 
 
IN THE SUPREME COURT OF PAKISTAN 
(Appellate Jurisdiction) 
 
 
PRESENT: 
MR. JUSTICE IJAZ UL AHSAN  
MR. JUSTICE MUNIB AKHTAR 
MR. JUSTICE JAMAL KHAN MANDOKHAIL 
 
 
CIVIL APPEAL NO.196-P OF 2014 
(Against the judgment of the Peshawar High 
Court, Peshawar dated 22.09.2010 passed in 
Writ Petition No.2064/2010)  
 
Allied Bank Limited  
 
…Appellant 
 
VERSUS 
 
Federation of Pakistan thr. Collectorate 
of Customs, Peshawar & others 
 
 
…Respondent(s) 
 
For the Appellant: 
Mr. Muhammad Ajmal Khan, AOR/ASC 
(via video link from Peshawar) 
 
Respondents 1-4: 
Mr. Abdul Rauf Rohaila, ASC 
(via video link from Peshawar) 
 
Respondent No.5: 
Nemo 
 
On Court Notice:  
Raja Muhammad Shafqat Abbasi, DAG  
 
 
Date of Hearing:  
     30.05.2023 
 
JUDGMENT 
 
 
 
IJAZ UL AHSAN, J-. Through the instant Appeal 
by leave of this Court, the Appellant has challenged the 
judgment of the Peshawar High Court, Peshawar dated 
22.09.2010 (hereinafter the “Impugned Judgment”) whereby 
the constitutional petition of the Respondent was dismissed. 
 
CIVIL APPEAL NOS.196-P OF 2014 
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2. 
 
Leave to appeal was granted by this Court vide 
this Court’s order dated 20.10.2014 which is reproduced 
below for ease of reference: 
 
 “Respondent No.5 filed a writ petition challenging 
withdrawal of certain tax exemption on the import of raw 
material and the learned High Court seemingly passed an 
order directing the release of goods to the writ petitioner on 
furnishing a bank guarantee. Pursuant thereto, the 
petitioner/bank furnished bank guarantee in the following 
terms:- 
 
“Now the condition of this Bank Guarantee is 
that this Bank Guarantee can be enforced at any 
time after the release of the goods, at the expiry 
of the validity period of the stay order/temporary 
injunction in terms of clause 4(A) of Article 199, 
of the constitution of Islamic Republic of Pakistan 
or the decision of the Court whichever is earlier 
… 
 
This Guarantee is valid up to 14.04.1994 by 
which dated claim, if any in writing by registered 
post should be received by period, we shall 
stand absolved and released from all liabilities.” 
 
This writ petition was, however, dismissed vide judgement 
dated 15.05.1994. Thereafter, the department never 
approached the petitioner for encashment of the bank 
guarantee and by that time the period of guarantee had 
expired not only in terms of the first part of the order, but 
also even by virtue of second part of the same, reproduced 
above, and on 04.05.2009 a notice for the above purpose 
was served upon the petitioner when the ordinary period 
of limitation; for recovery of amount through enforcement of 
the guarantee as well as on the basis of reasonableness of 
time had expired and the petitioner under the law stood 
discharged from its liability to pay. Whether such 
guarantee had been validly held to be enforceable by the 
learned High Court when the action of the respondent 
demanding enforcement of the guarantee was challenged 
in the constitutional petition through the impugned 
judgement especially when the guarantee was not even a 
continuous guarantee for an unlimited period of time. 
Leave is granted to consider the above.” 
 
3. 
 
The factual matrix and the arguments raised by 
the learned counsel for the Appellant have already been 
summed up and reproduced in the leave-granting order. The 
same therefore requires no repetition. We would however like 
CIVIL APPEAL NOS.196-P OF 2014 
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to clarify that the Appellant’s petition before the High Court 
sought to prohibit the Customs Department/Respondents 1-4 
from encashing five bank guarantees issued in favour of the 
said Respondents as surety for the liability of Respondent 
No.5. These guarantees were numbered 96/29, 93/65, 
93/62, 93/05 and 93/06. Their respective expiry dates were 
10.02.1995, 
14.04.1995, 
26.04.1995, 
08.01.1995 
and 
08.01.1995. 
 
4. 
 
