with another
account which is the joint account with another and third person -----

17. Similarly, the Banks have no lien on the deposit of a partner, on his separate account,
for a balance due to the Bank from the firm. Therefore, the banker is entitled to combine
all accounts kept in the same right by the customer. It does not matter whether the
accounts are current or deposit or whether they are in the same or different branches----It
is of essence to the validity of a banker’s lien, that there should be a mutuality of claim
between the Bank and the depositor. In order that it should be permissible to set-off one
demand against another both must mutually exist between the same parties.

One this reasonings the joint and several accounts operated by two or more persons
cannot be adjusted against the individual deposit of one of them. It is not oven to the bank
to claim the deposit of one partner made on his separate account in order to utilize other
Page No. 5 of 9
deposit against the debt due from the firm. In other words partnership-deposits cannot be
applied to the individual indebtedness of one of the partners. Courts in England do not
allow a lien to the banker on the deposit of a partner on separate account for a balance
due to the Bank from partnership firm.

(v) N. Muhammad Hussain Sahib v. The Chartered Bank and another (AIR 1965 Madras
266).

It was held in the said case that:---

“The general lien of bankers over any goods bailed to them is embodied in section ‘171
of the Contract Act. The question is whether any such lien may be over money deposited
by the customers. Where moneys are deposited in a bank the ownership of the moneys
passes to the bank and the right of the bank over the moneys lodged with it would not be
really a lien at all and it would be more correct to speak of it as a right of set-off or
adjustment. Whether the right of the bank is called a lien or set-off, the said right can be
exercised only by the bank by getting the funds deposited in its branch by the customer
transferred to it with the consent of the customer. It is not open to the customer to call
upon the bank to exercise any such lien or set off. “

(vi) It would also be advantageous to refer the judgment reported in AIR 1956 Madras
570, as in the said judgment their lordships were pleased to highlight distinction between
lien and right to set-off or justification by banker:---

“The lien under section 171 can be exercised only over property of some-one else and not
his own property. Thus when goods are deposited with or securities are placed in the
custody of a bank it would be correct to speak of the rights of the bank over the security
or the goods as a lien because the ownership of the goods or securities would continue to
remain in the customer. But, when moneys are deposited in a bank as a fixed deposit, the
ownership of the moneys passes to the bank and the right of the bank over the moneys
lodged with it would not be really a lien at all. It would be more correct to speak of it as a
right of set-off or adjustment. “

(vii) In another judgment reported in AIR 1928 Lahore 316. It was held that general lien
held by the bank does not entitle it to appropriate the fixed deposit in ‘either or survivor’
account towards the debt due by one of them alone. Following observations were made
after giving brief background of the case, which is reproduced hereunder:---

“A bank issued a fixed deposit receipt for Rs.500 in favour of B & R, the amount being
payable to either or survivor. R obtained an overdraft from the bank. The bank credited
the amount due under the fixed deposit receipt to this overdraft and on B demanding
payment informed him of the action taken on it and refused to pay. B thereupon brought
an action against the bank for the recovery of the amount due under the fixed deposit
receipt.

Held; that the bank could not appropriate the money towards the debt due by R alone.”

(viii) Similarly in other case reported in AIR 1945 Madras 447. Bankers lien and bankers
right of set-off were explained in the following words:---

“Banker’s lien is the right of retaining things delivered into his possession as a banker if
and so long as the customer to whom they belonged or who had the power of disposing of
them when so delivered is indebted to the banker on the balance of the account between
them provided the circumstances in which the banker obtained possession do not imply
that he has agreed that this right shall be excluded. Banker’s lien can properly be said to
arise only in respect of any securities held by the bank. If the customer deposits certain
securities and ultimately there is a sum due to the bank, the bank has a lien over these
securities and it could hold them against the amount due by the customer. In the case of
money of the customer paid into the bank into his current account or deposit account the
amount ceases to be the property of the customer and becomes the property of the banker
and the bankers is thereafter under a contractual obligation to repay or give credit to the
customer for the amount. In such a case, there is no property of the customer of which the
banker has possession, the possession of the banker-co-existing with his own ownership
Page No. 6 of 9
of the money. Accordingly the essential conditions necessary to the existence of the lien
are lacking.

Under his right of set-off the banker can take into account any item in his own favour as
against any payment in by his customer before arriving at the balance subsisting ‘
between them.”

(ix) Mercantile Bank of India Ltd. v. Rochaldas Gidumal & Co. AIR 1926 Sindh 225.

It was held that lien of a bank over the money of its customer does not extend to amounts,
which have been handed over for a specific purpose. The relevant portion is reproduced
hereunder:

“Where a person hands over certain money to a bank to be transmitted to another place
and to be paid to the payee there and the bank issues a bill of exchange or a demand draft,
the money is held by the bank under a special contract which excludes the general lien of
banker’s on goods bailed. The fact that the remitter and payee are the same person or that
the money is to be transmitted by telegraphic order makes no difference.”

It may also be seen that contract between the bank and its customer is a contract between
a debtor and a creditor. In Sheldon and Fidler’s Practice and Law of Banking, Eleventh
Edition, at page No. 31, following observation has been made:--

“As we have seen, the contract between the banker and his customer is a contract
between a debtor and a creditor. The contract contains an implied promise by the banker
to repay the money lent to him by the customer. Where, however, a customer has an
account which is in credit but owners money to the banker in respect of another account,
the banker may have the right to reduce his liability to repay the customer by the amount
which the customer owes to him, or, if that is the case, to reduce the amount which the
customer owes to him, by the credit balance in the customer’s account. This is known as
the banker’s right of set-off or of combining accounts. The banker may exercise the right
of set-off only when the money owed to him is a sum certain, which is due, and where
there is no agreement, express or implied, to the contrary. “

So, it is clear that bank can exercise right of set-off only when the money owed by it is a
sum certain, which is due, against his same customer, and whether there is no agreement,
expressed or implied, to the contrary. The banker should, therefore, always be guided by
his knowledge of circumstances, and should be conscious in exercising right of set-off in
such cases. Applying these principles, simple facts are that Qasim Khan had opened an
account in has name, but subsequent documents produced by bank itself (Exhs.D/4 and
D/6) reflect that either the title of account was changed and/or the same was being
operated by Muhammad Azam Khan and Mir Alam Khan, even in the lifetime of Qasim
Khan. Qasim Khan allegedly executed guarantee (Exh. D/13) but in his personal capacity,
Admittedly Qasim Khan died on 28th June, 1996. There is no denying of the fact that
appellants continue operating the said account, but this cannot be ignored that persons
can do business in any name and they might be running it in the name of their late father
out of love, respect etc. The firm name is merely a convenient mode of describing and it
is not very important, in that, bank has not disputed that after the death of Qasim Khan,
they are running and maintaining the account. Also that T.T. was purchased by Messrs
Qasim Khan & Co. (Exh. P/3-A) and credited in their account, at Quetta. The case of
appellants/plaintiffs is very simple and brief. They say that on 21st February, 1998, an
amount of Rs.5.5 million was remitted from Islamabad in their account, which was duly
credited but the bank without any lawful authority transferred a sum of Rs.38,88,721.65
in the account of principal-debtor. Azam Khan when appeared in witness-box specifically
stated that he had received a bill from the National Highway Authority and sum of Rs.5.5
million was sent through telegraphic transfer from Islamabad Branch to respondent-bank.
The amount was duly credited in their account. This admittedly happened after about one
year and eight months of the death of Qasim Khan. There is also no denial of the facts
that an amount of Rs.38,88,721.65 was transferred from the account of appellants to
adjust the liability of principal debtor (and alleged liability of Qasim Khan as guarantor,
in his personal capacity). It is also not disputed that neither the transfer was made with
the consent or authority of the appellants nor any prior notice was given to them. In such
circumstances, the burden vas upon the bank to justify the transfer. Respondent-bank, in
Page No. 7 of 9
its written statement set up the plea that they had a lien or more appropriately a right to
set-off against all money belonging to alleged guarantor to liquidate debts due, in
whatever account, the amount may be. But it is not that simple as appellants were
maintaining and operating A/C No.251 with the respondent Bank in their own right,
amount of Rs.5.5 million was received by the appellants in their own right from L.D.A.,
nothing to the contrary has been proved or even alleged by the bank and statement of
Azam Khan went unchallenged, inasmuch as, the same was remitted by appellants
themselves to the credit of their account. The question of banker’s lien over the amount in
dispute did not arise and respondent-bank could not possibly claim it as a set-off as the
amount did not belong to Qasim Khan and that mutuality is essential to the validity of a
set off but the same was lacking. And learned counsel for the respondent also failed to
satisfy us, as to how so-called amount of alleged guarantor could be claimed as set-off, to
adjust the liability of a principal-debtor.

Also that the appellants or their partners. were not guarantors of principal-debtor. Further
that resort could only be made to a Court of law, in the peculiar circumstances of the
case. So, appellants were not liable for the alleged guarantee of their predecessor or late
father, unless it could be established in a Court of law and to the extent of the estate of
the deceased coming to their hands. But from the evidence produced on record, it is clear
that account was being maintained by Muhammad Azam Khan and Mir Alam Khan even
in the lifetime of their father Qasim Khan. Although, initially he had opened the account
in his personal capacity but subsequently it underwent a change. It is also admitted
feature of the case that after the death of Qasim Khan, they were operating and
maintaining the account in their own right. Needless to add that documents were
produced by bank itself to establish these facts. The alleged guarantee executed by Qasim
Khan was personal in nature. Although clause 9 of the guarantee provides that in the
event of his death, it shall continue to be binding and operating against his successors.
However, the settled principle of law is that a pecuniary obligation arising out of the
contract by a deceased party will bind his legal representative to the extent of the estate of
the deceased coming to his hands. Refer A.D.B.P., v. Sanaullah Khan (PLD 1988 SC 67).
However, the extent to which contractual obligation is binding on the legal representative
of a party to such contract has been elucidated in the following extract by Keith in his
book on Elements of Law of Contract, which has been quoted with approval by the
Hon’ble Supreme Court in the afore-mentioned cited case:---

“Generally a contractual obligation undertaken by deceased promisor would be binding

on his legal representatives to the extent of the estate of the deceased promisor in their
hands as this obligation of the legal representative is not personal. However, there is one
exception to this rule in case of contracts which involve personal elements, and if
personal skill is the essence of the contract, the obligation under the contract can be
discharged only by that party whose personal skill is involved. The legal representatives
of the deceased promisor cannot be required to perform, nor can they render performance
of contract involving personal skill and action. On the death of a person, on principle, the
benefits and burdens of his contracts pass to the legal representatives as part of his
estate.”

It was also observed that:---

“From this a general principle has arisen that a pecuniary obligation arising out of the
contract by a deceased party will bind his legal representative to the extent of the estate of
the deceased coming to his hands. This principle has been statutorily recognized in
section 50 of the Civil Procedure Code which lays down the extent to which a decree
passed against a judgment-debtor who dies before the decree has been fully satisfied,
against legal representative. “

Finally it was held that:--

“Similarly in case of money decree the liability of the legal representatives of a party who
has died after the passing of the decree extends under section 52 of the C.P.C. to such
property of the deceased as is proved to have come into their possession or to the extent
of the property of the deceased in respect of which such legal representatives have failed
to satisfy the Court that they have duly applied such property of the deceased which came
to their possession. In this context of the law, without proving that any property has come
Page No. 8 of 9
into the hands of the son and to what extent in value compared with the pecuniary
liability of the deceased father, it cannot be recovered from the son. This aspect was
completely overlooked by the trial Court and the First Appellate Court and no such
inquiry was made or any proof furnished by the appellant-bank so as to make respondent
No. 1 liable for the debts of his deceased father.”

It may also be seen that the learned trial Court while deciding Issue No.3 in favour of
bank has simply relied upon a letter (Exh.D/15) issued by the State Bank of Pakistan, in
reply to complaint tiled by the appellants against the respondent. The approach of learned
trial Court was totally illegal as Civil Court was under a legal obligation to decide the
validity of action of the respondent with reference to law and not to base its decision, on
the opinion expressed in the letter by some official of State Bank, particularly when no
law was referred and more particularly when the appellants have specifically alleged that
Manager of State Bank of Pakistan and Manager of Bolan Bank were relative inter se. We
may add that we have intentionally withheld our views about genuineness of the
guarantee allegedly executed by late Qasim Khan, as it was not found necessary in order
to resolve the real controversy and lest it may prejudice the case of either party, in case
appropriate proceedings are filed.

In view of our findings, we declare the action of respondent-bank was patently illegal and
hold that the appellants are entitled to the amount claimed and transferred from their
account. Also that section 34, C.P.C. authorizes a Court to award interest from the time of
the institution of the suit up to the date of decree and further till the realization of the
amount. Although the act of respondent-bank in withholding the amount of appellants or
making deduction from their account and adjustment in the account of principal debtor
was wholly illegal and appellants have also claimed interest from the date of deduction,
the learned counsel for appellants has not addressed any argument, whether we can grant
such interest or the same is governed by some substantive law. Further neither any
damages have been claimed against the bank nor any evidence was led to justify the
same. Accordingly, we set aside the judgment and decree, dated 25th September, 1999
passed by learned Additional District Judge-II, Quetta and decree the suit of appellants
against the bank in the sum of Rs.38,88,721.65 with interest at the rate of 10% per annum
from the date of institution of suit till the date of decree and from the date of decree till its
realization, with cost throughout. Decree sheet be drawn.

Q.M.H./M.A.K./77/Q Appeal allowed.

Page No. 9 of 9
P L D 1987 Supreme Court 53

Present : Muhammad Haleem, C. J., Shafiur Rahman,

Zaffar Hussain Mirza and Mian Burhanuddin Khan, JJ

Ch. HABIBULLAH-Appellants
versus
SHEIKHUPURA CENTRAL COOPERATIVE
BANK LTD.-Respondent

Civil Appeals Nos. 91 of 1977 and 25 to 27 of 1983, decided on 18th November,

1985.

(Against the judgment and order of the Lahore High Court, dated 10-1-1977 in R. F.
A. No. 46 and R. F. A. No. 47 of 1967 and 1968 respectively).

(a) Constitution of Pakistan (1973)•--

-- Art. 185(2)(3)-Contract Act (IX of 1872), S. 171-Leave to appeal granted to petitioners

(two sisters and one brother) as an appeal as of right under Art. 185(2) of Constitution
had been filed by another brother of petitioners against same consolidated judgment of
High Court whereby four Regular First Appeals filed by respondent were allowed. [p.
54]A

(b) Contract Act (IX of 1872)-

-- S. 171--General lien of Banker-Father of appellants opening separate fixed deposit
accounts with respondent-Bank in names of his two sons and two daughters (all minors at
relevant time) with different amounts and himself operating same under arrangement with
Bank-High Court coming to conclusion that deposited amount belonged to father of
appellants and that appellants were mere Benamidars-No gift of amount deposited in
favour of appellants or Fixed Deposit Receipt holders was found made out-Principles
contained in S. 171, held, were attracted to case in circumstances- Decision of High
Court, therefore, did not suffer from any infirmity. [pp. 57, 6018 et seq & C

(c) Gift-

-- Proof-Conduct of donor and donee-When father deposited amount in a Bank in fixed

account in the name of his minor children and continued to operate such account
himself for a long time even after his children had attained majority without any
objection on their part. helot, alleged gift was neither consistent with the conduct of
donor nor the donee, rather their conduct disproved such gift. [p. 57]D

Guram Ditta and another v. T. Ram Ditta A I R 1928 P C 172 ; Muhammadan Law by
Fyzee, 1954 Edn., p. 218 ; Page on Law of Banking, with Edn., p. 123 and Contract Act
by Pollock and Mulla, S. 171 ref.

Zakiuddin Paul, Senior Advocate Supreme Court and Saleem Ahmad

Malik, Advocate-on-Record for Appellants.

Ex parte for Respondent.

Date of hearing : 18th November, 1985.

