THE HONBLE THE ACTING CHIEF JUSTICE RAMESH RANGANATHAN AND THE HONBLE SMT. JUSTICE T.RAJANI
C.M.A. Nos.359 of 2017 and batch
24-10-2017
N.C.C. Limited .Appellant
Sembcorp Gayatri Power Limited and another. Respondents
Counsel for Appellant: Sri D. Prakash Reddy, Learned Senior Counsel,
Sri Avinash Desai.
Counsel for respondent No.1: Sri C.V. Monan Reddy, Learned Senior Counsel
, Sri Thoom Srinivas.
<GIST:
>HEAD NOTE:
? Citations:
1) (1996) 5 SCC 450
2) (2016) 10 SCC 46 = MANUPATRA/SC/1105/2016
3) (1996) 5 SCC 34
4) (2016) 11 SCC 720
5) (1974) 2 SCC 231
6) (1997) 1 SCC 568
7) (1988) 1 SCC 174
8) [1982] 2 All E.R. 720
9) [1978] 1 All E.R. 976
10) (1986) 4 SCC 136
11) (1996) 1 SCC 735
12) (1981) 2 SCC 766 = (1981) 3 SCR 300
13) 2015 (6) ALD 486 (DB)
14) (1999) 8 SCC 436
15) (1984) 1 ALLER 351 (CA)
16) (1994) 1 SCC 502
17) (1995) 6 SCC 68
18) (1995) 6 SCC 76
19) (1995) 4 SCC 515
20) 2015 (1) ALT 275 (DB)
21) (2007) 8 SCC 110
22) AIR 2006 DELHI 256 = MANU/DAE/8543/2006 (Delhi HC (DB)
23) MANU/DE/0214/1987: AIR 1988 Delhi 2007
24) AIR 2006 Delhi 169
25) 200 (2013) DLT 289 = MANU/DE/1273/2013
26) (Judgment of the Division bench of the Bombay High Court in
Appeal (L) No.764 of 2012 dated 24.01.2013)
27) (2010) 10 SCC 677
28) (1988) 4 SCC 534
29) (2006) 5 SCC 282
30) (1997) 6 SCC 450
31) 2015 (4) SCALE 62
32) 1977 2 All ER 862
33) 2006 (1) ARBLR 321 (DELHI) = MANU/DE/8175/2006 (Delhi
HC)
34) (1991 (4) SCC 230
35) (2006) 13 SCC 599
36) AIR 1941 P.C. 93
37) 168 (2010) DLT 47 = MANU/DE/0120/2010
38) 566 F. Supp.1210 (1983).
39) MANU/TN/2876/2015 (Mad) = 2015(6) ARBLR 340
40) 1998 (1) ARBLR 566 (Delhi) = MANU/DE/0504/1998
41) (2013) NSWSC 2021
42) (2011) 7 SCC 69
43) 42 ER 89 = (1950) 2 Mac & G 231
44) (2010 2 SCC 114
45) AIR 1963 SC 1558
46) (1983) 4 SCC 575
47) (1991) 3 SCC 261
48) (1994) 1 SCC 1
49) (2007) 4 SCC 221
50) (2007) 8 SCC 449
51) (2008) 2 SCC 326
52) (2008) 12 SCC 481
53) (2009) 3 SCC 141
54) 68 ER 36 = (1849) 7 Hare 89
55) 38 Ch D 348 = 55 LT 802
56) (1917) 1 KB 486 (CA)
THE HONBLE THE ACTING CHIEF JUSTICE RAMESH RANGANATHAN
AND
THE HONBLE SMT. JUSTICE T.RAJANI
CIVIL MISCELLANEOUS APPEAL Nos.359 to 362 of 2017
COMMON JUDGMENT: (per Honble the Acting Chief Justice Sri Ramesh Ranganathan)
C.M.A. No.359 of 2017 is filed by the appellant (petitioner in
C.O.P. No.63 of 2017) under Section 13 of the
Commercial Courts,
Commercial Division and Commercial Appellate Division of High
Courts Act, 2015 (hereinafter called the 2015 Act) r/w. Section 37
of the Arbitration and Conciliation Act, 1996 (hereinafter called the
1996 Act) aggrieved by the order passed by the XXIV Additional
Chief Judge-cum-Commercial Court, City Civil Court, Hyderabad,
in C.O.P. No.63 of 2017 dated 18.04.2017. Parties shall,
hereinafter, be referred to as they are arrayed in these appeals.