The learned counsel for the Appellant has argued 
that the guarantees that are the subject matter of this lis 
were issued at the request of Respondent No.5 and that the 
first time any formal demand was made by Respondents 1-4 
for their encashment was on 14.05.1998 which was three 
years after the guarantees in question had expired. 
Subsequently, and after a period of over ten years, 
Respondents 1-4 submitted another demand notice dated 
04.05.2009 for encashment of the said guarantees which was 
well-beyond the period for encashing the same. The Appellant 
subsequently approached the High Court seeking a writ for 
prohibition 
which 
was 
dismissed 
vide 
the 
impugned 
judgement. The learned counsel prays that the instant Appeal 
be allowed and the petition of the Appellant before the High 
Court be accepted as prayed for. 
 
5. 
 
The learned counsel for Respondents 1-4, on the 
other hand, has defended the impugned judgement. He 
contends that government dues that had been pending since 
1993 were being sought to be recovered by way of the 
CIVIL APPEAL NOS.196-P OF 2014 
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encashment of the guarantees in question. Further maintains 
that in light of Section 202 of the Customs Act, 1969 (the 
“Customs Act”), there was no fetter on Respondents 1-4 from 
encashing the guarantees in question at any point in time 
since the said Section does not stipulate a period of limitation 
for the recovery of government dues under the said Act. In 
support 
of 
his 
contentions, 
the 
learned 
counsel 
for 
Respondents 1-4 has relied on Bara Ghee Mills (Pvt.) Ltd. vs. 
Assistant Collector Customs (PLD 2017 SC 738), Universal 
Insurance Co. Ltd. vs. Collector Customs, Central Excise & 
Sales Tax, Peshawar (2005 PTD 2355), and Atif Mehmood 
Kiyani vs. Messrs Sukh Chayn Private Limited, Royal Plaza, 
Blue Area, Islamabad (2021 SCMR 1446). He has prayed that 
the instant Appeal be dismissed. 
 
6. 
 
The learned Deputy Attorney General who has 
appeared pursuant to this Court’s notice has also supported 
the arguments raised by the learned counsel for Respondents 
1-4. He has argued that the guarantees in question were 
standalone contracts between the Appellant and Respondents 
1-4 and it was inconsequential how the litigation between 
Respondents 1-4 and Respondent No.5 concluded. Once 
Respondents 1-4 demanded encashment of the bank 
guarantees, the Appellant was duty-bound to encash the 
same under the terms of the said guarantees. 
 
7. 
 
We have heard the learned counsel for the parties 
and gone through the record. The single point of law that 
needs to be determined by this Court is:- 
CIVIL APPEAL NOS.196-P OF 2014 
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i. 
Could the High Court have, by disregarding the express terms 
of the guarantee, dismissed the petition of the Appellant 
seeking a writ of prohibition against Respondents 1-4?  
 
8. 
 
In its very essence, a bank guarantee is an 
undertaking given by a bank to pay a beneficiary a sum on 
behalf of a principal debtor. 
 
9. 
 
Guarantees are regulated in Pakistan under 
Chapter VIII of the Contract Act of 1872 (“Contract Act”). 
Guarantees are defined under Section 126 of the said Act. 
The same is reproduced for ease of reference:- 
 
“A “contract of guarantee” is a contract to perform the 
promise, or discharge the liability, of a third person in case 
of his default. The person who gives the guarantee is 
called the “surety”; the person in respect of whose default 
the guarantee is given is called the “principal debtor”, and 
the person to whom the guarantee is given is called the 
“creditor”. A guarantee may be either oral or written.” 
 
10. 
 
Since a guarantee is, for the purposes of the 
Contract Act, a contract under the law, the parties to the 
guarantee are deemed to be regulated by the terms of the 
guarantee which they have mutually agreed upon keeping in 
view the legal principle of consensus ad idem (meeting of the 
minds) when it comes to construction of contracts. Once a 
guarantee is executed between the parties (i.e. between a 
guarantor/surety and a creditor), they would be bound by the 
terms and conditions of the guarantee irrespective of any 
independent obligation of the principal debtor towards the 
CIVIL APPEAL NOS.196-P OF 2014 
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creditor. That rule is firmly entrenched in our as well as 
common law jurisprudence. 
 
11. 
 