JUDGMENT

SHAFIUR RAHMAN, J,-Leave to appeal was granted to the two daughters and a
son of Ch. Khushi Muhammad in their separate petitions, as an appeal as of right under
Article 185(2) of the Constitution had been filed by another son of Ch. Khushi
Muhammad against the same consolidated judgment of the Lahore High Court dated
10-1-1977 whereby four Regular first Appeals filed by respondent-Bank were allowed
and the judgments and decrees of the trial Court in the four separate suits instituted by
these appellants were set aside and their suits dismissed.
Page No. 1 of 6
 Ch. Khushi Muhammad, the father of the four appellants, the non-contesting
defendant No. 2, on 5-9-1949 approached the respondents Bank for depositing in fixed
account a sum of rupees eighty thousand tendered in cash. The account was to be
operated by him. He was issued a fixed deposit receipt for this amount. He deposited in
cash a further sum of rupees twenty thousand and when the balance in his account was of
Rs. 1,02,334 he equally divided it, into two fixed deposit accounts in November 1951 in
the names of his two minor sons. Habibullah and Tawakalullah each starting with deposit
of Rs. 51,667. In opening these ,,:counts he made the following declarations :-

“I desire you to open a Fixed Deposit Account in the name of Ch. Habibullah my son and
send you herewith Rs. fifty one thousand, six hundred and sixty-seven only (Rs.
51,667) for deposit in the same. He is a minor, His last birth day was on 10th August.
1951 when he was 11 years of age. I, Ch. Kltushi Muhammad son of Chandi, am the
father of this minor and as such shall operate on the account. I have read the rules of the
Bark and agree to abide b~ the same” (Exh. D. W. 1/43 at p. 31).

`I desire you to open a Fixed Deposit Account in the name of Ch. Tawakalullah, my
minor son and send you herewith Rs. fifty-one thousand six hundred and sixty-seven
only (in words) (Rs. 51,667) (in figures) for deposit in the same. He is a minor. His last
birthday was on 15th June, 1951 when he was 14 years of age. I, Ch. Khushi
Muhamniad son of Ch. Chandi, am the father of this minor, and as such shall operate
on the account. I have read the rules of the Bank and agree to abide by the same.” (Exh.
D. W. 1/7 page 118).

Ch. Khushi Muhammad continued operating these accounts till 1962-63 when the
balance in the account of Ch. Habibullah was Rs. 59,587 and in that of Tawakalullah Rs.
42,4600.

On the 25th November, 195& Khushi Muhammad opened another account in the
name of B. Kalsoom addrcsslng the Manager in the following words :--

“I desire you to open a Fixed Deposit Account in the name of B. Kalsoom Begum my
daughter and send you herewith Rs. Ten thousand for deposit in the same. She is a
minor. Her last birthday was on the 10th August, 1958 when she was 14 years of age. I,
Ch. Khushi Muhammad, am the father of this minor and as such shall operate on the
account. I have read the rules of the Bank and agree to abide by the same.” (Exh. D. W.
1/76, page 251).

There was opened another similar account by Khushi Muhammad but this time with
Mst. Aziz Fatima which was joint to be operated jointly or severally. It started with a
deposit of rupees v:n thousand but had in its balance Rs. 10,350 on 29-11-1962 while the
account of hisi. Kalsoom had a balance of Rs. 16,068 in November, 1963.

Khushi Muhammad was shown in the bank account books to have overdrawn his
account to the extent of Rs. 1,04,559.18 obtained by pledging the fixed deposit receipts of
these foul- accounts. The Bank exercised its line by diverting the balance as follows :-

Rs. 23,384.00 ...... ... on 25-11-1983

Rs. 59,587.04 ...... ... on 26-11-1983
Rs. 16,068.38 ...... ... on 26-11-1983
Rs. 5,519.76 ...... ... on 26-11-1,983

Rs. 1,04,559.18

The four appellants made efforts to make realizations of the amounts shown on their
Fixed Deposit Receipts and when they failed, each instituted a separate civil suit for
recovery of the amount shown in each with interest at stipulated rate for the period of F.
D. Rs. and at 6 % thereafter.

Ch. Habibullah instituted the civil Suit (No. 202) on 28-3-1964 seeking recovery of
Rs. 60,469.92. His case in the plaint was that the defendant Bank had issued to him for
lawful consideration a F. D. R. No. 53/63 dated 29-1 1-1962 for Rs. 57.572 at the rate of
Page No. 2 of 6
3J% maturing on 25-11-1963. On 1-7-1963 the defendant-Bank ncknowledgcd the
amount vide its Letter No. 249. When a demand for it was made the defendant: Bank
“failed to do so on the plea that the amount due to the plaintiff under this fixed deposit
receipt has been adjusted towards certain alleged account of defendant No. 2, the father
of the plaintiff”. It was denied that his father had ever contracted a loan, or lawfully
pledged the F. D. R. The plaintiff claimed interest after the date of maturity at the rate of
6 % and fixed his entitlement on the date of institution of suit at Rs. 60,469.62.

Only defendant-Bank contested the suit and by an amendment in written statement

challenged the jurisdiction of the civil Court. On merits, it was contended that the
plaintiff never deposited any amount for obtaining F. D. R. It was defendant Khushi
Muhammad, his father who had made the deposit, obtained the F. D. R. and had
throughout operated the account. In 1954, he had secured a loan of Rs. 83,000 and
executed the pronote and pledged the F. D. R. Finally, the balance of Rs. 59,587.04 was
adjusted towards the loan of defendant No. 2. It was claimed by defendant-Bank that “the
plaintiff has no right to claim and cannot legally claim any amount of which he was only
a Benamidar”.

In the replication, the plaintiff claimed that the defendant No. 2, his father had gifted
this amount to him and he had no authority to pledge the F. D. R. or to act on his behalf
treating him to be minor when even to the knowledge of the defendant-Bank, the plaintiff
had since long ceased to be a minor.

On the same set of facts but on different Fixed Deposit Receipts, Mst. Kulsoom
Begum (Suit No. 203) sought recovery of Rs. 16,309.09, Mst. Aziz Fatima (Suit No. 204)
sought recovery of Rs. 10,875.25 and Tawakul Ullah (Suit No. 205) sought recovery of
Rs. 44,61 1.59. The Bank pleaded the same defence as in the case of Habibullah and in
their replications these plaintiffs also set up gifts of the amount in their favour, denying at
the same time, any loan due to the defendant-Bank from Khushi Muhammad, their father.

The trial Court consolidated all the four suits and framed the following issues on the
pleadings of the parties :-

“(1) Whether the amounts standing in the name and accounts of all the four plaintiffs
were in reality the property of Khushi Muhammad, defendant No. 2 and the accounts in
the name of the plaintiffs were Benami ?

(2) Whether defendant No. 2 took no loan from defendant No. 1 amounting Rs. 83,000
and Rs. 20,000 ? (Onus objected to)

(3) Whether the defendant No. 2 did not pledge the accounts of Ch. Habibullah and Ch.
Tawakal Ullah for these loans ? (Onus objected to).

(4) Whether the defendant No. 2 has any right or authority to pledge the accounts of
Habibullah and Tawakalullah for the said loans
(Onus objected to). .

(5) Whether defendant No. I was entitled to adjust the loans against the accounts of the
plaintiff ? (Onus objected to).

(6) Whether this Court has no jurisdiction to try the suit

(7) Relief.”

Out of the four plaintiffs only Tawakulullah appeared as his own witness and as
attorney of the other three. Their father Ch. Khushi Muhammad who as defendant did not
file a written statement but appeared as P. W. 5. In defence, the Bank examined only one
witness. The plaintiffs were allowed to inspect the account books of the Bank in original,
admit or deny copies of a number of documents. The trial Court held that the plaintiffs
were not mere Benamidars but real owners of the amounts for which F. D. Rs. were held
by them that loan of Rs. 83,000 and Rs. 20,000 against defendant No. 2 was not proved,
defendant No. 2 had no authority to pledge the F. D. Rs. and the Bank was not entitled to

Page No. 3 of 6
adjust the loans from deposits by these F. D. Rs. The civil Court was found to have
jurisdiction in the matter. Hence all the suits were decreed with costs and interest.

The defendant-Bank filed four separate appeals. The High Court

while disposing of these appeals resettled the issues into the following two issues :-

“(i) Whether the plaintiffs were only Benamidars ; and

(ii) Whether the father had made valid gifts in favour of his sons and daughters ?”

The learned Judges examined the entire evidence afresh and came to the conclusion
that the deposited amount belonged to Ch. Khushi Muhammad and that the plaintiffs
were mere Benamidars. No gift of the; amount deposited in favour of the plaintiffs or the
Fixed Deposit Receipt holders was found made out. Hence all the four appeals were
allowed and the suits dismissed with costs.

The case of the appellants is that no doubt Ch. Khushi Muhammad, their father, was
the original owner of all the sums deposited with the Bank but by opening an account in
plaintiff’s name separately he clearly intended and effected a gift in their favour. He
continued to operate their account during minority being their natural and legal guardian
but after they attained majority his intermeddling with their accounts was wholly
unauthorized and the plaintiffs’ rights could not be jeopardized by such unauthorized act
Once the plaintiffs are recognized as owners of the amount, no question of its being
lawfully pledged by someone else, even their own father would arise as all of them were
major. Nor could the amount be adjusted towards the liabilities, even if existing, of their
father.

There are certain admissions, or admitted facts on the record which clinch the issue
on the factual plane. For example, Tawakulullah as his own witness and as attorney of his
brothers and sisters, the other plaintiffs, made the following admission.

Besides, these Fixed Deposit Receipts were periodically renewed either by collecting
interest or by reinvesting the principal amount along with the interest. This happened not
once or twice but over a long period of dealings between the respondent-Bank and the
father of the plaintiffs. This is sufficient to sustain the finding of fact recorded by the
High Court that no gift as such was proved, that the plaintiffs were Benamidars and the
beneficial ownership vested at all stages in Ch. Khushi Muhammad, their father.

Gift in favour of the two daughters sought to be proved by Ch. Muhammad Iqbal (P.
W. 3) and Hafiz Abdul Hayee (P. W. 4) ha, rightly been disbelieved by the High Court
because it is neither consistent with conduct of the donor nor of the donee. Rather, their
conduct disproves any such gift.
The law on the subject is clear enough. In a case from N.-W. F. P., that of Gulam Ditta
and another v. T. Ram Ditta (AIR 1928 P C 172) the law was summed up in the ollowing
words

“The general principle of equity, applicable both in this country and in India, is that in the
case of a voluntary conveyance of property by a grantor, without any declaration of
trust, there is a resulting trust in favour of the grantor, unless it can be proved that an
actual gift was intended. An exception has, however, been made in English law, and a
gift to a wife is presumed, where money belonging to the husband is deposited at a
Bank in the name of a wife, or, where a deposit is made, in the joint names of both
husband and wife.

This exception has not been admitted in Indian law under the different conditions
which attach to family life and where the social relationships are of an essentially
different character. The p im:iple to be applied has been stated in Kerwick v. Kerwick A
I R 1921 P C 56= 48
Cal. 260==47 I A 275 (P C).

The general rule and principle of the Indian law as to the resulting trusts differs but
little, if at all, from the general rule of English law upon the same subject, but in their
Page No. 4 of 6
 Lordships view it has been established by the decisions in the case of Gopeekrist v.
Gungapersad (1854) 6 M. 1. A. 53=4 W. R. 46=2 Suther. 13= 1 Sar. 493 (P.C.) and
Uzhar Ali v. Bebee Ultaf Fatima (1869) 13 M. I. A. 232=4 B L R 1=13 W R 1 (P C)
that owing to the widespiead and persistent practice which prevails amongst the native
of India, whether Mahomedan or Hindu, for owners of property to make grants and
transfers of it Benami for no obvious reason or apparent purpose, without the slightest
intention of vesting in the donees any beneficial interest in the property granted or
transferred as well as the usages which these natives have adopted and which have
been protected by statutes, no exception has ever been engrafted on the general law of
India negativing the presumption of the resulting trust in favour of the person,
providing the purchase-money. such as has, by the Courts of Chancery in the exercise
of their equitable jurisdiction,. been engrafted on the corresponding law in England in
those cases, where a husband or father pays the money and the purchase is taken in the
name of a wife or child. In such a case there is under the general law in India, no
presumption of an intended advancement as there is in England.”

In outlines of Muhammadan Law by Fyzee (1964 Edition) the following commentary

exists at p. 218 :-

“Advancement, Joint account.-Where a Muslim died leaving deposits in the joint

names of himself and his daughter, payable to either or survivor, such deposits did not
constitute a gift in the nature of advancement to the daughter in the absence of proof of
specific intention. There is a widespread practice in India to make transfers Benami,
without the slightest intention to transfer the beneficial interest ; hence, the burden of
proving the intention of an advancement is on the person who asserts it, though, in the
case of close relatives, very little evidence is enough to establish the claim Mujtabai
Begum v. Mahbub Rehman A I P. 1959 Madh. Pra. 359, 364.”

In Paget, Law of Banking (6th Edn., page 123) the following comments on the
subject exist :-

“The truth is that the deposit receipt itself, whether it says so on its face or not, is not
transferable, certainly not negotiable. The mere passing it to another person has no
effect in transferring the deposit balance. But that which it represents, the money
deposited, lent to the banker, is a debt or chose in action, independent of the receipt and
despite any restriction on the transferability of that receipt. As shown by Re Griffin,
Griffin v. Griffin, even the receipt itself may be utilised as the basis of an equitable
assignment. The same has been held where the receipt was endorsed `Pay my son’. It
makes no difference whether the debt is repayable at notice or at a fixed date, or that it
cannot be claimed without returning the receipt. It is always there; always a chose in
action, with the attributes of such, including assign-ability. When Courts use the
expression that there is no debt till the return of the receipt, they mean that there is no
enforceable debt, no immediate cause of action, not that the debt is non-existent till
then. Whether the debt has been assigned or not, the banker is no doubt entitled to the
return of the receipt if he has stipulated for it, but he is not entitled to refuse to accept it
from the hands of an assignee, whatever its terms.”

Once it is found that Ch. Khushi Muhammad was the real owner/ depositor of the
amounts in the Bank which stood in the name of the plaintiffs and he alone had been
dealing with the respondent-Bank in respect of them, the principles contained in section
171 of the Contract Act get attracted. In Pollock and Mulla, the following observation
with regard to Bankers’ lien have been made :-

“The rule of English Law that the Bank has a lien or more appropriately a right to set
off against all moneys of the customers in his hands has been accepted in India. The
banker is at liberty to transfer the deposits of a customer to set off and liquidate debts
due from the customer in whatever account the money may be, current or deposit
whether they are in the same or different branches but mutuality must exist between the
parties.”

Finally, the question of Ch. Khushi Muhammad being indebted to the extent to justify
the Bankers’ lien over all these F. D. Rs/deposits. Khushi Muhammad did not file any
Page No. 5 of 6
written statement contesting his liability.. As a witness of the plaintiff he was most
evasive and non-committal. He could not for certain say whether he owed any money to
the bank or not. He could not identify his signatures on the documents. The statement of
account of the bank D. W. l 172 at page 40 of the printed book shows his account in debit
from 1954 till the 25th November, 1963. He owed to the Bank Rs. 1,02,697 on 29th June,
1963. Though the original promissory note was excluded from admissible evidence, the
other documents, fairly large number of them, taken note of by the High Court proved the
loan satisfactory, as held by the High Court in the following words -

“It is to be pointed out that all the objections hereinbefore raised from the side of the
plaintiffs were merely of a technical nature or of total denial of loan. The plaintiffs and
their learned counsel have not raised any objection regarding correctness of the figures
and precise amounts worked out or mentioned in relevant documents, vouchers, letters
and receipts etc. and nor have they set up any case to show that the figures or the
amounts were different. Rather it is through all the aforesaid documents that it is
connected and found out as to how the accounts mentioned in the last fixed deposit
receipts were made out, from where and how. By relying on these figures (and rather
balances) obviously the plaintiffs could not take objections to the earlier accounts of
these receipts and deposits and rather by accepting the last figures they in a way took
no objection to the transit history of the same and gave no counter-version or counter-
figures about each item which went to make out the last figures. Similarly they led no
evidence to rebut these figures and nor showed any cause or motive on the part of the
bank in the execution and existence of the various vouchers, letters, receipts, accounts
and other various transactions mentioned above.”

It is clear to us from the discussion of the evidence and the law on the’ subject that
the decision of the High Court suffers from no infirmity and all these appeals must fail
which are hereby dismissed with no order as t ‘o costs.

S. Q. Appeal dismissed.

Page No. 6 of 6
P L D 1982 Karachi 200

Before Saleem Akhtar, J

FANCY INVESTMENTS LTD., KARACHI ---Plaintiffs

versus

UNITED BANK LTD. AND 2 others-Defendants

Suit No. 766 of 1977, decided on 9th October, 1981.

(a) Contract Act (IX of 1872)- S. 171-Banker’s right of lien, held, arises only in respect
of such properties which come to his hands in his capacity as banker and in course of
banking business.

Umar v. S. A. Rana P L D 1957 Kar. 760; Re Bowes Earl of Strethmore v. Vane (1886) 33
Ch. D 586 ; Brandao v. Barnett (1846) 12 Cl. Fin 787 and Farooq v. Eastern Banking
Corporation Ltd., Karachi P L D 1980 Kar. 115 ref.