The appellant filed four C.O.Ps. under Section 9 of the 1996
Act requesting the Commercial Court to grant an injunction
restraining the 1st respondent, its agents, servants, or any other
persons claiming through or under it, from taking coercive action
pursuant to the letter dated 23.02.2017 or otherwise, including
but not limited to, restraining it from invoking or encashing the
schedule bank guarantees issued by the 2nd respondent; and to
further restrain the 2nd respondent from honouring/encashing the
schedule bank guarantees at the request of the 1st respondent.
In the petition filed by them under Section 9 of the 1996 Act,
the appellant had stated that they had entered into various
contracts in respect of the design, engineering, procurement,
supply, assembly, construction, erection, mechanical completion,
pre-commissioning, commissioning and full performance testing of
a pulverized coal fired power plant consisting of 2 x 660 MW
supercritical boiler based plant with NCC Power Projects Limited,
and a consortium of China National Technical I & E Corporation
and Tianjin Electric Power Construction Company (CTC for
short); the equity stake of the first respondent-NCC Power Projects
Limited was acquired by SembCorp Utilities Pte Ltd, consequent to
which its name was changed to Sembcorp Gayatri Power Limited;
the 1st respondent was the owner of the project, the petitioner had
to execute the work, and CTC had to supply the material to be used
for execution of the project; seven independent contracts, in EPC
mode, were entered into between the petitioner and the 1st
respondent to facilitate the aforementioned project along with their
amendments; the scope of the co-ordination agreement, entered
into between the parties, was to co-ordinate and administer all the
other six contracts; the supply contract agreement (FOB) was
entered into between the parties thereto, as the 1st respondent
wanted CTC to supply the material; the appellant was required to
execute the work using the supplies made by CTC which was
approved as the supplier by the 1st respondent; the appellant was
not given the choice to change the supplier, even though there
were delays in supplies; the 1st respondent and the appellant had
entered into an On-Shore Service Contract dated 10.04.2011 to
provide certain construction works for the purpose of the projects;
the scheduled completion date of Unit-1 and Unit-2 had to be
achieved, ordinarily, within 42 months and 45 months, from the
date of issuance of notice to proceed, respectively; under the co-
ordination agreement, ordinarily, the provisional acceptance test,
for Unit-1 and Unit-2, should have been achieved, and duly
completed, by 10.11.2015 (inclusive of a 3 month grace period from
10.08.2015) and 10.02.2016 (inclusive of a 3 month grace period
from 10.11.2015), respectively; all these time-lines were necessarily
subject to the equipment being supplied on time by the approved
supplier; provisional acceptance was achieved for Unit-1 on
26.05.2016, and for Unit-2 on 18.02.2017; the reason, behind the
delay in achieving provisional acceptance, was attributable to the
1st respondent and CTC; some of the delays, in achieving
provisional acceptance, were not only due to the delays in supply
by CTC, but also because design coal was not provided by the 1st
respondent itself; even till date, the 1st respondent has not been
able to provide the specific type of coal required for conducting
performance guarantee tests; the 1st respondents inability, to
procure the required type of coal, was the only reason for non-
completion of the performance guarantee tests; the 1st respondent
has been commercially operating Unit-1 from 15.11.2016, and
Unit-2 from 18.02.2017, using coal (other than the design coal);
they have been selling electricity commercially; and, on the other
hand, the 1st respondent had implied, in the impugned letter, that
the Units would not be treated as having been completed.