This Court has, in the case of EFU General 
Insurance Ltd. vs. Zhongxhing Telecom Pakistan (Private) 
Limited (2022 SCMR 1994) expressed its view on demand 
guarantees. The relevant portion of the said judgement is 
reproduced for ease of reference:- 
 
“6. … It is clear that the guarantee in question was in the 
nature of a demand guarantee. The law relating to 
performance bonds and demand guarantees, and the 
conceptual framework regarding the same, especially as to 
the enforcement (or otherwise) of such instruments, is now 
well settled in common law jurisdictions. In our country 
one of the leading decisions is of this Court, reported as 
Shipyard K. Damen International v Karachi Shipyard and 
Engineering Works Ltd. PLD 2003 SC 191, 2003 CLD 1 
(“Karachi Shipyard”). It is a leave refusing order of a 
learned three member Bench. Reference was made therein 
to a large number of authorities, including English and 
Indian cases, and many were considered in detail. The 
principles deducible were set out in para 7 (pp. 201-3), 
with which (subject to what is stated below) we are in 
agreement … 
 
7. It will be seen that demand guarantees are regarded as 
being in nature similar to letters of credit, and the 
guarantee constitutes an autonomous contract between the 
issuer and the beneficiary. Now, one aspect of the law 
relating to letters of credit is the rule of strict compliance. 
The documents presented by the beneficiary to the issuing 
(or, if such be the case, confirming) bank must comply 
strictly with the terms thereof. If so, the bank is (subject to 
exceptions and conditions not presently relevant) bound to 
pay. If not, the bank is bound to refuse payment …” 
 
CIVIL APPEAL NOS.196-P OF 2014 
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12. 
 
In the UK, the England & Wales Court of Appeal in 
Edward 
Owens 
Engineering 
Ltd. 
vs. 
Barclays 
Bank 
International Ltd. ([1977] 3 W.L.R. 764) while dealing with 
the encashment of a performance bond (which are a sub-set of 
demand guarantees) noted that:- 
 
“A bank which gives a performance guarantee must 
honour that guarantee according to its terms. It is not 
concerned in the least with the relations between the 
supplier and the customer; nor with the question whether 
the supplier has performed his contracted obligation or not; 
nor with the question whether the supplier is in default or 
not. The bank must pay according to its guarantee, on 
demand, if so stipulated, without proof or conditions. The 
only exception is when there is a clear fraud of which the 
bank has notice.” 
(Underlining is ours) 
  
Similarly, in Sri Lanka, the Supreme Court in Commercial 
Bank of Ceylon PLC vs. Ace Containers (Pvt) Ltd. ([2015] 1 
S.L.R. 223) relied heavily on Paget’s Law of Banking when 
describing a demand guarantee. The said para is reproduced 
for ease of reference:- 
 
“Paget's Law of Banking 12th edition Chapter 34.2 at page 
730 describes the characteristics of Demand Guarantees 
as follows “The essential difference between a guarantee 
in the strict sense (i.e, a contract of suretyship) and a 
demand guarantee is that liability of a surety is 
secondary, whereas the liability of the issuer of a demand 
guarantee is primary. A surety's liability is co-extensive 
with that of the principal debtor and, if default by the 
principal debtor is disputed by the surety, it must be 
proved by the creditor Neither proposition applies to a 
demand guarantee. The principle which underlies demand 
CIVIL APPEAL NOS.196-P OF 2014 
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guarantees is that each contract is autonomous. In 
particular, the obligations of the guarantor are not affected 
by disputes under the underlining contract between the 
beneficiary and the principal. If the beneficiary makes an 
honest demand, it matters not whether as between himself 
and the principal he is entitled to payment. The guarantor 
must honour the demand, the principal must reimburse the 
guarantor 
(or 
counter-guarantor) 
and 
any 
disputes 
between the principal and the beneficiary, including any 
claim by the principal that the drawing was a breach of 
the contract between them, must be resolved in separate 
proceedings to which the bank will not be a party.”” 
 