(b) Contract Act (IX of 1872)

-- S. 171 and Banks (Nationalization) Act (XIX of 1974), S. 6 Banker’s lien,-Security

delivered to banker for a specific purpose Banker, held, cannot exercise lien over such
property.

Plaintiff deposited shares with a Bank for specific purpose of obtaining compensation
bond, in terms of Banks (Nationalization) Act, which defendant No. 1 was to deliver to
plaintiff and these shares were never pledged.

Held: Where security is delivered to a banker for a specific purpose it is inconsistent with
right of lien and impliedly there is an agreement to contrary and therefore a banker
cannot exercise lien over such property. Before lien is exercised by a banker he has to
establish that he has taken possession of security as a banker and secondly there is no
contract to contrary.

J. H. Rahimtoola for Plaintiffs.

Mamnoon Hasan for Respondents Nos. 1 and 3. .

Dates of hearing: 21st and 22nd September, 1981.

JUDGMENT ‘

Both these suits arise out of identical facts and same question of law is involved,
therefore I propose to dispose them of by a common judgment. Fancy Investments
Limited, filed Suit No. 766/1977 in respect of their 42,200 shares of Commerce Bank
Ltd. which they bad surrendered to the Commerce Bank in terms of Bank
(Nationalization) Act, 1974. Suit No. 767/1977 has been filed by Fancy Foundation in
respect of 22,002 shares of Commerce Bank Ltd. which they had surrendered to
Commerce Bank, as stated above. The plaintiffs were the registered share-holders of
Commerce Bank Ltd. holding the aforestated shares. On 1st January, 1974, by Banks
(Nationalization) Act, 1974, all Pakistani banks were nationalised and their ownership,
management and control transferred to and vested in the Federal Government. The Act
provided that all shares held by persons in capital of a bank which was nationalised were
to be transferred to and vested in the Federal Government with effect from 1-1-1974. The
registered share-holders of Nationalised Banks were to receive compensation from the
Federal Government in the form of Bonds of the Federal Government which were made
negotiable. On or about 8-10-1974 the plaintiff received a printed letter/circular from the
Commerce Bank requesting surrender of shares in the form prescribed under the rules to
enable the said bank to make payment of Federal Government compensation bonds. The
plaintiffs surrendered the aforestated shares to Commerce Bank Ltd. in terms of Banks
(Nationalization) Act, 1974, alongwith all relevant and required applications and forms
Page No. 1 of 5
for exchange with compensation bonds. Commerce Bank issued receipt in favour of the
plaintiffs acknowledging the receipt of the shares for exchange with compensation bonds.
However the defendant No. 1 in which the Commerce Bank had merged did not pay any
compensation bond to the plaintiffs. The plaintiffs therefore served notices on the
defendant No. 1 without any result. As the shares deposited with defendant No. I were
pledged with defendant No 3 the plaintiffs demanded that the compensation bond may be
issued and delivered to the defendant No. 3 in lieu of the receipts issued by Commerce
Bank. The plaintiffs in Suit No. 766/1977 have averred that they are entitled to
compensation bonds worth Rs. 2,11,000 and interest amounting to Rs. 84,000, whereas
the plaintiffs in Suit No. 767/ 1977 have likewise claimed that they are entitled to
compensation bonds worth Rs. 1,15,010, and interest amounting to Rs. 46,000. The
plaintiffs have therefore prayed that the defendants Nos. I and 2 be directed to deliver the
compensation bonds to the plaintiffs and in the alternative the aforestated value as
determined under the Banks Nationalization Payment of Compensation Rules, 1974, with
interest should be paid to them.

2. The defendant No. 1 in their written statement have stated that the State Bank of
Pakistan through Public Debt Office, Karachi had issued the compensation bonds in
pursuance to rule 6 of Banks Nationalization Payment of Compensation Rules and
forwarded to the defendant No. 1 for delivery to the plaintiffs. But later Board of
Industrial Management by its letter dated 13-2-1974 instructed to withhold delivery of
compensation bonds to the plaintiffs. The defendants have further pleaded that the
plaintiffs and their family concerns and their directors and partners are heavily indebted
to the defendant No. I particulars of the debts running in lacs of rupees has been stated. It
was therefore pleaded that the defendant No. 1 have a lien over the said compensation
bonds and are entitled to retain the same. The defendant No. 1 have admitted that the said
shares were deposited in terms of Banks (Nationalization) Act, 1974, for exchange with
compensation bonds. The defendant No. 2 has also filed its written statement in which it
is stated that the plaintiffs had purchased 1,50,000 shares of the former Commerce Bank
Ltd. out of the funds of Metropolitan Steel Corporation in the name of the Directors of
the plaintiffs. However when distinctive numbers of 1,50,000 shares were supplied it was
decided to release compensation bonds relating to the other shares and instructions were
accordingly given to the defendant No. 1. On the basis of these pleadings the following
issues were framed:

(1) Whether the defendant No. 1 bas a lien on the compensation bonds in question as
stated in paras. 3 and 4 of its written statement

(2) What should the decree be ?

Issue No. l:

3. In para. 3 of the written statement the defendant No. 1 has stated that the plaintiffs and
their directors, partners and other family members and allied concerns are heavily
indebted to the defendant No. 1 as borrowers or guarantors. Particulars of such
indebtedness has been given in detail in the same para. and on the basis of these facts in
para. 4 it has been averred that the defendant No. 1 have a lien on the said compensation
bonds and are entitled to retain the same. In a nutshell the defence of the defendant No. 1
is that as the plaintiffs are indebted to them they are entitled to exercise lien over the
compensation bond. Before considering whether in these circumstances lien can be
exercised certain facts admitted by defendant No. 1 may also be mentioned here. The
defendant No. 1 have admitted that the shares were delivered to Commerce Bank Ltd. for
obtaining compensation bonds from the Government in terms of Banks (Nationalization)
Act, 1974. The defendant No. 1 had also issued receipts acknowledging receipt of the
shares from the plaintiffs for exchange with compensation bond. It is thus an admitted
position that the shares were deposited and delivered to Commerce Bank for exchange
with compensation bond. The entire exercise was in terms and provisions of Banks
(Nationalization) Act, 1974, which provided a procedure for payment of compensation
bond through the banks. The plaintiffs have not led any evidence but the defendant No. 1
have examined one of its Officers who has produced the statement of account of Hand
Tools Ltd. and Fancy Investments Ltd. to show that they are indebted to the defendant
No. 1. He has, however, admitted that the shares were delivered for specific purpose for
exchange with compensation bond and that the shares were not pledged with the United
Page No. 2 of 5
Bank. It has also been stated in the cross-examination that United Bank Ltd., the
defendant No. 1 came into possession of the shares which are subject-matter of both the
suits for the first time when these shares were lodged for exchange with the compensation
bond. He further admitted that the compensation bonds were to be issued by the Federal
Government and defendant No. 1 were acting as agent of the State Bank of Pakistan who
were acting on behalf of the Federal Government. He also confirmed that embargo placed
by Board of Industrial Management has been lifted. The entire documentary and oral
evidence of the defendant No. 1 is that (1) the shares are not pledged with defendants No.
1, (2) they were delivered to defendant No. 1 for the specific purpose to exchange for the
compensation bond and (31 in taking possession of the compensation bonds the
defendant No. 1 were acting as agent of the Federal Government. In view of these facts it
has to be seen whether the defendant No. 1 could claim lien over the compensation bond.

4. In this regard first reference has to be made to section 171 of the Contract Act which
provides that in the absence of a contract to the contrary, bankers may retain as a security
for a general balance of account any goods bailed to them. Admittedly, section 171 is not
exhaustive as held in P L D 1957 Kar. 760. The banker’s lien is subject to any contract to
the contrary. Bankers has a general lien on all securities that may be deposited with him
by a customer. A banker thus acquires a lien over pledged good for the recovery of his
dues and has a right after notice to the debtor to sell those goods to reimburse himself.
Therefore right of lien arise only in respect of such properties which come to his hands in
his capacity a bankers and in the course of banking business. In Paget’s Law of Banking,
VIIIth Edo., at page 499 relying on Re Bowes, Earl of Strethmore v. Vane ((1886) 33 Ch.
D 586), following observation has been made:

“The nature of the securities subject to lien is further deducible from the condition that
they must come to the bankers hand in this capacity as bankers, in the course of banking
business. It is a part of a bankers business to advance money and any class of property
may by proper means be made the subject of security.”

Lord Chorley in Law of Banking, VIth Edn. at page 292, observed:-

“the bankers lien is a general lien existing by mercantile custom, -and is binding upon the
customer whether he knows of it or not. Furthermore, although a lien normally confers
only a right to retain possession, a banker’s lien is exceptional and carries with it the
valuable right of sale and recoupment. It has indeed been neatly defined as an `implied
pledge’. The most difficult question which arises is as to the types of property over which
the banker is entitled to claim a lien. The principle of the lien being that of an implied
pledge, it can attach only to such property as customer by implication agrees that .it
shall.”

5. For determining the nature of bankers lien all the authors and authorities have heavily
relied on Brandao v. Barnett ((1846) 12 Cl. & Fin. 787). The following passage has been
quoted with approval and has been followed till today:

“Bankers most undoubtedly have a general lien on all securities deposited with them as
bankers by a customer, unless there be an express contract, or circumstances that show an
implied contract inconsistent with lien.”

6. In the case of Farooq v. Eastern Banking Corporation Ltd. Karachi (P L D 1980 Kar.
115), the claim of a banker for lien under section 171 of the Contract Act was repelled on
the ground that the bank had not proved that there was any general balance outstanding
against the customer in his account and secondly that no goods were pledged to the
banker over which he could exercise lien.

7. Mr. J. H. Rahimatullah, the learned counsel for the plaintiffs relying upon para. 78 of
Halsbury’s Laws of England, Volume 3, IVth Edn. has contended that the defendant No.
1 did not obtain the possession of the shares as a banker and as the said shares had been
given for a specific purpose it was the intention to exclude the lien. The learned counsel
further contended that the shares were not deposited in the accounts mentioned by the
defendant No. 1 but they were deposited separately and under the receipts they were
accepted for a specific purpose. The determination of question whether a particular
security in a bankers possession was delivered to him for the purpose of being dealt with
Page No. 3 of 5
by him as a banker depends partly on the facts and partly on the general usage of the
bankers and the customer who owns the security. In the present case the evidence is very
clear on the point and there is no dispute between the parties that the security came into
the hands of the defendant No. 1 not in the normal course of their banking business but
by virtue of operation of the Banks (Nationalisation) Act, 1974, whereby compensation
bond was to be paid in lieu of the. shares by the Government through defendant No. 1.
The defendant No. 1 was not to pay any compensation bond but it was merely an
intermediary for collecting the shares and delivering the compensation bond which was
received from the State Bank. Under section 171, the bankers lien may be excluded by
express contract or by implied contract. It has therefore to be seen whether the deposit of
shares in the hands of defendant No. 1 in any manner excluded the lien claimed by
defendant No. 1. In Paget’s Law of Banking, VIIIth Edn. at page 506 it has been observed
as follows:

“As between the bankers and his own customer, the lien may be excluded by express
contract or by circumstances which show an implied contract inconsistent with lien.
Goods merely deposited for safe custody would clearly be exempt from lien, but they
could be utilised as security by the customer’s giving a written memorandum of charge,
evidencing the banker’s change of position with regard to them. Nowadays some banks
include in their memoranda of charge provision giving them a charge over securities
deposited for safe custody.”

Lord Chorley in Law of Banking at page 292 observed as follows:

“It follows from what has been said already that no lien will arise if there is `an express
contract, or circumstances which show an implied contract inconsistent with lien’. Thus
all cases of deposit for safe custody, even of instruments of negotiable character to which
the lien would normally attach are clearly inconsistent with lien. Similarly, where a
customer pays money to his banker for the express purpose of enabling the banker to
discharge some obligations incurred on his behalf, as for the payment of the price of
shares bought for him, the intention is clearly that there should be no lien.”

8. From the aforestated observations it is now well settled that where security is delivered
to a banker for a specific purpose it is inconsistent with the right of lien and impliedly
there is an agreement to the contrary and therefore a banker cannot exercise lien over
such property. Before the lien is exercised by a banker he has to establish that he has
taken possession of the security as a banker and secondly that there is no contract
contrary to the lien. Mr. Mamnoonul Hasan, the learned counsel for the defendants has
contended that admittedly the plaintiffs are indebted in Suit No. 766/77 as a debtor and in
Suit No. 767/77 as a guarantor. According to the learned counsel it was the duty of the
plaintiffs to have pleaded and proved that there was a special contract with the banker
which is inconsistent to the right of lien. There is hardly any dispute between the parties
over the facts of the case. The plaintiffs have in the plaint stated that the shares were
deposited with defendant No. 1 for a specific purpose for obtaining the compensation
bond which the defendant No. 1 was to deliver to the plaintiffs as provided by Banking
(Nationalization) Act, 1974. This has been admitted by the defendant No. 1 and it has
also .been admitted that these shares were never pledged. In the face of these pleadings
and the admitted position the contention of the learned Advocate for the defendant No. 1
is not tenable.

9. The learned counsel for the defendant No. 1 then contended that as the shares were not
deposited under an agreement or pursuant to an agreement but under a statute therefore
the provisions of section 171 will not apply. This has reference to the Banks
(Nationalization) Act, 1974. As the specific purpose and procedure was provided by the
said Act the same would be pressed in service for determining the nature and the purpose
for which the shares were deposited with the defendant No. 1. In the result my finding on
Issue 1 is in the negative.

Issue No. 2:

10. In Suit No. 766/77 the plaintiffs have claimed the return of compensation bonds of
the value of Rs. 2,11,000 and payment of interest of Rs. 84,000 from 1-1-1974 to 20-11-
1977, and alternative prayer is for a sum of Rs. 2,11,000 and Rs. 84,000 with further
Page No. 4 of 5
interest at the same rate. In Suit No. 767/77 the plaintiffs have made similar prayer for
delivery of compensation bonds of the value of Rs. 1,15,010 and payment of interest
amounting to Rs. 46,000 from 1-1-1974 to 20-11-1977 and alternative prayer has been
made for a decree of Rs. 1,15,010 and 46,000 with further interest. The value of the
compensation bond in both the suits the value as stated above by the plaintiffs and the
interest calculated by them have been admitted by defendant No. 1. In view of my finding
on Issue No. 1 1 decree the suit No. 766/77 against defendants Nos. 1 and 2 jointly and
severally directing the defendants Nos. 1 and 2 to hand over and deliver to the plaintiffs
Federal Compensation bond of the value of Rs. 2,11,000 in exchange for 42,200 shares of
Commerce Bank received by them. The defendants Nos. 1 and 2 shall further pay interest
of 84,000 and shall further pay interest at the rate provided by Banks (Nationalisation)
Act, 1974, and rules framed thereunder till payment or delivery of the compensation
bond. If the defendants Nos. 1 and 2 fail to deliver the compensation bond and interest as
stated above within a period of two months then the defendants Nos. 1 and 2 shall pay to
the plaintiff sum of Rs. 2,11,000, and Rs. 84,000. The plaintiffs shall further be entitled to
the interest at the rate provided by Banks (Nationalisation) Act, 1974 and rules framed
thereunder on Rs.2,11,000 till payment. Likewise in Suit No. 767/77 1 grant a decree to
the plaintiffs against the defendants Nos. 1 and 2 jointly and severally directing the
defendants Nos. 1 and 2 to hand over and deliver to the plaintiffs, Federal Compensation
bond of the value of Rs. 1,15,010 in exchange of 22,002 shares of Commerce Bank
deposited with the defendant No. I and the defendants Nos. 1 and 2 pay Rs. 46,000 as
interest on the sum of Rs. 1,15,010 at the rate provided by the said Act and the rules till
delivery of the compensation bond to the plaintiffs. If the defendants Nos. 1 and 2 fail to
deliver the compensation bond as ordered within a period of two months the defendants
Nos. I and 2 shall pay to the plaintiff Rs. 1,15,010 and Rs. 46,000 together with interest at
the rate mentioned above on the sum of Rs. 1,15,010 from the date of suit till recovery. In
both the suits the defendant No. 1 shall bear the costs. The defendants Nos. 1 and 2 are
allowed to satisfy the decree within a period of two months.

M. Y. M. Suit decreed.

Page No. 5 of 5
P L D 1980 Karachi 115

Before Naimuddin, J

FAROOQ-Plaintiff

versus

MESSRS EASTERN BANKING CORPORATION LTD., KARACHI

AND ANOTHER-Defendants

Civil Suit No. 150 of 1970, decided on 10th October 1979.