The appellant further stated that, according to the clauses of
the On-Shore Service Contract, they were entitled for extension of
time to finish the project, since the reasons for the delay were not
attributable to them, and were beyond their control; the reasons for
the delay had been communicated to the 1st respondent regularly
through various e-mails, correspondence, MPRs, in the meetings,
and in accordance with the terms and conditions of the contract;
the appellant had repeatedly sought extension of time, as the delay
was either attributable to the 1st respondent or to CTC which
would entitle the appellant for extension of time as per the
contract; however, the same had been arbitrarily denied by the 1st
respondent, despite admitting that the delay was because of
belated supplies from CTC; the delays, on the part of CTC, may
also be due to the default of the 1st respondent itself, which had to
open a Letter of Credit for supplies to be made; the agreed contract
price, of the On Shore Service Contract Agreement, was
Rs.85,00,00,000/-; the appellant had furnished two bank
guarantees of the State Bank of India in favour of the 1st
respondent as performance bank guarantees for Rs.4,25,00,000/-
each on 27.09.2014; both these bank guarantees were extended
upto 31.03.2017; the appellant had finished all its obligations
under the contract without any delay from its side; the 1st
respondent had also made payment to the appellant for the work
done, in the period beyond the schedule completion date, without
extending the time formally which the appellant was otherwise
entitled to; all payments were not received, by the appellant from
the 1st respondent, for the work done by them; the 1st respondent
is, admittedly, due to the appellant a sum of Rs.300 crores in all
contracts (excluding its claim for price escalation); in continuation
of their previous request, the appellant requested the 1st
respondent on 02.01.2017 to grant interim extension of time
beyond 10.11.2015 upto 27.11.2016 for Unit-1, and beyond
10.02.2016 upto 31.03.2017 for Unit-2, along with the additional
costs incurred by the appellant as the delays had occurred due to
the 1st respondent and CTC; when they started demanding
payment of their dues, formal extension of time (caused due to
delay not attributable to them), and price escalation, the first
respondent, as a counter-blast and an after thought, arbitrarily
sought liquidated damages from the appellant vide letter dated
23.02.2017 for an aggregate sum of Rs.8.5 Crores under the On-
Shore Service Contract Agreement for the alleged delay, of 471 days
for Unit-1 and 379 days for Unit-2, in achieving provisional
acceptance; the appellant and the 1st respondent had agreed, in the
Co-ordination agreement, that the appellant would not be held
liable for delay or liquidated damages caused due to the failure of
CTC to supply material in accordance with the terms and
conditions of the Supply FOB Agreement; the 1st respondent itself
wrote a letter to CTC informing them that there was a delay of 555
days for completion of Unit-1 and 495 days for Unit-2, which had
occurred because of them; a copy of the said letter was also marked
to the appellant which showed that, according to the first
respondent itself, the delay was due to CTC, and not the appellant;
the 1st respondent had levied liquidated damages of USD
40,978.312 on CTC to be paid on or before 09.03.2017, failing
which the same would be set off by the 1st respondent against
payments required to be made to CTC; the 1st respondent was
trying to unjustly enrich itself levying liquidated damages on the
appellant, though the delay was on the part of the supplier; the
first respondent was threatening to encash the bank guarantees
furnished by the appellant; and this was clearly fraudulent, and
contrary to the purpose for which the bank guarantees were
submitted.
In their petition, the appellant had stated that, in view of the
categorical admission of the 1st respondent in their letter dated
23.02.2017, that the delay was due to CTC, levy of liquidated
damages on the appellant, for the delay caused by the 1st
respondent itself and CTC, was contrary to the provisions of the On
Shore Service Contract Agreement and the Co-ordination
Agreement; the onus on the appellant to prove delay on the part of
CTC, had also been discharged by the categorical admission of the
1st respondent; the appellant had, time and again, informed the
first respondent that the delay in completion of the project was
attributable solely to the supplier and the 1st respondent; no party
can be a Judge in its own cause, and the 1st respondent was not
permitted under law to unilaterally decide the issue of damages in
its favour; if they had a claim for damages, they should approach
the competent judicial authority for adjudication of the dispute; the
1st respondent is, admittedly, due around Rs.300 Crores to the
appellant for the works done by them in all the contracts; they also
have bank guarantees of around Rs.300 crores which include the
aforesaid bank guarantees of Rs.149 crores; the 1st respondent has
admitted having sent a notice to CTC levying liquidated damages
for the delay caused by them; the 1st respondent is committing
fraud, and is illegally levying liquidated damages of Rs.8.5 Crores
under the On-Shore Services Contract Agreement on the appellant,
and is threatening to set off the said amount against payments to
be made to them; the 1st respondent is also fraudulently seeking to
encash the bank guarantees given by the appellant; the Court can
grant an injunction restraining invocation of bank guarantee, if a
prima-facie case of either (i) fraud, or (ii) irretrievable injustice, or
(iii) such invocation not being in terms of the bank guarantee, or
(iv) if special equities are made out; and as the petitioner has,
prima-facie, showed that all these conditions exist, they are entitled
to the relief sought for.