The conduct of parties to a bank guarantee has also been the 
subject of discussion by the Indian Supreme Court in U.P. 
State Sugar Corporation vs. Sumac International Ltd. ([1997] 1 
SCC 568) wherein it was of the view that:- 
 
“The law relating to invocation of such bank guarantees is 
by now well settled. When in the course of commercial 
dealings an unconditional bank guarantee is given or 
accepted, the beneficiary is entitled to realize such a bank 
guarantee in terms thereof irrespective of any pending 
disputes. The bank giving such a guarantee is bound to 
honour it as per its terms irrespective of any dispute raised 
by its customer. The very purpose of giving such a bank 
guarantee would otherwise be defeated. The courts 
should, therefore, be slow in granting an injunction to 
restrain the realization of such a bank guarantee.” 
(Underlining is ours) 
 
Reference may also be helpfully made to the judgement of the 
High Court of England & Wales in Simon Carves Ltd. vs. 
Ensus UK Limited ([2011] EWHC 657 (TCC)). Reflecting the 
CIVIL APPEAL NOS.196-P OF 2014 
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everchanging need to keep up with contemporary commercial 
practices, Mr. Justice Akenhead opined that:-  
“12. I am very reluctant on the basis of an argument that 
has run for no more than about 45 or 50 minutes from both 
parties to make any final findings of law about this. … It is 
certainly the case, and the law and practice establishes 
this over many years, that a bank or surety which has 
provided 
an on 
demand 
bond, 
sometimes 
called 
an unconditional bond, cannot be enjoined against paying 
against a valid demand unless there is the clearest at 
least prima facie evidence of fraud, either fraud at the 
bank or fraud by the giver of the demand. ...” 
(Underlining is ours) 
 
13. 
 
It would therefore appear that once a bank issues 
a guarantee, it is duty-bound to pay the beneficiary of a 
guarantee in terms of the guarantee itself. 
 
14. 
 
Ex facie, the guarantees issued by the Appellant in 
favour of Respondents 1-4, although issued on behalf of 
Respondent No.5, were independent standalone obligations 
between the Appellant and Respondents 1-4 which were liable 
to be paid on demand by the Appellant without reference to 
Respondent No.5. But the said obligation was limited by time 
and amount with time being the expiry date mentioned in the 
guarantee document itself. It was for this reason that we 
insisted that the learned counsel for Respondents 1-4 satisfy 
this Court that a valid demand had been made for the 
encashment of the guarantees within the period stipulated in 
the terms of the guarantees itself. The learned counsel has 
taken us to the relevant demand notices addressed to the 
Appellant but we note that all such demand notices were 
CIVIL APPEAL NOS.196-P OF 2014 
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issued after the expiry of the encashment period stipulated in 
the relevant guarantees. 
15. 
 
When confronted with the said situation, the 
learned counsel has tried to raise an argument to the effect 
that in terms of Section 202 of the Customs Act, no limitation 
ran for the recovery of government dues and therefore the 
guarantees in question could be encashed by Respondents 1-
4 at any time the said Respondents chose to demand 
payment since the guarantees could not operate as estoppel 
against the express provisions of the Customs Act and the 
said guarantees had been issued as a surety against the 
liability of Respondent No.5. We note that this is the line of 
reasoning that has found favour with and subsequently been 
adopted by the High Court in the impugned judgement. We 
must, however, respectfully disagree with the submissions of 
the learned counsel for Respondents 1-4 as well as the view 
taken by the High Court. The obligation of the Appellant to 
pay was anchored in the contract of guarantee and not in the 
Customs Act. Therefore, the obligation of the Appellant to pay 
under the guarantee does not make the “guaranteed amount” 
“government dues” in the sense used in Section 202 of the 
Customs Act. Further, for avoidance of any doubt, the right of 
Respondents 1-4 to recover any government dues from 
Respondent No.5 had already been expressly protected in the 
terms of the guarantees itself. For ease of reference, the 
relevant portion of the guarantee is reproduced:- 
 
CIVIL APPEAL NOS.196-P OF 2014 
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“… This would, however be without prejudice to the Power 
of the Collector of customs to recover the amount … 
involved in the release of the captioned consignment shall 
be recoverable under Section 202 of the Customs Act 1969 
specially by way attachment and sale of any moveable or 
immoveable property of the defaulter and appointment of 
receiver from the Management of the moveable or 
immoveable property of the defaulter as in envisaged in 
clause a & b of Sub Section (3) of Section 202 ibid.” 
 