(a) Negotiable Instruments Act (XXVI of 1881)-

=-- S. 31-Cheque-Cheque returned with remarks “refer to drawer”- Expression “refer to

drawer”-Held, means “dishonor of cheque”.- [Words and phrases].

Plunkett and another v. Barclays Bank Limited (19361 2 K B 107 ref.

(b) Contract Act (IX of 1872)

--- S. 171-Lien--Neither any balance outstanding against client in his account with Bank
nor any ‘goods bailed over which Bank could claim lien-Provisions of S. 171, held, not
applicable in such case.

(c) Negotiable Instruments Act (XXVI of 1881)

-- S. 31-Cheque-Bank, in absence of a contract to contrary or any statutory provision or

banking usage or practice, bound to honour cheque even if balance in account equal to
amount of cheque-Duty of Banker to see that his client’s credit should not suffer on such
ground and if it does, he becomes liable to him for damages-Cheque found to have been
wrongfully dishonored-Held, client entitled to special damages notwithstanding fact that
he did not plead and prove any special damages.-[Damages].

Hart’s Law of Banking, 4th Edn., Vol. 1, p. 443 ; Paget’s Law of Banking, 5th Edn., p.
173 ; Wilson v. United Counties Bank Limited and another 1920 A C 102 ; Gibbons v.
Westminster Bank Limited (1939) 3 All E R 577 ; Davidson v. Barclays Bank Ltd. 1940
All E R 316 ; Jogendranath Chalravarti v. New Bengal Bank Ltd. A I R 1939 Cal. 63 ;
.Messrs New Central Hall v. United Commercial Bank Ltd. A I R 1959 Mad. 153 and S.
K. C. C. Bank Ltd., Amalaparam v. Vissapraqada Subrahmanyam A I R 1963 Andh. Pra.
250 ref.
Jan Muhammad Dawood for Plaintiff.

Naseem Farooqui for Defendant No. 1.

Dates of hearing : 9th and 10th October, 1979.

JUDGMENT-

The plaintiff who is the sole proprietor of Yasmeen Plastic Industries, and had an account
with the Eastern Banking Corporation Limited, being Current Account No. 23, has
brought this suit against the said Bank which is now taken-over by the National Bank of
Pakistan under Ordinance No. 30 of 1973, claiming a sum of Rs. 1,00,000 as damages on
account of dishonour of cheque drawn by him on his account while his account was in
sufficient funds. The plaintiff has however, not pleaded any special damages.

Eastern Banking Corporation Limited, defendant in its written statement took the stand
that the plaintiff’s account had no sufficient funds and they had lawful excuse to return
the cheque as the plaintiff had failed neglected avoided to surrender the original
guarantee tendered by it on behalf of the plaintiff to the P. 1. A. Here 1 may mention that
it appears that the .plaintiff had another account with the defendant in the name of
Page No. 1 of 6
Travomars and in that account some guarantee was furnished to P. 1. A. on behalf of the
plaintiff.

On the pleadings of the parties the following consent issues filed by the learned counsel
for the parties were adopted by the Court.

(1) Is the Suit as framed maintainable ?

(2) What were the incidences of the plaintiff’s accounts with the defendant ?

(3) Was the plaintiff’s cheque in question wrongfully returned by the defendants without
effecting payment ?

(4) Is the plaintiff estopped from making the suit claim ?

(5) Did the return of the plaintiff’s cheque constitute dishonour ?

(6) Has the plaintiff suffered damages, if so to what extent ?

(7) Has any cause of action accrued to the plaintiff ?

(8) What should the decree be 7

Today at the Bar Mr. Nasim Faruqui Advocate for the defendant stated that he does not
press issues Nos. 1, 4 and 7.

In support of his claim the plaintiff examined himself and produced the cheque (Exh. 6;1)
which was dishonoured and its memorandum (Exh. 6/2) which stated the reason for
return of the cheque as `refer to drawer”. He also produced a copy of his account with
Eastern Banking Corporation Limited (Exh. 6/12) showing that a sum of Rs. 10,000 was
lying to his credit in his account with defendant 1. He additionally produced a letter from
the United Rank Limited, dated 3-1-1969 (Exh. 6/3) wherein it is stated that on account
of dishonour of the cheque in question he was required to clear the overdraft in his
account with the United Bank Ltd. This cheque was drawn and delivered by the plaintiff
to United Bank Ltd. for credit of his account with it after its clearance.

The plaintiff also examined Khalid Mahmood (Exh. 7) who stated that the plaintiff had an
account with the United Bank Limited, Pakistan Chowk Branch Karachi of which he was
the Manager. He produced the letter Exh. 6/3. This witness in his cross-examination
stated that the Bank had allowed to the plaintiff overdraft facilities and the facilities were
secured by hypothecation of stocks. He further stated that the cheque of Rs. 10,000 which
was dishonoured, was deposited by Yasmeen Plastic Industries in their current account in
order to reduce their liability of Rs. 1,00,000.

The defendants examined A. S. Qadri (Exh. 9) who was the Manager of defendant 1 at
the relevant time, posted at Karachi. He stated that the plaintiff had two accounts in two
different names, the first with the name of Yasmeen Plastic Industries and other in the
name of TRAVOMARS and that at the request of the plaintiff, the Bank had furnished a
bank guarantee to P. 1. A. which was not returned by the plaintiff at any time in spite of
several letters written in this regard. He further stated that the Bank used to send to the
plaintiff a copy of the monthly statement of accounts and half yearly confirmation slip
showing the balance in the account. He produced a copy of the statement of account from
16-J 1-1967 to 1-1-1970 (Exh. 9/1) in the name of Yasmeen Plastic Industries. He has
also produced another statement of account of TRAVOMARS from 23-11-1967 to 1-6-
1970 (Exh. 9,/2). He stated that the plaintiff did not dispute the correctness of the
statement of account sent to his firms. He further stated that the cheque was never
dishonoured but was returned with the remarks `refer to drawer’ for three reasons,
namely, insufficiency of funds, (2) Bank had a lien over the amount of Rs. 1,00,000 for
the bank guarantee furnished on behalf of Yasmeen Printing Industries & TRAVOMARS
to the P. I. A. and (3) if the cheque was honoured that would have amounted to closer of
the account and this could be done only when the unused cheques were ;turned to the
Bank. He stated that another cheque drawn in the account of TRAVOMARS was returned
with the same remarks for the same reason. Regarding the guarantee the witness has
Page No. 2 of 6
stated that the plaintiff stand in his letter dated 23-6-1979 (Exh. 6,118) that the guarantee
was collected by Mr. M. Naqvi is incorrect as no such person was in the employment )f
the Bank and there was no other person. In the cross-examination - to Mr. Jan
Muhammad Dawood he stated that the statements of account were sent every month by
ordinary post and in this case there was a lien on the account of the plaintiff and they
informed him by the letter addressed to the firm of the plaintiff namely, TRAVOMARS.
The letter was sent by the ordinary post. He admitted that the Bank had not sent separate
debit notes of debiting expenses for the same were represented i4 the monthly statement
of account. He explained that the incidental charges are charged to cover the expenses of
cheque books, ledger books and statements etc. He further stated that such charges run
between Rs. 5 to Rs. 10 per account half-yearly and that such charges are normally
debited in the account in the last week of June and December. He admitted the suggestion
that no incidental charges were debited in the account of Yasmeen Plastic Industries for 1-
I1-1968 to 23-1-1969. He also admitted that the Bank guarantee to P. I. A. had already
expired when the cheque was presented. He, however, explained that unless the bank
guarantee was returned to the Bank the Bank could not know that any claim had arisen
within the validity period of the Bank guarantee. He further admitted that the Bank did
not receive any claim from P. I. A.

Having generally reviewed the evidence led before me in this case, I now deal with issues
Nos. 2, 3, 5, 6 and l for, as stated earlier Issues Nos. 1, 4 and 7 are not pressed by Mr.
Nasim Faruqui Advocate for the defendants.

I would take Issues Nos. 2, 3 and 5 together.

Issues Nos. 2, 3 & 5.-The Plaintiff is his deposition stated that he drew the cheque on his
account with the defendant 1 for there was a balance of Rs. 10,000 in his account. In
support of the statement he produced a copy of statement account which bears the date of
6-2-1968 and sht7ws that on 4-1-1968 a sum of Rs. 1,10,000 was lying to the credit of the
plaintiff in his account with defendant 1. It further shows that on 22-1-1968 a sum of Rs.
10,000 was lying to this credit in the said account. However, the cheque (Exh. 6/1) which
was returned unpaid is dated 30-12-1968 and it was presented to the Bank on 1-1-1969 as
would appear from the memorandum (Exh. 6/2). Therefore, this statement of account
does not support the claim of the plaintiff that when the cheque was presented he had a
sum of Rs. 10,000 in his account. The plaintiff has also not produced any account book in
support of his claim.. There is no other evidence except the plaintiff’s word and statement
of the account (Exh. 6/1). On the other hand defendants, witness A. S. Qadri produced
copies of statements of accounts of Tasneem Plastic Industries as well as TRAVOMARS
(Exh. 9/1 and Exh. 9/2) Exh. 9/1 is relevant to the case under consideration and according
to it on 30-12-1968 a sum of Rs. 9,99 was lying to the credit of the plaintiff in this
account: Therefore, it is obvious that the cheque drawn was in excess of Rs. 5 and there
being no sufficient fund in the account of the plaintiff it was returned for that. reason. The
trend of cross-examination of the witness shows that assurance, of this statement of
account was being challenged. However, Mr. A. S. Qadri in his deposition clearly stated
that the Bank used to send monthly statements of account and half-yearly confirmation
slips of plaintiff’s balance in the account. This statement was not questioned in the cross-
examination. Significantly. the plaintiff in his cross-examination did not deny the
suggestion that the Bank used to send him the statements of account. He, however, stated
that he did not remember if the Bank had sent the statements of account. Now, if the
plaintiff was receiving the monthly statements of his account and the statement of
account produced by the defendants was incorrect, he should have produced his copy of
the statement of account to show that there was sufficient balance in his account.

The burden of proof being on the. plaintiff he has failed to show that there was sufficient
balance in his account and therefore it is not possible to hold on the basis of the evidence
available on- record that the plaintiff’s cheque was wrongfully returned by the defendant.
No doubt that when a cheque is returned with the remarks `refer to drawer’ it means
`dishonour of the cheque’ for the expression `refer to drawer’ amounts to a statement by
the Bank that “we are not paying, go back to the drawer and ask why” or also, “go back
to the drawer and ask him to pay”. [See Plunkett and another v. Barclays Bank Limited
(1)1.

Page No. 3 of 6
So far as the question of guarantee is concerned the plaintiff’s case is that the guarantee
furnished on behalf of his firms was returned to the Bank by P. I. A. as the same was
collected by Mr. M. Naqvi as asserted by him in his Letter (Exh. 6118) which name was
subsequently corrected as Mr. A. S. K. Qadri in the letter addressed by the Advocate for
the plaintiff dated 22-7-1970 (Exh. 6/16). However, A. S. K. Qadri came in the witness-
box and denied that he ever collected the original guarantee. In any case, the question
whether the guarantee was returned or not, in my view, is immaterial for the argument of
Mr. Nasim Faruqui learned counsel for the defendant is that the Bank had a lien under
section 171 of the Contract Act on the balance in the account of the plaintiff. However, in
my opinion the provisions of section 171 of the Contract Act are not at all attracted, for
under the provisions of this section a banker, amongst others named therein; in they
absence of a contract to the contrary, has a right to retain as security for a) general
balance of account goods bailed to him. In the present case firstly, the plaintiff has not
pleaded and proved that there was any general balance outstanding against the plaintiff in
his account, secondly no goods were bailed to them over which the Bank could claim lien
under the said provisions. Therefore, no lien could be claimed on the credit balance in
they account of the plaintiff with the defendant for non return of the original’ guarantee
issued on behalf of the plaintiff to P. I, A. even if the allegation is’ accepted as correct.

As regards the third ground that if the cheque was honoured there would not have been
left any balance in the account and that would have amounted to closure of the account
and the same could not have been closed without returning unused cheques, it would
suffice to say that in the absence of a contract. to that effect between the parties or
banking usage or practice (which has to be pleaded and proved) the Bank had no right to
refuse payment on that ground. The Bank, in the absence of a contract to the contrary or
any statutory provision or banking usage or practice was bound to honour the’ cheque,
even when the balance in the account was equal to the amount of the cheque. However, if
after the payment of the cheque nothing was left in the account it was open to the Bank to
close the account after giving notice to the plaintiff. It is the duty of a banker to see that
his client’s credit should not suffer on such a ground and if it does, he be comes liable to
pay him damages.

However, in the present case I have found as a fact that the Bank was entitled to refuse
the’ payment of the cheque for, the amount of the cheque exceeded the amount available
as balance in the account of the plaintiff.

I am therefore, of the opinion that there was sufficient reason for not honouring the
cheque.

Accordingly, I decide all these three issues against the plaintiff.

Issue No. 6.-In view of my findings on Issues 2, 3 and 5 it is not necessary to decide this
issue. However, since an important question of law has been raised and there is no
reported decision of this Court, I think it proper to decide the same.
(1) (1936) 2 K B 107

When a cheque of the customer who has sufficient funds- in the hands of a bank properly
applicable to the payment of such cheque is dishonoured he is entitled to compensation
for any loss or damage caused due to such dishonour. This principle is statutorily
recognised in section 31 of the Negotiable Instruments Act, 1881, in the following
words :

“31. The drawee of cheque having sufficient funds of the drawer in his hands, properly
applicable to the payment of such cheque must pay the cheque when duly required so to
do, and, in default of such payment, must compensate the drawer for any loss or damage
caused by such default.”

However, it is submitted by Mr. Nasim Faruqui learned counsel for the defendants that
the plaintiff has not pleaded with full particulars and proved any special damages as
required by law. He further submitted that plaintiff’s claim for Rs. 1,00,000 by way of
damages cannot be taken into consideration in the absence of particulars and proof and
the suit is liable to be dismissed. On the other hand, Mr. Jan Muhammad Dawood learned

Page No. 4 of 6
counsel for the plaintiff submitted that Court can treat the claim for Rs. 1,00,000 as a
claim for general damages and award such damages as it considered just.

In reply Mr. Nasim Faruqui argued that under the provision of section 31 of the
Negotiable Instruments Act no general damages can be awarded for compensation has to
be for such loss or damage as is suffered by the drawer due to dishonour of the cheque
which means special damages.

However. on the point in issue I may refer to a passage from Hart’s Law of Banking, 4ih
Edn., Vol. I, p. 443, which is quite illuminating. It is :

“Where the banker, being bound to honour his customer’s cheque, has failed to do so he
will be liable in damages. If special damage naturally ensuing from the dishonour is
proved, it will be properly taken into account in assessing the amount of the damages. If
the customer be a trader, the jury may properly award substantial damages, in the absence
of the proof of special damage. In other cases the customer will be entitled to such
damages as will reasonably compensate him for the injury which, from the nature of the
case, he has sustained. All loss flowing naturally from the dishonour of a cheque may be
taken into account in estimating the damages.”

Further, Page in his Law of Banking, 5th Edition at page. 173 has stated that substantial
damages may be given against the banker without actual loss to the customer.

Reference may also be had to the decision of House of Lords in Wilson v. United
Counties Bank Limited and another (1). In this case it was held that there was a right to
claim substantial damages in case of refusing or dishonouring of a cheque by a bank
though in the case of non-trader special loss or injury must be proved before substantial
damages could be claimed except where there are special circumstances like a man
issuing a cheque to a financee being dishonoured wrongfully and the financee breaking
off the engagement in consequence.

I may also cite here Gibbons v. West minister Bank Limited (2). In this case a bank
wrongfully. dishonoured a cheque of the plaintiff; who was not a Trader. The plaintiff did
not, in the statement of claim, plead any matters showing a loss of credit, but proved that,
after the cheque was dishonoured, her landlords had asked her to pay her rent in cash; and
not by cbeque.