On fraud, the appellant pleaded that the 1st respondent had,
itself, written a letter to CTC informing them that there was a delay
in supplies; yet they were seeking to extract money from the
appellant; these factors clearly establish that the bank guarantees
have been obtained by the 1st respondent by fraud in order to
encash the same arbitrarily, illegally and to gain wrongfully at the
cost of the appellant. With regards special equities, the appellant
stated that they would suffer irretrievable injustice if injunction,
against the coercive measures including encashing the bank
guarantees, was not granted; special equities were also in favour of
the appellant as the 1st respondent was owned and operated by a
Singapore based entity SembCorp Utilities Pte Ltd, and the 1st
respondent had no other assets in India; even if the appellant were
to succeed in the main dispute by way of arbitration, they would
not be able to recover the money illegally obtained on encashment
of the bank guarantees; the project itself was given as security to
the banks for the loans extended by them to the 1st respondent; a
successful result in the arbitral proceedings would be futile,
causing irreparable loss and damage to the appellant, its
promoters, shareholders, stake holders and lenders; and it would
also have an adverse effect on their employees and their family
members.
The appellant would further state that the On Shore Services
Contract Agreement, and the Co-ordination Agreement, provide for
adjudication of disputes by way of arbitration; since no amicable
settlement had been reached between the parties, they intended to
invoke the arbitration clause against the 1st respondent; the illegal
coercive steps by the 1st respondent as threatened, including
fraudulent encashment of the bank guarantees, was imminent; if
stay of all coercive steps, including encashment of the bank
guarantees, was not granted, the appellant would suffer
irretrievable loss and injury; it would also frustrate all further legal
remedies available to the appellant; if, on the other hand,
injunction is granted, no irreparable loss would be caused to the
1st respondent as the appellants monies are, admittedly, lying with
the 1st respondent, besides the bank guarantees of about Rs.400
Crores, which would adequately safeguard the interest of the 1st
respondent if it succeeds in the arbitral proceedings; even on
merits, the claim of the 1st respondent was baseless and concocted;
and as special equities are in their favour, the appellants are
entitled for an order of injunction.
In the counter-affidavit, filed on behalf of the 1st respondent,
it is stated that the bank guarantee is a complete and a separate
contract; Courts would not interfere with the enforcement of a
bank guarantee where such enforcement is in terms of the bank
guarantee itself which show that it is an on demand bank
guarantee, and unconditional and irrevocable; the appellant has
not even contended otherwise; except for a vague allegation of
fraud, the appellant has not placed any material on record to
substantiate its allegations; bald assertion of fraud, made solely
with a view to obtain an order of injunction, would not suffice;
and, in the absence of established fraud, the Court would not grant
an injunction restraining encashment of the bank guarantees.
It is further stated that the petitioner had made false
averments in order to obtain an order of injunction; in its e-mail
dated 18.11.2016, the appellant has admitted that the slow pace of
commissioning activities on Unit-II was likely to further delay the
provisional acceptance test; admittedly, as on 18.11.2016,
provisional acceptance of Unit-II had not been achieved; in their
letter dated 02.01.2017, the appellant admitted that provisional
acceptance test was likely to be achieved by 31.03.2017; tripartite
discussions were held on 22.02.2017 between the appellant, CTC
and the first respondent to decide on the action plan to proceed
with regards the provisional acceptance test of Unit-1; these
documents show that provisional acceptance of Units-I and II has
not been achieved till then, and the appellant has lied on oath; till
provisional acceptance test of Units-I and II are successfully
conducted by the appellant, there is nothing due for payment by
the 1st respondent in lieu of which the bank guarantees are sought
to be injuncted; under the EPC contracts, the appellant was
required to undertake the works in such a manner that the
scheduled completion date of Units-I and II would be achieved
within 42 months and 45 months, from the date of issuance of
notice to proceed, respectively; under the Co-ordination Agreement,
the provisional acceptance test for Unit-I and Unit-II was required
to have been achieved, and duly completed, by 10.11.2015
(inclusive of a three month grace period from 10.08.2015) and
10.02.2016 (inclusive of a three month grace period from
10.11.2015), respectively; it was agreed, among the parties, that
time would be of essence for delivery of the equipment, and
completion of works, under the EPC contract; they had requested
the appellant to perform its obligations including expediting works
to meet the completion schedule; because of the delay, in achieving
provisional acceptance and final acceptance for Units-I and II, the
1st respondent incurred significant losses including in relation to
payment of interest during construction to its lenders, cost
overruns, overruns above the project cost, payment of penalty to
Power Grid Corporation of India Limited due to delay in evacuation
of power, etc; and such losses were of a value exceeding the pre-
estimated liquidated damages provided under the EPC contract and
other contracts.