Respondents 
1-4 
could 
not 
have 
sought 
to 
recover 
Respondent No.5’s liability in the manner that is now before 
us. By seeking to encash the said guarantees, Respondents 1-
4 had, in essence, treated the Appellant as if it was an 
extension of Respondent No.5 which is, with all due respect, 
incorrect. The Appellant is a separate entity in the eyes of the 
law and cannot be saddled with the liability of making good 
any government dues that were to be recovered from 
Respondent No.5 (and Respondent No.5 alone) once the 
guarantees in question expired. We therefore have no 
hesitation 
in 
arriving 
at 
the 
conclusion 
that 
while 
Respondents 1-4 had the benefit of no period of limitation 
running against the recovery of government dues, such 
benefit was only available against Respondent No.5 and the 
High Court could not have held that by virtue of Section 202 
of the Customs Act, the Appellant had also become subject to 
the said provisions because the Appellant is not subject to the 
Custom Act and the guarantee had been issued as a 
standalone contract for a limited period and for a limited 
purpose namely payment to the Government certain amounts 
CIVIL APPEAL NOS.196-P OF 2014 
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on its first call, unconditionally, provided the demand/call 
was made within the time specified and mutually agreed in 
the contract itself. Therefore, the guarantees issued by the 
Appellant could not have been encashed by Respondents 1-4 
at any point in time regardless of their expiration dates. It 
may be emphasized that a contract of guarantee is a 
standalone and independent contract between the guarantor 
(in this case, the Appellant) and the beneficiary (in this case, 
Respondents 1-4/Federation) for a limited period (unless the 
guarantee contract specifically states that it is a continuing 
guarantee or language to that effect and no date or event of 
expiry thereof is specified) and for a limited purpose (that is, to 
pay the amount mentioned therein on a call being made within 
the time specified) without reference to any third party or the 
underlying transaction that constituted the basis for issuance 
of the guarantee. The parties to the guarantee contract are 
bound by the terms and conditions of the guarantee including 
its date of expiry. Unless a valid call is received by the 
Guarantor within the time specified in the guarantee, the 
Guarantor is released of any and all obligations under the 
contract and the contract itself expires. The Guarantor, by 
reason of issuing the guarantee, does not become subject to 
Section 202 of the Customs Act in the sense understood by 
the High Court by reason of guaranteeing payment of certain 
sums. The Guarantor does not become liable to pay 
“government dues” referenced to in Section 202 of the 
Customs Act because such liability continues to be attached 
to the person who owes such dues to the Customs 
CIVIL APPEAL NOS.196-P OF 2014 
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Department. The Department can, therefore, rely on Section 
202 to recover the said dues from the person/company (in 
this case, Respondent No.5). 
 
16. 
 
We have also examined the judgements sought to 
be relied upon by the learned counsel for Respondents 1-4. 
Two of the said judgements are leave-refusing orders of this 
Court and the third judgement was passed by a division 
bench of the Peshawar High Court. The said orders do not 
address the specific question before us and proceed on a 
different set of facts and circumstances and do not lay down 
the law on the subject. Even otherwise, none of the relied-
upon judgements deal with the issue of encashment of 
guarantees past their expiration date. The same are therefore 
distinguishable and are of no help to the case of Respondents 
1-4. 
 
17. 
 
To answer the issue framed by this Court, the 
High Court could not have disregarded the express terms of 
the guarantees and allowed encashment of the same by 
dismissing the Appellant’s petition on the ground that no 
limitation ran against the recovery of government dues by the 
Customs Department/Respondents 1-4 in terms of Section 
202 of the Customs Act. 
 
18. 
 
For the aforenoted reasons, we find that the 
impugned judgement suffers from misapplication of the 
applicable law on the subject and is therefore unsustainable. 
Consequently, the impugned judgement is set aside and the 
CIVIL APPEAL NOS.196-P OF 2014 
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petition of Appellant filed before the High Court is allowed as 
prayed for. This appeal allowed.  There shall be no order as to 
costs. 
 
19. 
 
These are the detailed reasons for our short order 
of even date. For ease of reference, the said short order is 
reproduced:- 
 
“For detailed reasons to be recorded later, this appeal is 
allowed.” 
 
Judge 
 
 
Judge 
 
 
Judge  
ISLAMABAD, THE 
30th of May, 2023 
Khalil Sahibzada, LC*/- 
 
NOT APPROVED FOR REPORTING*/- 