(1) 1920 A C 102 (2)x(1939) 3 All E R 577

It was held by Lawsrence: J. that “the authorities which have been cited to me all lay
down that a trader is entitled to recover substantial damage, without pleading and proving
actual damage for the dishonour of his cheque, but it has never been held that the
exception to the general rule as to the measure of damages for breach of contract extends
to anyone who is not a trader. The cases in which this view has been taken, and which
have been cited to me, are Marzetti v. Williams (1), Rolin v. Steward (2), Bank of New
South Wales v. Milvain (3), Kinlan v. Ulster Bank Ltd. (4). The rule is so expressed in
Grant on Banking, 7th Edn., pp. 88, 89, and in Smith’s Leading Cases, 13th Edn., Vol. 2,
p. 574, where it is also stated that the exception to the general rule is an exception which
ought not to be extended, and reference there is made to the opinion of Lord Atkinson in
the House of Lords in Addis v. Gramophone Co. Ltd. (5). In my opinion, ,l ought to treat
this matter as covered by these authorities, and I must hold that ,the corollary of the
proposition which is laid down by these cases is the law namely, that a person who is not
a trader is not entitled to recover substantial damages unless the damages are alleged and
proved as special damages. I am therefore of opinion that “the plaintiff, whom I hold not
to be a trader, is entitled to recover only nominal damages, and she will have judgment
for 40 s. Judgment for the plaintiff for 40 s”.

The very same view regarding both traders and non-traders was adopted in Davicson v.
Barclays Bank Ltd. (6).

However, it is submitted by Mr. Nasim Faruqui learned counsel for the defendants that
the rule of English Law cannot be allowed in this country for there is no similar provision
in. the English Bills of Exchange Act as is contained in section 31 of our Negotiable
Page No. 5 of 6
Instruments Act. But the submission is not well founded for according to Indian Text
Bookwriters on Negotiable Instruments Act, 1881 same rule has been followed by Courts
in the sub-continent in respect of the provisions of section 31 of the Negotiable
Instruments Act, 1881, and in support reliance is placed by the authors on Jogendranath
Chalravarti v. New Bengal Bank Ltd. (7).

I may also refer to a decision of Madras High Court in Messrs New Central Hall v.
United Commercial Bank Ltd. (8). It was ruled by Pan. chapakes Ayyar sitting with
Basheer Ahmed Sayeed, JJ. :

“We are of the opinion that the Indian Law on the subject is not at all different from the
English Law on the point, and that in case of non-trader nominal damages should be
awarded - where there is no proof of special loss or damage by the wrongful
dishonouring, and in the case of a trader, substantial damages should be awarded even in
the absence of proof of special loss or damages.”

The Madras decision was followed by the High Court of Andhra Pradesh in S. K. C. C.
Bank Ltd., Amalaparam v. Yissapraqada Subrahmanyam (9).

1 may mention that in this case the English decisions in Wilson v. United Counties Bank
Ltd. and Gibbons v. Westminster Bank Ltd., were followed Therefore, if the plaintiff had
succeeded in proving that his cheque was wrongfully dishonoured he would have been
entitled to special damages’

(1) (1830) 1 B & Ad. 415 (2) (i854) 14 C B 59;

k3) (1884) 10 V L R 3(4) 1928 1 R 171

(5) 1909 A C 488 (6) 1940 All E R 316

(7) A I R 1939 Cal. 63(8) A I R 1959 Mad. 153

(9) A I R 1963 Andh, Pra. 250

notwithstanding the fact that he did not plead and prove any special damages.

As to the quantum of damages I may mention that in the Madras case of Messrs. The
New Central Hall v. The United Commercial Bank Ltd. 11 cheques aggregating less than
Rs. 4,000 were dishonoured and damages, on the fact of that case, in the sum of Rs. 6,000
were awarded and in Calcutta Case of Jogendra Nath Cljakravar/i v. New Bengal Bank
Ltd., three cheques by a non-trader were dishonoured and damages in the sum of Rs. 500
were awarded. In the case reported in A I R 1963 Andh. Pra. 250, a cheque of Rs. 28 by a
non-trader was dishonoured and an award of nominal damages in the sum of Rs. 175 by
the lower Court was upheld.

Issue No. 8.-Since in this case the cheque was not unduly dishonoured I am of the view
that the plaintiff is not entitled to any relief.

I, therefore, dismiss the suit leaving the parties to bear their own costs in the
circumstances of this case.

S. Q. Suit dismissed.

Page No. 6 of 6
P L D 1967 Karachi 829

Before Noorul Arifin, J

HUSSAIN KHAN-Plaintiff

versus

BARKAT ALI AND OTHERS-Defendants

Suit No. 137 of 1965, decided on 13th March 1967.

Civil Procedure Code (V of 1908)-------

----- O. XXI, r. 63-Suit to establish right to property attached in execution of

decree-Decree holder not competent to execute his decree against person who is neither
legal representative of judgment-debtor nor a party to suit in which decree was
parsed-Building contract between H and K for construction of house over land owned by
B-Materials built into building cease to be property of building contractor and become
absolute property of owner of land-Contractor has no lien on construction made by him
and consequently cannot’ proceed against such property firs execution of decree obtained
by him against K for payment of his bills in respect of construction-Contract Act (IX of
1872), S. 171.

B an owner of a piece of land entered into contract with K for construction of a building
on the plot. It; in his turn entrusted the construction to H, a building contractor. H
obtained a decree against K for payment of his bills for construction and in execution of
that decree obtained attachment of the building constructed. B moved an application
under Order XXI, rule 58, C. P. C. on the ground that he was neither a party to the suit
nor was he a legal representative of K against whom the decree was passed.
Consequently the attachment was withdrawn. H, thereupon, filed a suit under Order XXI,
rule 63, C. P. C. and claimed that he had a right to execute his decree against the
construction which he had carried out with his own investment:

Held a decree-holder is not competent to execute his decree against a property of a person
who is neither the legal representative of the judgment-debtor, nor was he a party to the
suit in which that decree was made. A building contractor has no lien on constructions
made by him for the payments of his bills. This kind of lien is not recognized by section
171 of the Contract Act. No lien can arise from a building contract, whether by operation
of law or under the terms of the contract. The rule is that property in materials built into a
building ceases to be the property of the contractor and becomes that of the owner. The
contractor, in the circumstances, could not lay any claim to the property and was not
entitled to proceed against the same in execution of the decree which he had obtained
against k.

Hudson’s Building and Engineering Contracts (8th Edn., p. 382 ; Elwes v. Mawe (1802) 3
East 38 and Wake v. Hall (1883) 8 A C 195(HL) ref.

Mohammad Akram for Plaintiff.

Ajmal Mian for Defendant No. 1.

Ashiq Ali Qureshi for Defendants Nos. 2, 3, 4 and 5.

M. M. Mehmoodi for Defendant No. 6.

Iqbal Qazi for Defendant No. 7.

Munawar Abbas for Defendant No. 8.

Date of hearing : 6th March 1967.

JUDGMENT
Page No. 1 of 4
This suit has been brought by the plaintiff under Order XXI, rule 63, C. P. C. for the
following reliefs:

“(a) That plaintiff is entitled to recover his decretal amount Rs. 30,063 with interest at six
per cent. per annum from 15-9-1954 till payment as ordered in Suit No. 945 of 1954 and
Execution No. 44 of 1961 by attachment and sale of building situate on Plot No. 331
A.M., Preedy Street, Tample Road Junction, Karachi, as being the balance of cost of
construction due to plaintiff from defendant No. 1.

(b) That the plaintiff is entitled to retain possession of ground floor as well as of the first
floor of the construction raised on the said plot of land bearing No. 331 A.M., Preedy
Street and is entitled to recover rents and usufruct of the said construction from
defendants Nos. 1, 6, land 8 till the payment of cost of the said construction by defendant
No. 1 in terms of decree passed in -Suit No. 945 of 1954 (Hussain Khan v. Dr.
Karimuddin) and agrees it dated 25-7-1952.

(c) Any additional further or alternative relief may be granted to the plaintiff as may be
just in the circumstances of the case.

(d) Costs of the suit may be awarded against defendant No. 1:

2. The material facts are these: The defendant No. 1, Barkat Ali, is the allottee and the
transferee of a plot of land bearing No. 331 A.M., Preedy Street, Karachi. On 25-2-1952,
the defendant entered into a contract with late Dr. Karimuddin (whose legal
representatives on record are defendants Nos. 2 to 5) for construction of a building on this
plot. Dr. Karimuddin in his turn, entrusted the construction to the plaintiff under a
contract dated 25-7-1952. The plaintiff proceeded to carry out, construction under this
contract, but soon disputes developed between him and Dr. Karimuddin. Consequently,
these two persons entered into another contract on 9th March 1953, by which the plaintiff
acknowledged payment to him by Dr. Karimuddin of certain sums of money and agreed
to carry out the construction according to the agreement between the parties. This
agreement also provided that an account will be taken between the plaintiff and Dr.
Karimuddin with regard to the plaintiff’s claim for payment of his bills for construction,
and the amounts received by him from time to time from Dr. Karimuddin.

3. The agreement dated 9th March 1953, however, failed to bring about a final settlement
between the plaintiff and Dr. Karimuddin. These persons, therefore, referred the disputes
between them to the arbitration of one Mr. Ishaque Khan. The arbitrator made an ex parte
award on 9-5-1953, which award was however, set aside by this Court by order dated
10-11-1953. On remand of the case by the Court, the arbitrator proceeded with arbitration
a second time, and gave his award on 15th September 1954, by which he found a sum of
Rs. 30,063 (Rupees thirty thousand and sixty-three) due from Dr. Karimuddin to the
plaintiff, and further held that the plaintiff would be entitled to retain the ground and the
first floors of the building on Plot No. A.M. 331, Preedy Street, Karachi, until payment in
full of his debts. The award, on being filed in the Court, was made rule of tile Court and a
decree followed in terms of the award by the Court’s order dated 6-3-1957.

4. The plaintiff then filed an execution application, being No. 44 of 1961, against the
legal representatives of Dr. Karimuddin and obtained in these execution proceedings
attachment of the construction on Plot No. A.M. 331. This attachment was withdrawn by
order dated 11-2-1965 on the application of the defendant under Order XXI, rule 58, C. P.
C. It was found by the Court that the judgment-debtors, namely, the legal representatives
of Dr. Karimuddin, were not in possession of this property on their own account, and that
the defendant Barkat Ali was the owner in possession of the property. It may here be
stated that defendants Nos. 2 to 5 in the present suit, who are the legal representatives of
Dr. Karimuddin, are in possession of some portions of the building in dispute as tenants
of defendant No. 1. The defendants Nos. 6, 7 and 8 are also tenants in the building.

5. On dismissal of his execution application, the plaintiff brought the present suit under
Order XXI, rule 63, C. P. C. to establish, as noted above, his claim to remain in
possession of the ground and the first floors of the building in dispute and to recover the
amount of decree against Dr. Karimuddin by attachment and sale of this building. The
Page No. 2 of 4
suit is resisted by defendant No. 1 on the ground that he was not a party to the arbitration
proceedings between the plaintiff and the late Dr. Karimuddin and the decree which
followed the award made in these proceedings and, further, the building belonged to him
and not to Dr. Karimuddin or his legal representatives and, therefore, could not be
attached or sold in execution of the plaintiff’s decree. On the pleadings of the parties, tote
following issues were settled by the Court:-

“(1) Whether the construction in suit was got constructed by Dr. Karimuddin the husband
of the defendant No. 2 and the father of defendants Nos. 3, 4 and 5 through plaintiff and
Barkat Ali son of Munsif, the defendant No. 1 was bound to pay for it?

(2) Is the construction in suit liable to be attached and sold in execution of the decree
passed in Suit No. 945 of 1954 by -the High Court of West Pakistan, Karachi Bench at
Karachi, which is being executed in Execution No. 44 of 1961?

(3) Is the defendant No. 1 bound by the decree passed in Suit No. 945 of 1954, Hussain
Khan v. Dr. Karimuddin, by the High Court of West Pakistan, Karachi Bench, at Karachi,
which is being executed in Execution No. 44 of 1961 ?

(4) Was the decree in Suit No. 945 of 1954, obtained by the plaintiff in collusion with Dr.
Karimuddin, in order to defraud the defendant No. 1 ?

(5) Is the plaintiff entitled to recover rents from the defendants Nos. 6, 7 and 8?

(6) Is the suit bad for misjoinder of parties?

(7) Is the suit as framed not maintainable?

(8) To what relief if any is the plaintiff entitled?”

The case came up for hearing before me on 1-3-1967, when I directed that issues Nos. 2
and 3 should be tried as preliminary issues. Issue No. 3 does not present any difficulty,
because Mr. Mohammad Akram, the learned Advocate for the plaintiff, agreed that the
defendant No. 1 was not bound by the decree passed against Dr. Karimuddin do the
award made by Mr. Ishaque Khan. The learned Advocate argued issue No. 2 at length.
Under this issue, the question for determination is whether the construction on Plot A.M.
331, is liable to be attached and sold in execution of the decree in favour of the plaintiff
against Dr. Karimuddin. Mr. Mohammad Akram’s argument on this issue is two-fold, that
is, (i) since the plaintiff carried out the construction of the building on Plot No. A.M. 331,
and invested his own moneys therein, he has a right to proceed against this construction
and to recover the amount of his decree by attachment and sale thereof, and (ii) under the
award of Mr. Ishaque Khan, the plaintiff was entitled to retain possession of the ground
and the first floors of the construction on this plot.

6. As regards the right to retain possession of the ground and the first floors, it is
conceded by Mr. Mohammad Akram that the plaintiff was no longer in possession of
these floors. The question of proceeding in execution against the construction on the basis
of possession, therefore, does not arise. Even if the plaintiff was in possession of these
two floors, he would not, merely on that account, be entitled to execute his decree by sale
of the construction, because plot No.. A.M, 331, as well as the construction thereon,
belongs to defendant No. 1, who was party neither to the arbitration proceedings, nor to
the proceedings in Court on the award made against Dr. Karimuddin. Mr. Mohammad
Akram was unable to bring to my notice any rule of law by which a decree-holder is
competent to execute his decree against the property of a person who is neither the legal
representatives of the judgment-debtor, nor was he a party to the suit in which a decree
was made: But Mr. Mohammad Akram contended that the plaintiff had a right to execute
his decree against the construction which he carried out with his own investments. What I
understand the learned Advocate to mean is, that a building contractor has a lien on
constructions made by him for the payment of his bills. This kind of lien is not
recognized by section 171 of the Contract Act. As stated in Hudson’s Building and
Engineering Contracts (VIII Edition) at page 382, no lien can arise from a building
contract, whether by operation of law or under the terms of the contract. The contract
may, however, confer contractual rights over materials or plant having some or all of the
Page No. 3 of 4
characteristics of a lien. But this position does not arise in the present case, because there
is no contract between the plaintiff and the defendant No. 1, conferring any such
contractual lien over the plaintiff. Even if the plaintiff could at all lay claim to any lien,
he cannot do so now, because, he is no longer in possession of the constructions carried
out by him: But the plaintiff’s learned Advocate insisted that the construction carried out
by the plaintiff should be treated as plaintiff’s property. I am unable to agree with this
view. The rule is that property in materials built into a building ceases to be the property
of the contractor and becomes that of the owner. On this question, I would reproduce the
following passage from Hudson’s Building and Engineering Contracts (VIII Edn., p.
362):-

“once the builder has axed materials the property in them passes from him, and at least as
against him they become the absolute property of his employer, whatever the latter’s
tenure of or title to the land. The builder has no right to detach them from the soil or
building, even though the building owner may himself be entitled to sever them as
against some other person, e.g., as tenant’s fixtures.”

I would here like to make reference to two English decisions also, which are Elwes v.
Mawe ((1802) 3 East 38) and Wake v. Hall ((1883) 8 A C 195 (H L)). It is observed in the
first of these cases that-

“Whatever is annexed to the reality becomes part of it and the person who was the owner
of it when a chattel loses his property in it, which immediately vests in the owner of the
soil.”

But this broad rule was ‘qualified to some extent by lord Blackburn in the second of these
decisions, in which it was observed that-

“Whenever the chattels have been annexed to the land for the purpose of the better
enjoying of the land itself, the intention trust clearly be presumed to be to annex the
property in the chattels to the property in the land, but the nature of annexation may be
such as to show that the intention was to annex them only temporarily.”

It was further observed that-

“Where a chattel is so annexed that it cannot be removed without great damage to the
land, it affords a strong ground for thinking that it was intended to be annexed in
perpetuity to the land.”

7. It is not the plaintiff’s case that the materials used by him in the construction of the
ground and the first floors of the building in question were not used with the intention of
permanent annexation to the land, or that these materials can be removed without damage
to the building and so it is not possible to hold that the property in the building materials
did not pass from the plaintiff to the defendant No. 1 as soon as the ground and the first
floors of the building were constructed. The plaintiff, therefore, cannot lay any claim to
any property in the ground and the first floors of this building and, consequently, cannot
proceed against these floors in execution of the decree which he obtained against the late
Dr. Karimuddin. Accordingly, my finding on issue No. 2 is against the plaintiff.

