Pakistan, July 4 -- The Supreme Court of Pakistan has ruled that the forfeiture of a performance guarantee for breach of contract is legally permissible, holding that under Section 74 of the Contract Act, 1872, courts may intervene only where the amount forfeited is unreasonable, disproportionate or amounts to a penalty.

In a detailed judgment, a three-member bench comprising Chief Justice Yahya Afridi, Justice Naeem Akhtar Afghan and Justice Shakeel Ahmad decided appeals arising out of a dispute between the Trading Corporation of Pakistan (TCP) and M/s Abdullah Mezroei Metal Trading Company over a contract for the import of urea.

The court observed that performance guarantees are intended to ensure the timely and complete fulfilment of...