After referring to Clauses 2.3 and 2.4 of the Co-ordination
Agreement, it is stated, on behalf of the first respondent, that the
contractual obligations of the appellant, under the co-ordination
agreement, are much wider than merely facilitating co-ordination
between the 1st respondent, CTC, and other sub-contractors or
sub-suppliers; the first respondent issued notice dated 23.02.2017
seeking liquidated damages of Rs.134 crores under the civil and
construction works contract; Rs.145.75 crores under the supply
(ex-works) contract; 9.04 Million USD under the supply (C&F)
contract; and Rs.8.5 crores under the on-shore services contract; as
the appellant failed to comply with the request for payment, the 1st
respondent became entitled to encash the bank guarantees in lieu
of the liquidated damages for the delay; and, because of the delay
caused by the appellant, the 1st respondent had already suffered
irretrievable losses in terms of reputation and business.
It is further stated that the liquidated damages claimed from
the parties, i.e. the appellant and CTC, became due on account of
the delay caused in performing different obligations under different
agreements; both the claims were independent of each other, and
could be invoked simultaneously without prejudice to one another;
the appellant became liable to pay liquidated damages to the 1st
respondent under the NCCL-EPC contracts, and the co-ordination
agreement, for failure to complete the works under NCCL-EPC
contracts, and for failure to achieve provisional acceptance for
Units-I and II till date; the liquidated damages were claimed from
CTC for the delay caused by them in delivering equipment under
the supply FOB contract; this would not curtail the 1st
respondents right to claim liquidated damages from the appellant
for its failure to achieve provisional acceptance for Unit-I by
10.11.2015, and for Unit-II by 10.02.2016, under the NCCL-EPC
contracts; the claims were separate and mutually exclusive; the 1st
respondent had the right to claim liquidated damages against both
the parties concurrently; in terms of Clauses 3.1 and 3.2 of the co-
ordination agreement, the appellant was barred from claiming
exclusion from liability for any delay liquidated damages and/or for
the delay, in completion of the provisional acceptance test for
Units-I and II, attributable to them; and therefore the appellants
contention that the liquidated damages could not be levied on them
for the delay caused by the 1st respondent, and its supplier-CTC,
did not merit acceptance.
The 1st respondent denied that the reasons, behind the delay
in achieving provisional acceptance, were due to the delay in
supplies by CTC, and because the 1st respondent did not provide
the designed coal. It is also denied that they were not able to
provide the specified type of coal till date. It is stated that the
appellant has neither furnished details of the design coal that was
to be used by the 1st respondent in terms of any agreed technical
specification, nor have they explained how the actual coal, being
used by the 1st respondent, did not match the design coal; the
appellant had also failed to explain how the alleged non-usage of
design coal had adversely affected the achievement of provisional
acceptance; the appellant had failed to achieve final acceptance in
terms of Article 6.4 of the 2nd amendment to the On-shore Services
Contract Agreement; the Units could not, therefore, be treated as
having been completed; the appellant had placed only one letter
dated 02.01.2017 on record in support of their allegation that they
had communicated the reasons for the delay regularly to the 1st
respondent through e-mails; the appellant was barred from
claiming exclusion from liability, for any delay or for delayed
liquidated damages, because of the failure of CTC to supply
material in accordance with the terms and conditions of the supply
agreement, as the delay in completion of provisional acceptance
test for Units-I and II was attributable to them; the claims against
the appellant and CTC were independent of each other, and could
be invoked simultaneously without causing prejudice to one
another; and exercise of its right to claim damages from CTC,
under the supply FOB contract, could not curtail the first
respondents right to claim liquidated damages from the appellant
for its failure to achieve provisional acceptance for Units-I and II till
date.