8. In view of these conclusions, I am of the opinion that the present suit cannot be
maintained. Hence I would dismiss the suit with costs.

K.B.A. Suit dismissed.

Page No. 4 of 4
P L D 1966 (W. P.) Karachi 556

Before A. S. Faruqui and Noorul Arfin, JJ

MESSRS CONTINENTAL SYNDICATE OF TRADE-----Appellant

Versus

LLOYDS BANK LTD-—Respondents

Letters Patent Appeal No. 79 of 1960, decided on 24th March 1966.

(a) Contract Act (IX of 1872)----S. 176-Power of sale given to pawnee-Subject to only
limitation that notice of sale should be reasonable-Notice containing material from which
debtor can infer amount of debt due as well as intention of pawnee to sell goods-Notice,
held, sufficient.

The words, “he may sell the thing pledged on giving the pawnor reasonable notice of the
sale”, in section 176 of the Contract Act, 1872 merely require that the notice should
contain an intimation of the pawnor’s intention to sell the goods if the debt was not paid
within a reasonable time. The power of sale given to the pawnee under this section is
subject to only one limitation, which is, that the notice of sale should be reasonable. The
section does not require that the amount due from the pawnor should be specifically
stated in the notice. It is enough if the notice contains material from which the debtor can
infer as to what debts he has to pay to the pawnee. It is also not necessary that the notice
should contain the date or place of sale or that the pawnee should first arrange the sale of
the pledged goods, and then communicate his decision to the pawnor.

Hooseinbhoy Hoodbhoy v. Netherlands Trading Society P L D 1962 Kar. 565

distinguished,

(b) Contract Act (IX of 1872)-----S. 176-Pawnee’s right to sell pledged goods after
notice-Can be exercised bona fide at any time he chooses-Limitations contained in S. 54,
Sale of Goods Act, 1930-Not applicable-Sale of Goods Act (III of 1930), S. 54.

Where the Bank sold the pledged goods more than 2 years after the notice to pawnee
under section 176 of the Contract Act, 1872 and it was urged that the sale having not been
held within reasonable time after service of notice under section 176 of the Contract Act,
1872, the sale could not be treated as sale in pursuance of the notice and as such was not
binding on the pawnor:

Held, there is no such limitation under section 176 of the Contract Act, 1872 as is
contained in section 54 of the Sale of Goods Act, 1930 which requires an unpaid seller to’
sell the goods within reasonable time after giving the notice of re-sale to the buyer. The
requirement of section 176 of the Contract Act, 1872 is that the notice should be
reasonable. It is, therefore, for the pawnee to choose the time, after notice under section
176, to put his power of sale into operation and in order to do so, he does not require any
further authority or permission from the debtor. Of course this power should not suffer
from absence of bona fides. Where there is no evidence to show that delay in effecting
the sales was deliberate and mala fide or that the sales were improper in any way or much
below the market rate, no inference of bad faith on the part of the Bank can be drawn.

(c) Contract Act (IX of 1872)---S’s. 171, 174, 176 & 177-General lien of Bankers over
goods pledged-Banker entitled to combine several accounts of customer into one
realisation account and in absence of any special agreement to contrary has right to
exercise lien on goods pledged in one account for balance due in other account.

Where the Bank with whom the goods were pledged combined four accounts of the
pawnee into one realization account so as to make the goods pledged in each account
security for the total balance due on all accounts, grievance was made that this action of
the Bank deprived the pawnee of his right under section 177 of the Contract Act, 1872 to
redeem the goods in each account separately at any time before the sale:

Page No. 1 of 8
Held, a Banker, unless precluded by agreement, is entitled to combine different accounts
kept by the customer in his own right, whether deposit or current and to exercise his lien
or set-off for the resulting balance the right of the pawnor under section 177 of the
Contract Act, 1872 to redeem pledged goods at any time before they are sold is subject to
the Bank’s right under section 171 of the Act which provides that in the absence of a
contract to the contrary the Banker is entitled to retain as security for the general balance
of account any goods bailed to him. Accordingly the Bank in the case was entitled to treat
the goods pledged in the four loan accounts as security for the general balance which
became due to it by the merger of these accounts in the realization account.

Halsbury: Vol. VII Simond’s Edn., p. 172, para. 322 and Garnett v. M’kewan (1873) 8
Ex. Ch. 10 ref.

Munawar Abbas for Appellants.

Bhojani for Respondents.

Dates of hearing: 19th, 20th and 26th January 1966.

JUDGMENT

NOORUL ARFIN, J.----The Continental Syndicate of Trade, the appellant herein, has
come in Letters Patent Appeal from the judgment dated the 6th of May 1960, of our
learned brother Qadeeruddin Ahmad, J., whereby Suit No. 967 of 1953, brought by
Lloyds Bank Ltd., the respondent, was decreed for Rs. 50,944-4-4 (Rupees fifty thousand
nine hundred and forty-four, annas four and pies four) with interest and costs.

2. The appellant was a customer of Lloyds Bank Ltd., and had a current account and
several loan accounts with it. The loan accounts relevant to this case are accounts bearing
Nos. 27, 28, 29 and 168. Under the first three of these accounts, the appellant imported
textile machinery on Letters of Credit established with the bank. Account No. 168 was in
respect of car radios, imported through the bank. The amount due from the appellant on
the loan accounts was Rs. 65,146-9-0. The bank combined these accounts into one
realization account which showed this figure as the debit balance against the appellant.
Another sum of Rs. 3,298-15-4 was claimed to be due from the appellant on current
account. The Bank’s total claim was thus Rs. 68,445-8-4. The bank sold the goods held
under its pledge on the four loan accounts for Rs. 17,501-4-0, which amount was
appropriated towards the appellant’s out standings and a suit for Rs. 50,944-4-4 was filed
by the bank in respect of the amount still due from the appellant. The appellant denied its
liability for this amount on various grounds and in turn claimed Rs. 42,120 against the
Bank as under:---

(i) Rs. 6,000 claimed by the appellant as refund of the of marginal amount;

(ii) Rs. 5,140 alleged to be the insurance money the Bank but not paid to the appellant;

(iii) Rs. 17,600 being the value of 22 drums of caustic soda, which, it was alleged, the
bank failed to deliver to the appellant;

(iv) Rs. 14,000 which the appellant claimed as damages for non-delivery of a
consignment of knitting wool imported by the appellant.

3. Numerous issues were raised, but the parties went on trial on the following issues only,
the other issues have been dropped or not pressed:

(a) Has the plaintiff bank maintained the defendant’s account according to the normal
banking practice and is the defendant bound by the same?

(b) Did the defendant maintain current account with the plaintiff and has a sum of Rs.
3,298-15-4 become due by the defendant to the plaintiff bank? If so, on what date?

(c) Did the plaintiff serve notice on the defendant of its intention of selling the goods and
was the action of the plaintiff justified in selling the goods?
Page No. 2 of 8
(d) Were the goods sold at a fair and reasonable price?

(e) Was the plaintiff liable to deliver 22 drums of caustic soda to the defendant? If so, did
the plaintiff deliver the same to the defendant?

(f ) Is the defendant’s entitled to claim Rs. 17,000 on account of the value of the
undelivered 22 drums in question?

(g) Did the plaintiff refuse to deliver the goods related to loans Nos. 27, 28 and 29 on
demand to the defendant? If so, with what effect?

(h) Did the plaintiff supply to the defendant complete copy of the current account? If so,
with what effect?

(i) Is the defendant not liable to the loan account of loan No. 168 on account of plaintiff
withholding the delivery of the goods?

(j ) Is the defendant entitled to claim Rs. 6,000 on account of margin money paid to the
plaintiff on the grounds set forth in paragraph 6 of the written statement?

(k) Is the defendant entitled to a decree for Rs. 42,120 against the plaintiff as stated in
para. 6 of the written statement?

(l) What sum of money if any, is due to the plaintiff from the defendant?

(m) What amount, if any, is due, to each party against the other?

(n) General.

4. The findings of the learned trial Judge on these issues being against the appellant, the
Bank’s suit was decreed and the appellant’s counter-claim dismissed.

5. Mr. Munawar Abbas, the learned counsel for the appellant, raised before us the
following objections to the judgment in appeal :----

(1) That the Bank sold the pledged goods without notice or sufficient notice required
under section 176 of the Contract Act.

(2) That the Bank was not entitled to combine the four loan accounts into one realization
account.

(3) That the Bank wrongly refused to deliver the pledged goods when delivery was
demanded by the appellant.

(4) That the sales of the pledged goods by the Bank was either fictitious or not according
to the market rates.

(5) That the debit balance of Rs. 3,298-15-4 on the current account had arisen because the
Bank had wrongly debited to this account the amount due from the appellant on certain
other accounts.

(6) That the Bank wrongly credited the sum of Rs. 5,140 to the appellant’s account
instead of crediting this amount to the relevant loan account.

(7) That the appellant’s counter-claim was wrongly rejected.

6. As to the first point, M. Munawar Abbas referred us to section 176 of the Contract Act
which requires a pawnee to give notice to the pawnor before proceeding to sell the
pledged goods. The section reads as under:

“Pawnee’s right where pawnor makes default. If the pawnor makes default in payment of
the debt, or performance, at the stipulated time, of the promise, in respect of which the
Page No. 3 of 8
goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or
promise, and retain the goods pledged as a collateral security; or he may sell the thing
pledged on giving the pawnor reasonable notice of the sale.

If the proceeds of such sale are less than the amount due in respect of the debt or promise,
the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the
amount so due, the pawnee shall pay over the surplus to the pawnor.”

The appellant’s contention is that the requirement of this section as to notice of sale has
not been complied with. The two notices, Exh. 11/7 dated 28-10-1951 and Exh. 11/1
dated 22-2-1952, which the Bank has treated as notices of sale, have not been proved to
have been given to, or served on, the appellant. The reason behind this contention is this.
These notices were given on behalf of the Bank by Messrs Lalchand & Co., a firm of
Advocates which had extensive commercial practice in Karachi. No representative of this
firm was produced to prove the despatch of the notices or the receipts thereof by the
appellant. It is, therefore, urged that we should disregard these documents and hold that
no notice of sale as required by section 176 of the Contract Act was given We are,
however, unable to sustain this objection. There is sufficient material on i.e record to
show that the appellant did in fact receive the notice in question. The first of these notices
is Exh. 11/7 dated 28-10-1951. On 16th January 1952, the bank wrote to the appellant
Exh. 11/15 in which, after referring to the personal visit to the bank of the appellant’s
proprietor, Mr, Nazar Ali Shaikh, it was stated that the bank had agreed to defer the
auction of the pledged goods and legal action against the appellant till 19-1-1952, and
that if payment was not made by this date, the bank would proceed with the sale of the
goods. The appellant has not denied the receipt of this letter or the visit to the Bank of its
proprietor. The necessity of this visit can be explained only by the fact that the appellant
knew that the Bank had decided to sell the pledged goods and that this knowledge was
the consequence of the notice date 28-10-1951 given by Messrs Lalchand & Co. We are,
therefore, not inclined to accept the appellant’s version that it did not receive the two
notices of sale Exhs. 1 1/7 and 11/1. In any case, the letter Exh. 11/15, by which the bank
informed the appellant that the goods would be sold if payment was not made by
19-1-1952 is itself sufficient notice of sale under section 176 of the Contract Act.

7. It was then urged by Mr. Munawar Abbas that the two notices Exhs. 11/7 and 11/1 do
not comply with the requirements of section 176 of the Contract Act. The appellant’s
complaint is that the notices did not contain the exact figures of the amounts due from the
appellant, nor the intimation of the Bank’s clear decision to sell the pledged goods on the
appellant’s failure to make payments by specified dates. Before examining this
contention, we may consider the contents of the two notices. The first notice dated
28-10-1951 (Exh. 11/7), stated “you have not yet cleared your accounts relating to
Camley Refrigerators and Car, Radios” and then called upon the appellant to pay the
amounts due on these accounts within one week, failing which, the appellant was
informed, the bank would dispose of the goods by public auction or by private treaty. The
second notice, dated 22-2-1952 (Exh. 11/1), was also in similar terms, but with the
difference that instead of describing the accounts by reference, to the goods, the numbers
of the three accounts to which the notice related were giver.

8. The question is, in what respect these notices do not comply with the requirements of
section 176 of the Contract Act. We have to note that the power of sale given to the
pawnee under this section is subject to-only one limitation, which is, that the notice of
sale should be reasonable. The section does not require that the amount due from the
pawnor should be specifically stated in the notice. It is enough if the notice contains
material from which the debtor can infer as to what debts he has to pay to the pawnee. It
is also not necessary that the notice should contain the date or place of sale or that the
pawnee should first arrange the sale of the pledged goods, and then communicate hiss
decision to the pawnor. The words in section 176 of the Contract Act “he may sell the
thing pledged on giving the pawnor reasonable notice of the sale”, merely require that the
notice should contain an intimation of the pawnor’s intention to sell this goods if the debt
was not paid within a reasonable time. In our opinion, the two notices fulfil these
requirements. In the first notice, the accounts on which payment was demanded from the
appellant were described by reference to the goods to which the accounts related. The
second notice contained the numbers of the accounts. From these references, it was
possible for the appellant to know as to what amounts it was required to pay to the Bank.
Page No. 4 of 8
We are also of the view that the appellant was aware of the debts payable by it to the
Bank, and on this ground also the notices cannot be considered bad because the amounts
of the debts were not specifically stated therein. The notices also informed the appellant
that if payment was not made within one week, the pledged goods would be sold. In this
way, the intention of the bank to sell the goods was clearly communicated to the
appellant.

9. To sustain his objection to the notices, Mr. Munawar Abbas relied on the decision of
this Court in Hooseinbhoy Hoodbhoy v. Netherlands Trading Society (P L D 1962 Kar.
565). We think that this decision is not applicable to the facts which are before us. In this
case the notice which was urged to be the notice under section 176 of the Contract Act
was as follows:-

“Please take notice in default of compliance of any one of the above demands, our
clients will take steps to recover all that is due to them from you without further
reference to you.”

It was held that this notice could not be treated as notice under section 176. We are in
respectful agreement with this view. This notice neither contained material to indicate to
the debtor as, to what amount he was required to pay, nor did it communicate the
pawnee’s intention to sell the pledged goods. But in the present case the two notices, as
we have explained above, do not suffer from any of these defects.

10. Mr. Munawar Abbas then pointed out that the Bank sold the pledged goods on
different dates between January and May 1953; long after the dates of these notices.
According to him, the sales should have been made within reasonable time after the
notices. This not having been done, the sales did not bind the appellant and could not be
treated as sales in pursuance of the notices in question. He supported this contention by
referring the decisions under section 54 of the Sale of Goods Act. This section requires an
unpaid seller to sell the goods within reasonable time after giving the notice of re-sale to
the buyer. But there is no such limitation on the pawnee’s right of sale in B section 176 of
the Contract Act. The decisions under section 54 of the Sale of Goods Act will not,
therefore, apply to a case under section 176 of the Contract Act, the requirement under
which is only that reasonable notice of sale should be given. It is for the pawnee to
choose the time to put his power of sale into operation and in order to do so, he does not
require any further authority or permission from the debtor. It is correct that the exercise
of this power should not suffer from absence of bona fides. But no material has been
placed before us to show that delay in effecting the sales was deliberate and mala fide, or
that the sales were improper in any way or so much below the market rates as to raise a
reasonable inference of bad faith on the Bank’s part. We, therefore, see no force in the
appellant’s, complaint with regard to delay in the sales.

11. The next two points, the merger of the four loan accounts into one realization account,
and the Bank’s refusal to deliver the pledged goods to the appellant, may be taken
together. The appellants grievance is, that the effect of combining these accounts was to
make the goods pledged in each account security for the total balance due on all the
accounts, and that this resulted in depriving the appellant of its right under .section 177 of
the Contract A-c, to redeem the goods in each account separately at any time before sale.
For reasons we will discuss, this contention has no force It is now well recognised that
the Banker, unless precluded by agreement, is entitled to combine different accounts of a
customer The principle is thus stated in Halsbury Vol. II Simond’s Ed 72 para. 322:---

“Unless precluded by agreement the banker is entitled to combine different

accounts kept by the customer in his own right, whether deposit or current and to
exercise his lien or set-off for the resulting balance.”

In Garnett v. M’kewan ((1873) 8 Ex. Ch. 10), it was observed that the Bank is entitled at
any time to combine the several accounts of a customer and to charge an account with
credit balance with the debit balance of another account”.

