The practical problem

No proven loss does not always mean no forfeiture

Suppose a company signs a time-sensitive supply contract, provides a performance guarantee and then misses the delivery deadline. It may later argue that the buyer suffered no proven loss, so the guarantee must be refunded. That argument is not always correct.

In Trading Corporation of Pakistan v. M/s Abdulla Mezroei Metal Trading Company, Civil Appeals Nos. 140-K and 141-K of 2016, the Supreme Court examined this exact issue under Section 74 of the Contract Act, 1872.

The dispute

A guarantee securing a time-sensitive urea contract

TCP contracted with the Company for the supply of 50,000 metric tons of urea. Time was expressly made the essence of the contract, and the Company furnished a performance guarantee equal to three percent of the contractual value. The contract allowed forfeiture if the goods were not supplied within time or another contractual term was breached.

TCP extended the shipment schedule while expressly preserving its right to forfeit the guarantee. Even after those extensions, no shipment was made. The Company itself referred to higher international prices and shortage of supply when it sought more time. TCP then encashed the guarantee.

The Supreme Court's decision

Reasonableness is the real test

The Supreme Court held that Section 74 does not make proof of actual loss a condition that must always be satisfied before a stipulated sum can be enforced. The court must instead decide whether the amount retained is reasonable compensation or an excessive, harsh or unconscionable penalty.

On the facts, forfeiture of the full guarantee was reasonable. It represented only three percent of a high-value public procurement contract for an essential commodity. The seller had received repeated extensions, the contract protected TCP against waiver through indulgence, and performance still did not take place.

The Court also rejected the Company's claim for US$3.465 million lost under its separate arrangement with its supplier. TCP was not a party to that upstream contract and had not agreed to absorb the Company's procurement or market risk. The judgment therefore places that commercial risk where it was contractually assumed.

Although courts do not normally re-evaluate an arbitral award like an appeal, intervention was justified here because the arbitrator had ignored material contractual terms and the revised performance timeline, producing a patent error of law.

Practical contract protection

What businesses should settle before signing

  • State clearly what event permits invocation or forfeiture of the guarantee.
  • Record whether an extension, delay or indulgence amounts to waiver and document every revised deadline.
  • Keep the guaranteed amount commercially defensible in light of the contract's value, urgency and likely consequences of breach.
  • Align supplier and subcontractor commitments with the main contract. If upstream losses are to be passed on, the main contract must deal with that risk expressly.

The practical lesson is simple: a performance guarantee is not decorative paperwork. Its wording, the surrounding contract and the parties' conduct after a delay can decide whether the entire amount is recoverable or refundable.

Primary sources

Materials for further review

Sources were checked on 11 September 2026.

Legal disclaimer

This article provides general information and does not constitute legal advice. The enforceability of a performance guarantee or forfeiture clause depends on its exact wording, the governing contract, the nature of the breach and the surrounding facts.

Reading this article or contacting SJ LEGAL SERVICES through its website does not, by itself, create a lawyer-client relationship.