13. However, Mr. Munawar Abbas contends that the right to combine the accounts did
not entitle the Bank to treat the goods held in one account as security for the balance in
other accounts This reasoning is attempted to be supported by reference to the provisions
Page No. 5 of 8
of section 177 of the Contract Act’ which permits a pawnor to redeem pledged goods at
any time before they are sold. But this right of the pawnor, in our opinion, is subject to
the Bank’s right under section 171 which provides that in the absence of a contract to the
contrary, the banker is entitled to retain, as security for the general balance of account,
any goods bailed to him. No special agreement exclndin’2 this general term has been
shown to exist in this case. On the contrary, the two agreements between the parties
produced in evidence conferred on the Bank the right to exercise lien on goods, pledged
in one account for the balance due in other accounts These agreements are Exh. 11/2
dated 21st January 1949 and Exh. 8 dated 1st August 1950, by which the appellant
pledged its refrigerators and stocks of knitting wool, car radios and other goods with the
bank. Both these documents empowered the Bank to sell the pledged goods and to treat
the sale proceeds as security for all the indebtedness and liabilities of the appellant.
According the Bank was entitled to treat the goods pledged in the four loan accounts as
security for the general balance which became due to it by the merger of these accounts
in the realization account.

13. As to the Bank’s claim on the current account the position is this. Two debit entries
were made in this account: One was for Rs. 1,421-4-0 and was made on 22-4-1951 and
the other entry was for Rs. 3,767-0-0 and is dated 28-7-1951. These entries, according to
the appellant, produced a debit balance in the current account which was till then in
credit. The nature of the first entry was explained by the Bank’s witness Muhammad
Yousuf, who stated that the amount of Rs. 1,421-4-0 represented the debit balance of loan
account No. 74. This account was closed and its debit balance was transferred to the
current account by making the debit entry in question. The second debit entry was
explained by the appellant’s proprietor, Mr. N. A. Shaikh. He stated in his evidence that
the amount of Rs. 3,767-0-0 represented the price of one out of eleven bales of cotton
piece goods which had been short-landed. The bank debited this amount to the current
account. The appellant’s contention is that the Bank could not exercise any lien on the
credit balance standing in the current account for the debits due to it from the appellant. It
is urged that under section 171 of the Contract Act, it is only goods bailed, and not
.money deposited, with the banker which could be the subject of lien. It is stated that
money deposited in the bank to the credit of the current account of the customer does not
constitute a bailment, nor remain an ear-marked sum of money. Such money ceases to be
the customer’s property and the banker cannot be said to be in possession of any property
of the customer. In this way, the condition necessary to the existence of the exercise of
the lien on the appellant’s current account was lacking. It is correct that money deposited
in the current account is not an earmarked sum of money and may not aptly be treated as
the subject of lien. However, we think that the two debit entries in question were made by
the bank in the exercise of its right of set-off or appropriation. Under this right, a banker
can take into account any item in its own favour as against any payment made by the
customer before arriving at the balance subsisting between them. Accordingly, the
appellant’s objection to the two debit entries made by the bank in the current account is
without any substance.

14. The appellant next objected to the credit entry of Rs. 5,140 made in the current
account on 18-8-1951. The, parties’ counsel were in agreement that this amount was
received by the Bank from an Insurance Company on account of loss in transit of some
Refrigerators imported by the appellant. We confess that we have not been, able to
understand the appellant’s grievance on this point. The amount was received by the bank
on the appellant’s account and due credit was given to the appellant therefore by making
the credit entry in question in the current account.

15. With regard to the appellant’s objection to the sales of the pledged goods made by the
bank, we are unable to accept the appellant’s suggestion that these sales were fictitious or
were according to the market rates. The onus to prove these allegation was on the
appellant who; however, failed to bring any material on the record to support these
allegations. It was open the appellant to produce evidence as to the market rates of the
goods on the dates the sales were made. No much evidence, however, was produced.

16. Turning to the appellant’s counter-claim, we will first take up the item of Rs. 5,140.
This amount was received by the bank from an Insurance company for loss in transit of
some Refrigerators. As noted above, the amount was credited to the appellant current

Page No. 6 of 8
account on 18-8-19-51. The inclusion of this item in the counter-claim is without any
basis.

17. The next two items of the counter-claim, for Rs. 6,000 and Rs. 17,600, are
inter-connected and relate to a consignment of 70 drums of caustic soda imported by the
appellant through the bank in loan account No. 59. Due to the appellant’s failure to take
delivery, the Bank cleared the goods from the Customs and stored them with its agents,
namely Cox and Kings. The appellant later on took delivery of 48 drums. The remaining
goods were in bad condition. By letter dated the 30th of November 1949, (Exh. 11/9A).
Cox and Kings requested the bank to pursuade the appellant to take delivery of the 22
drums as storage thereof was not possible on account of their bad and damaged condition.
By letter dated 29-5-1950 (Exh. 7/2), the appellant expressed to the Bank its inability to
take delivery of these 22 drums on account of some litigation pending in Court. The Bank
closed this loan account on 22-8-1951. The outstanding balance was adjusted by transfer
of Rs. 6,600 from the appellant’s margin account which was in credit on this date. The
appellant’s claim for Rs. 6,000 is in respect of the credit balance in the margin account.
When it was pointed out to Mr. Munawar Abbas that this amount had been transferred
and credited to the loan account No. 59, he did not press the appellant’s claim for this
item of the counter-claim.

18. As regards the amount of Rs. 17,600, the appellant’s stand is that the loan account No.
59 was closed as adjusted on 22-8-1951 and, therefore, the appellant should be deemed to
have paid to the bank the price of the 22 drums of caustic soda which was calculated at
Rs. 17,600. It was admitted by the appellant that on 10-12-1951 the bank gave a delivery
order (Exh 9/8) to the appellant on Cox and Kings for these drums. The complaint is, that
Cox and Kings did not in fact deliver these goods alleging that the goods had been
wrongly delivered to some other party. Mr. Nazar Ali Shaikh, the appellant’s proprietor,
stated in his evidence that he brought this fact to the notice of the Bank in writing. But
this letter has not been produced, nor was the bank’s witness, Muhammad Yousuf,
cross-examined on this point. Mr. Bhojani, the learned counsel for the bank, stated before
us that the 22 drums of caustic soda probably had to be destroyed due to deterioration, by
the Bank’s agents Cox and Kings. He further stated that at no time any complaint had
been received from the appellant regarding non delivery of these goods by Cox and
Kings. In our opinion, there is substance in what Mr. Bhojani has stated. The
responsibility for this state of affairs is entirely on the appellant, who failed, to take
delivery of ‘these goods for several years in spite of requests from the Bank and its
agents. Accordingly, the appellant cannot have any claim for Rs. 17, 600 against the
Bank.

19. The last item of the counter-claim is Rs. 14,000. This amount is claimed by the
appellant as damages for loss allegedly caused by the Bank’s refusal to deliver to the
appellant a consignment of knitting wool exported by a London firm, G. R. Irani & Co. in
1951 against a bill of exchange for £2,458-15-Od made payable by the appellant to the
Bank. By letter dated 31-7-1952 (Exh. 15), the exporter extended the time of payment of
the bill by 90 days and agreed that in the meantime the appellant should take delivery of
the goods on payment to the Bank of the Custom duty and clearing charges.
Consequently, by letter dated 4th September 1952 (Exh. 9/11), the appellant requested the
Bank to deliver the goods to S. M: Yusuf & Brothers on payment of landing and clearing
charges. Apparently, the Bank did not agree to this request. On 5th September, the
appellant wrote to the Bank Exh. 9/12, in which the appellant complained that the Bank
had refused to accept Exh. 9/1 I from the representative of S. M. Yusuf & Brothers. This
letter also referred to the visit of the appellant’s proprietor to the Bank in connection with
the delivery of this consignment and the Bank’s reply that no instructions for delivery had
been received from G. R. Irani & Co. This letter was followed by Exh. 9/13 dated
16-9-1952, in which the appellant again made demand for delivery of the goods. We
regret to note that the Bank has not given any satisfactory explanation as to why these
goods were not delivered to the appellant in spite of the exporter’s instructions. To none
of the letters abovementioned the Bank sent any reply. The Bank’s witness, Muhammad
Yusuf, stated at the trial that G. R. Irani & Co. had instructed the Bank not to deliver the
goods to the appellant. But the letter containing these instructions , has not been
produced. The Bank has not even explained as to what actually happened to the goods.
For its defence, the Bank has relied on section 230 of the Contract Act. Mr. Bhojani urged
that the Bank, bong merely agent, of G. R. Irani & Co., was not liable for non-delivery of
Page No. 7 of 8
these goods to the appellant. This contention, in our opinion, is erroneous, because the
basis of the appellant’s claim for Rs. 14,000 is in tort and not on breach of contract by the
Bank.

20. However, the difficulty in the way of the appellant is not the nature of the Bank’s
liability but the appellant’s own failure to prove damages. No satisfactory evidence has
been brought on record to prove that the appellant suffered any, loss by the Bank’s refusal
to deliver the goods in question. Mr. Nazar Ali Shaikh, the appellant’s proprietor, stated
in his evidence that S. M. Yusuf & Brothers had agreed to pay to the appellant Rs. 14,000
as profit on this consignment of wool. But the writing containing this arrangement has
not been produced. Nor has any representative of the buyer come in the witness box to
support the appellant’s contention. The appellant has not even proved the market rates
knitting wool in the first week of September 1952, to enable the Court to test the
correctness of tile appellant’s claim that S. M. Yusuf & Brothers had agreed to buy the
consignment at a trice which would have yielded a profit of Rs. 14,000 to the appellant.
In the absence of these materials, it is not possible to accept the appellant’s contention
that it sustained loss to the extent of Rs. 14,000 by the Bank’s refusal to deliver the
consignment of knitting wool to S. M. Yusuf & Brothers.

2. In the light of the above discussion, we hold that the appellant is not untied to the
reliefs claimed in this appeal. The appeal is, therefore, dismissed, but in the
circumstances of this case we leave the parties to bear their own costs.

K.B.A. Appeal dismissed.

Page No. 8 of 8
P L D 1957 (W. P.) Karachi 760

Before Wahiduddin Ahmad, J

UMAR-Applicant

versus

S. A. RANA and others-Opponents

Revision Application No. 67 of 1953/Revision Application No. 68 of 1953, decided on

6th April 1957.

Lien-Definition ---How arises-Hotel-keeper has a lien, for unpaid bills, on goods brought
by guest into hotel whether such goods belong to guest or third persons-Common Law of
England -Application-Contract Act (IX of 1872), Ss. 171 and 221.

A lien is “a right in one man to retain that which is in his possession, but belongs to
another, till certain demands of the person in possession are satisfied”. It can arise in one
of three ways: ‘(1) by common law; (2) by express or implied contract; and (3) by the
general course of dealing in the trade in which the lien is claimed. Liens are of two kinds
viz: general and particular. General liens are those in which the right to retain the
property is claimed for a general balance of accounts while particular lien is a right to
retain property “for a charge on account of labour employed or expenses bestowed upon
the identical property detained”. Courts of law have looked with favour to liens known as
“particular liens” and have jealously guarded against “general liens”.

Held, that there is a lien of the hotel-keeper on the goods, whether belonging to the guest
or third parties, brought in the hotel and it is not discharged until the hotel dues have been
paid in full.

Principles of justice, equity and good conscience will be followed by law Courts in
respect of matters where there is no specific provision of law and the principles
established under the English common law are applicable as principles of justice, equity
and good conscience in India and now in Pakistan.

Held, that the common law of England was applicable on the facts of this case.

Further, that section 171 of the Contract Act limited the right to a general lien and not to
liens which arise by common law or by express or implied contract and the provisions of
section 171 were therefore not applicable in the present case. In fact, the liens mentioned
in section 171 were not exhaustive at all. A reference to section 221 of the Contract Act
would show that under certain circumstances the liens of agents were also recognised.

Threfall v. Borwick (1874-75), 10 Q B D 210 and Gordon v. Silber 1890, 25 Q B D 491

rel.

Wadhela Rajsanji v. Shekh Masluddin 14 I A 89 ref.

Jan & Son v. A. Cameron I L WXLIV All. 735 and Rampal Singh v. Murray df Co. I L R
XXII All. 164 distinguished.

A. P. Fomeca for Applicant.

Muhammad Parial for Opponents.

ORDER

WAHIDUDDIN, J.---This order Will dispose of the two Revision Applications Nos. 67
of 1953 and 68 of 1953 as there is a common question of law involved.

The applicant hired furniture to Opponent No. 1, and Opponent No. 3 stood surety for
him. The furniture consisted of two glass almirahs, one lady’s writing table and four
Page No. 1 of 4
chairs and were hired at Rs. 22 per month. After some time, opponent No. 1 shifted to the
hotel of opponent No. 2, and took with him the hired furniture to one of the rooms given
to-him as a lodger. Opponent No 1 gave up his residence in opponent No. 2’s hotel. He
had to pay a bill of about As. 175 as hotel charges. On 8th June 1950 he wrote a letter to
the Manager of opponent No. 2’s hotel expressing his regret in not paying the -amount
of’, the bill due from him and requested that his goods lying in the room may be removed
to some other place: and promised to take back the said goods after payment of the dues.
He, however, did not pay a single penny and opponent No. 2 therefore, did not allow the
said goods to. be .removed and claimed a lien on the said property for the payment of the
hotel charges. Opponent No: .1 did not pay the hire charges of the applicant and a sum of
Rs, 88 became due from him for the period commencing 14th May 1950 to .13th
September 1950. The applicant called upon opponent No. 1. to pay the said amount but
he failed to do so. In the meanwhile he also discovered that opponent No: 1 was a lodger
in, the hotel of opponent No. 2 and therefore called upon opponent No. 2 to return the
furniture and also informed him that if he failed to do so he would be responsible: to pay
hire charges at Rs. 22 per month. Opponent No. 2 informed the applicant that there was a
charge on the furniture to the extent of Rs. 171-4-6 and if he was able to satisfy him about
their claim, then the furniture can be obtained on payment of the said amount. In„ these
circumstances£ the applicant filed two suits in the Karachi Small Causes Court, one foe
the recovery of Rs, 88 and for the return of the furniture and the other for the recovery of
Rs. 242 as hire charges for the period from 14th September 1950 to 13th August 1951.
The learned judge, Small Causes Court on 22nd December 1952 decreed the suit ex-parte
against Opponents 1 and 3 and dismissed the suit against Opponent No. 2 with costs. Mr.
Fonseca the learned counsel for the applicant, admitted that after the decision of the trial
judge the amount due to Opponent No. 2 has been paid under protest and the furniture
has been taken away.

The short question involved in this matter is whether opponent No 2 was liable to pay the
hire charges and also to return the furniture without payment of the hotel charges due
from Opponent No. 1.

The learned counsel for: the applicant has strenuously argued that in law there is ‘no lien
of the hotel keepers on the property of third parties and that as the ‘pro6erty was used by
opponent No. 2 and was not returned he was liable to pay the hire charges for the time the
furniture remained in his possession. Mr. Fonseca has drawn my (attention to section 171
of the Contract Act and urged that in law the lien is only recognised of bankers, factors,
wharfingers, attorneys of a High Court and policy-brokers. He argued that it is only one
of those persons whose lien is recognised under the law. He therefore contended that the
learned trial Judge should have at least decreed the suit for the return of the furniture in
dispute. Mr. Parial, the learned counsel for opponent No. 2, has, however, urged that the
lien of the hotel keepers or inn-keepers has been recognised under the common law and
therefore the conclusion of the learned judge on this question was correct and opponent
No. 2 was not at all bound to return the goods in dispute to the applicant without payment
of his charges. The learned counsel for both the parties took me through a number of
authorities in support of their respective contentions.

A lien is “a right in one man to retain that which is in his possession, but belongs to
another, till certain demands of the person in possession are satisfied”. It can arise in one
of the three ways : (1) by common law ; (2) by express or implied contract ; and (3) by
the general course of dealing in the trade in which the lien is claimed. Liens are of two
kinds vii. general and particular. General liens are those in which A the right to retain the
property is claimed for a general balance of accounts while particular lien is a right to
retain property “for a charge on account of labour employed or expenses bestowed upon
the identical property detained”. The Courts of law have looked with favour to liens
known as “particular liens” and have jealously guarded against “general liens”. It may be
noted that the right of general lien does not exist by the common law. They arise either
out of general usage or by agreement. Section 171 of the Contract Act limits the right to a
general lien and not to liens which arise by common law or by express or implied
contract. In my opinion, the provisions of section 171 of the Contract Act are therefore
not applicable in the present case. In fact, the liens mentioned in section 171 are not
exhaustive at all. A reference to section 221 of the Contract Act will show that under
certain circumstances the liens of agents are also recognised. It will also be worthy to
note that in law liens are also recognised for the arbitrators for the work done by them in
Page No. 2 of 4
respect of the records and the documents produced before them by the parties concerned.
This clearly shows that section 171 is not exhaustive and therefore the case of opponent
No. 2 is not covered under this section. This, however, does not mean that the lien
claimed by him is not recognised by law. The learned counsel for Opponent No. 2 has
invited my attention to two English Cases reported in Threfall v. Borwick ((1874-75) 10
Q B D 210) and Gordon v. Silber ((1890) 25 Q B D 491). In the first case A went to the
,defendant’s inn and stayed there with his family for some time; he took with him to the
inn a piano as his own which he had hired from the plaintiff. He did not pay the bill of the
hotel. The owner of the piano filed a suit against the hotel-keeper, who claimed to detain
the piano in exercise of his lien as inn-keeper as debt due from his lodger. The learned
Judges, after considering the arguments of the parties, came to the conclusion that the
defendant as inn-keeper was bound to take in the piano brought by the guest in the hotel
premises and having done so he had a lien upon it for the charges due from the lodger. In
the second case, the defendants, husband and wife, stayed at the plaintiff’s hotel ; the
wife had with her a quantity of luggage, which was her separate property. Husband and
wife both stayed in the hotel for a pretty long time. There was a large amount due from
the husband. The hotel-keeper detained the wife’s luggage in the alleged exercise of his
right of lien. It was held that the plaintiffs were entitled to a lien upon the goods,
notwithstanding that they were the separate property of the wife. In this case the learned
judge Lopes, L. J., observed “by the common law of England every person who keeps a
common inn is under an obligation to receive and afford proper entertainment to every
one who offers himself as a guest, if there be sufficient room for him in the inn, and no
good reason for refusing him. The inn-keeper is under an obligation to keep the goods of
a guest received into the inn safely and securely, and can be sued and made liable in
damages if he fails in this respect. Ire compensation for the burden thus imposed upon
him, the law has given him a lien upon the goods of the guest until he discharges the
expenses of his lodging and food. It the guest has brought goods to the inn to which he
has no title, this will not deprive the inn-keeper of his lien, because he is obliged to
receive the guest without inquiries as to his title. It seems, therefore, that a lien is
commensurate with the obligation to receive the guests and to keep safely and securely
his goods. The right of lien of an inn-keeper depends upon the fact that the goods came
into his possession, in his character of inn-keeper, as belonging to a guest”. The learned
judge further observed : “ Husband and wife arrive at an hotel with luggage ; the inn-
keeper has no power of discriminating what may be the property of the husband and what
may be the property of the wife; he receives, and is bound to receive husband and wife
with their luggage ; the inn-keeper’s charges are not paid, and I cannot see how it can be
successfully contended that the lien does not attach. It would, in many cases, be defeating
the inn-keeper’s lien and the object for which it was given”.

The above-mentioned authorities lay down that an inn-keeper or an hotel keeper under
the common law has got a lien over the property of his guest for the hotel charges. Mr.
Parial, relying on the above mentioned authorities, has urged that the same principle will
be applicable in Pakistan as there is no contrary provision of law. He further contended
that in the present case also, whenever a guest comes and stays in any hotel it is the duty
of the hotel-keeper to allow the guest to bring all the articles which he wants to bring
with him in the room given to him for staying. The hotel-keeper cannot refuse to accept
the goods brought by the guest into the hotel. If he would do so, then the guest will be
entitled to claim compensation and damages in law. He also contended that under the
conditions that regulate the stay of a guest in an hotel it is clearly stipulated that there will
be a lien of the hotel-keeper on the goods brought by the guest for the hotel charges. Mr.
Parial also relied on the letter written by Opponent No. 1 to Opponent No. 2 by which he
agreed that the goods in dispute will remain with Opponent No. 2 till his dues are paid.
He contended that by this letter there exists an implied contract between the parties, viz.
Opponent No. 1 and Opponent No.’ 2 that there will be a lien against the goods in dispute
for the hotel bills due from Opponent No. 1.

There is great force in the contentions advanced by Mr. Parial. As I have already
observed, lien arises in one of three ways, viz. : by common law ; by express or implied
contract ; and by the general course of dealing in the trade in which the lien is claimed.
The present case is covered by a lien that has arisen by common law and also by express
or implied contract. It has been pointed out over and over again that the principles of
justice, equity and good conscience will be followed by law Courts in respect of matters
where there is no specific provision of law and there are number of authorities to support
Page No. 3 of 4
the view that the principles established under the English common law are applicable as
principles of justice, equity and good conscience in India and now in Pakistan. There is
no contrary provision on the question under consideration and I will, therefore, follow the
English decisions on the question Under consideration and will hold that there exists not,
only alien in favour of the hotel-keepers to retain the property for hotel incharges by
common law but it can also be created by express or implied contract. I accept the
contention , raised by Mr. Parial that the letter of Opponent No. 1 to Opponent No. 2
dated 8th June 1950, creates such an implied contract.

The learned counsel for the applicant has invited my attention to two Indian cases in Jan
& Son v. A. Cameron (I L R 44 All. 735) and Rampal Singh v. Murray & Co., (I L R 22
All. l64), in support of the contention that the principles of common law are not to be ‘
applied in India if they are not found applicable to Indian Society and the circumstances.
Both these cases were between hotel-keepers and their guests, but are clearly
distinguishable. In the first case the question of the application of common law was
considered but in the other case no such question was raised and discussed. But in both
the cases it was held that the provisions of the Indian Contract Act namely of Bailor and
Bailee were applicable and therefore the matter in dispute was considered from that point
of view.

The question in the former case was about the liability of hotel-keepers in case the goods
of, the guest are stolen and in the latter case the point involved was about the liability of
the guest, if the goods hired out to the guest have to be destroyed due to his death in
consequence of the infectious nature of the disease. In my judgment the principles
discussed in, these cases, though remotely connected, cannot be applied to the facts of the
present case. I have already held that there is no specific provision in the Contract Act
dealing’ with the point under consideration and am further of the opinion that the present
case does not relate to an hotel in the Mofussil but arises out of a transaction entered in a
big commercial town like Karachi and therefore, according, to the principle of law
enunciated by their Lordships of the Privy Council in the cape of Wadhela Rajsanji v.
Shekh Masluddin (141 A 89), the common law of England is applicable on the facts of
this case. It is my considered view that there is a lien of the hotel keeper on the goods,
whether, belonging to the guest or third parties, brought in the hotel and it is not F
discharged until the hotel dues have been paid in full.

I therefore consider, that the learned Judge below was right in dismissing the plaintiff’s
suit. For the reasons given above the two revision applications are dismissed with costs.

A.H. Petition dismissed.

Page No. 4 of 4
P L D 1952 Dacca 279

Before Guha, J

Munshi EMAMUDDIN AHMED, through MUHAMMAD ABDUR RAHMAN

and others-Plaintiff-Appellants

Versus

PROVINCE OF EAST BENGAL and others-Respondents

Appeal from Appellate Decree No. 1572 of 1944, decided on 18th December 1950
against the Decree of N. Roy Chowdhury, I. C. S., District Judge of Zilla Faridpur, dated
the 25th April 1944, in Title Appeal No. 10 of 1944, reversing the Decree of Amiruddin
Sarkar, Munsif, 1st Court, Madaripur, dated the 17th November 1943.

Contract Act (IX of 1872), S. 59-Money expressly paid for specified

object-Appropriation of money cannot be altered without assent of both parties.

Where the money has been expressly paid for a specified object and it was received and
acknowledged on that account, there is no power on the part of either of the parties to the
transaction, without the assent of the other, to vary the effect of the transaction by altering
the appropriation in which both originally concurred.

Muhammad clan v. Ganga Bishan Singh I L R 38 Cal. 537 ref.

Sris Chandra Dutt, Amicus Curiae for Appellants.

M. A sir for Imam Hossain Chowdhary for Respondent No. 1.

JUDGMENT

GUHA, J.----This is an appeal by the plaintiffs and arises out of a suit for declaration that
a revenue sale held on the 24th June 1940, is null and void and ultra vires and that there
were various illegalities and irregularities in conducting the sale so the sale held on the
24th June 1940, is liable to be set aside. The plaintiff’s case was that they were owners of
4 annas share of Touzi No. 1800 of the Faridpur Collectorate and a sum of Rs. 23-3-2 was
the revenue payable for their separate account of 4 annas share of the Touzi. This sum of
Rs. 23-3-2 was payable in two kisti, namely, Rs. 11-11-2 was payable on the 12th
January, and the balance of Rs. 11-8-0 was payable on the 28th March, of every year. The
plaintiff’s case was that on the 26th March 1940, the plaintiffs paid Rs. 20 on account of
revenue, and on the 28th March 1940, they paid Rs. 6 also on account of revenue, in all
Rs. 26 in payment of revenue on or before the latest date of payment of March kisti of
1940, that is, by the 28th March 1940. This sum of Rs. 26 was received by the
Collectorate but out of it, they appropriated a certain amount in payment of arrear of
revenue for January kisti of 1940, and also a certain sum for the arrears of cesses due
from the plaintiffs and that left a sum of Rs..6 only in payment of the sum due for the
revenue payable in kisti March 1940. The plaintiff’s case is that they did not know that
out of the amount of Rs. 26, they deposited in March 1940, the Collector appropriated
any amounts on account of arrear of revenue for kisti January 1940, and also for arrears
of cesses and they had no knowledge that actually there were arrears for kisti March
1940. The plaintiffs then said that after the appropriation of those amounts the mahal was
in arrear for Rs. 5-8-0 for kisti March 1940, and it was put up for sale in June following
and was actually sold on the 24th June 1940, and purchased by the Government for a sum
of Re. 1 and, thereafter, the Government took necessary steps for taking delivery of
possession and took possession. The plaintiffs came to know of this sale and filed an
appeal to the Commissioner of the Division but that appeal was dismissed as barred by
time and that decision of the Commissioner was on the 10th September 1940. Thereafter,
on the 23rd August 1941, they have brought this suit for setting aside that revenue sale as
null and void and ultra vires as according to the plaintiffs, there had been no proper
service of notice under section 5 of the revenue sale law and also that the sale was void as
in fact there should not have been shown any arrears because the plaintiffs before the
28th March 1941 paid a sum of Rs. 26 on account of revenue though the revenue payable
Page No. 1 of 3
in the March kisti was a sum of Rs. 11-8-0 and if the Collector would not have deducted
the alleged arrears of revenue and cesses, the estate Should not have been shown as in
arrears and could not have been sold in law under the provisions of revenue sale law.
Then there was a usual notice under section 80 of the Code of Civil Procedure, and,
thereafter, the present suit was instituted.

The suit was contested by the defendant No. 1, who is now the Province of East Bengal,
and its defence was that the suit was not maintainable for defect of parties and in view of
the provisions of section 33 of the revenue sale law, that the sale was duly held after due
and proper service of the required notices which were not suppressed and that the sale
was, in fact, for arrears of revenue due for kisti March 1940, and it was also stated by the
Province of East Bengal that when the sum of Rs. 26 was received by the Collector in
March 1940, he was perfectly justified in deducting therefrom the arrears of revenue
which were due for kisti January 1940 and also the other arrears of cesses and after
deducting those amounts, only a sum of Rs. 6 was credited for the payment of revenue of
kisti March 1940, and the estate was in fact in arrears for a sum of Rs. 5-8-0 only. The
learned Munsif who tried the case came to the conclusion that the suit was maintainable
in the present form and there were no defect of parties nor was the suit barred under
section 33 of the Bengal Revenue Sales Act, that evidently no notice under section 5 of
the Revenue Sales Act was served and that the Collector had no jurisdiction to
appropriate for arrears of January kisti and arrears of cesses out of the sum of Rs. 26
deposited in March 1940, which was paid as revenue for kisti March and in effect the
learned Munsif held that the Collector went beyond his jurisdiction to divert any amount
from the sum of Rs. 26 in payment of dues other than those for which the money was
paid, namely, for payment of revenue due for kisti March 1940, and in that view the
learned Munsif held that the Collector had no jurisdiction to put the property to sale in
June 1940 and therefore, the plaintiff’s suit was decreed holding that the sale was without
jurisdiction and null and void.

Against that decision, an appeal was taken by the Provincial Government in the Court of
the District Judge of Faridpur and the learned District judge held in effect that as there
had been arrears of certain previous dues as revenue and cesses, the Collector was within
his jurisdiction to appropriate that amount from the sum that was deposited on the 26th
March and 28th March 1940, on account of revenue and, therefore, the plaintiffs’ suit was
not maintainable and in that view he dismissed the plaintiff’s suit. Against that decision
the present appeal has been taken by the plaintiffs to this Court.

Mr. Sris Chandra Dutt appearing amicus curiae on behalf of the appellants submitted that
the learned District judge was Wrong in his decision in that as the money that was paid
on account of the revenue in March 1940, which was much in excess of the amount due
for payment in kisti March 1940, there could not have been any arrears but for the fact
that the Collector unjustly appropriated a portion of the amount in payment of certain
previous revenue and cesses and, therefore, showed that the estate was in arrears, which
he was not entitled to do in law. In support of his contention Mr. Dutt refers to the case of
Muhammad clan v. Ganga Bishan Singh (1910) I L R 38 Cal. 537 where it has been laid
down that where the money has been expressly paid to satisfy the revenue due in a kisti
and it was received and acknowledged on that account, there is no power on the part of
either of A the parties to the transaction, without the assent of the other, to vary the effect
of the transaction by altering the appropriation in which both originally concurred. Mr M.
Asir appearing on behalf of the Government of East Bengal for the respondent submitted
that the Collector had ample jurisdiction to appropriate the money in payment of the
arrears of revenue due for January kisti as well for the cesses. It is true that if there is any
arrears of revenue, the Collector would have been entitled to deduct the amount of
revenue which was in arrears in kisti January 1940, namely, Rs. 3-14-9 and certain
amounts that were due for arrears of cesses and in that the Collector was perfectly
justified in view of the provisions in section 42 (1) of the Cess Act (IX of 1880) and Rule
110 framed by the Government under the said Act. It was urged, therefore, that the
amount that was due for revenue in the kisti March 1940, fell in arrears by a sum of Rs:
5-8-0 and so the Collector was perfectly within his jurisdiction to put the property to sale
in June 1940. Mr. Asir wanted to argue that there was nothing to show on the record that
the amount of Rs. 26 that was deposited in March 1940, was deposited on account of
revenue only. If the facts would have been as Mr. Asir asked me to find out, then his
client would have a clear-cut case for success in this appeal. In this case the plaintiffs
Page No. 2 of 3
alleged in their plaint that the sum of Rs. 26 was paid for revenue due in March kisti of
1940. If that was so, and if the sum of s.3-14-9 which was arrears of revenue for January
kisti 1 40, were deducted, the amount that would have remained to the credit of the
plaintiffs would be Rs. 22-1-3 and that was much in excess of the demand for kisti March
1940, which is only Rs. 11-8-0. The plaintiffs contend that when the money was so paid,
there was no power of the Collector to divert that sum to any other account and in this
connection I may refer to section 59 of the Contract Act. The money having been put in
for certain purpose must be appropriated for that purpose and if either of the parties
wanted to divert it to another channel it can be done with the express consent of affecting
parties. So the position is this that the Collector was not justified in diverting the sum of
money that was paid in March 1940, for payment of revenue due in kisti March 1940, in
payment due to him for arrears of cesses then due. Mr. Asir wanted to submit that the
onus was on the plaintiffs to show that the money that was paid was, for revenue. I have
looked into the evidence and found that the plaintiffs’ evidence was that money was paid
on account of revenue. This evidence of the plaintiffs in examination-in-chief was trot
challenged in cross-examination. So, the position is this that the money was paid for
revenue and that being the fact the Collector went beyond his jurisdiction to divert the
sum for any other purpose. So I hold that the learned District judge was not right in his
decision while the learned Munsif was correct.

The result, therefore, is that this appeal is allowed and the judgment and decree of the
lower appellate Court are set aside and those of the trial Court are restored.

There will be no order as to costs.

Leave for appeal under section 15 of the Letters Patent is prayed for and is refused.

I am very grateful to Mr. Sris Chandra Dutt for arguing before me in this appeal amicus
curiae on behalf of the appellants.

A. H. Appeal allowed.

Page No. 3 of 3
Page No. 4 of 1