The 1st respondent also denied that the appellant had
discharged the onus to prove delay, on the part of CTC, from the
admission of the 1st respondent itself; or they were due Rs.300
crores to the appellant for the works done by them in all the
contracts; and they had bank guarantees for Rs.300 crores which
included the bank guarantee of Rs.149 crores. It is stated that the
appellant has not filed any documents in support of their plea that
they had informed the 1st respondent of the reasons for the delay
attributable to the suppliers and the 1st respondent, and had
sought extension of time; mere allegation of fraud, in the
injunction application, did not justify grant of injunction relating
to encashment of the bank guarantees; the appellant had failed to
produce any material or documents to substantiate the allegation
of fraud; non-performance or delay by CTC, caused under the
supply (FOB) Contract, could not be used as an excuse for the
appellants failure to perform its obligations under the NCCL- EPC
contracts; similarly, the 1st respondents right to claim liquidated
damages from CTC, under the NCCL-EPC contracts, did not curtail
their right to claim liquidated damages from the appellant for its
failure to achieve provisional acceptance under the EPC contracts;
and exercise of such a right, under the EPC contracts, cannot be
termed a fraud.
The 1st respondent denied that there were any special
equities in the appellants favour, for grant of injunction, merely
because the 1st respondent was owned and operated by a
Singapore based entity i.e., M/s. Sembcorp Utilities Pte Ltd; or that
the appellant would not be able to recover the money from the 1st
respondent on encashment of the bank guarantees even if they
were to succeed in the arbitral proceedings. The 1st respondent
states that it is a Company incorporated in India under the
Companies Act, 1956, and has significant assets in Nellore District
of Andhra Pradesh.
In their reply, to the counter-affidavit filed by the first
respondent, the appellant denied the allegation of abuse of process
of court. They submitted that the validity of the bank guarantees
had been extended; and all essential ingredients, to restrain
invocation of bank guarantees, had been pleaded and established.
Reference is made by them to the report of the Central Electricity
Authority, Bangalore dated 06.03.2017 to contend that Unit 1 was
synchronized on 26.05.2016 and started operating commercially
on 17.11.2016, and Unit 2 was synchronized on 02.02.2017,
commissioned on 15.02.2017 and started operating commercially
on 21.02.2017; the first respondent had publicly announced
completion of construction of the Thermal Power Project on these
dates; both the Units have been operating commercially; the first
respondent was generating revenue out of the supply of such
energy; provisional acceptance test had been achieved for the
Units, since the first respondent had been running both the Units
at its optimum capacity; in the e-mail dated 18.11.2016, the
appellant was informed that a part of the delay, in the slow pace of
work, was because the first respondent did not deploy suitable
man power at the site, and lack of priority given by the first
respondent to Unit 2; it was also stated that there was inordinate
delay in the delivery of the turbine by CTC which led to the slow
pace of the work; notwithstanding the delay caused by the first
respondent or CTC, the appellant was able to finish the work
within minimum time, and had put both the Units to Commercial
operations from 17.11.2016 and 21.02.2017 respectively; the
understanding of the first respondent, on the scope of clause 2.3
and 2.4 of the co-ordination agreement to levy liquidated damages,
was incorrect; under Clause 3.1 and 3.2 of the co-ordination
agreement, the appellant could not be made liable for the delay in
due completion of the Provisional Acceptance Test, if such delay
was solely due to the consortium; Clauses 3.1 and 3.2 opened with
a non-obstante clause, and prevailed over any other contrary
clauses; in any event, it was not the appellants case that they
violated Clauses 2.3 and 2.4; the appellant had performed its
contractual obligations, and had put both the Units in commercial
operations, notwithstanding the delay caused to the project by the
first respondent and the consortium; the appellant was entitled for
extension of time, because of the delay caused by CTC; the
appellants letter dated 02.12.2016, and the protocols dated
28.07.2016 and 02.08.2016, clearly established that it had fulfilled
all its obligations under the contract; since the first respondent did
not give provisional acceptance within ten days of the notice dated
02.12.2016, provisional acceptance must be deemed to have
occurred; the appellant must be deemed to have achieved
provisional acceptance for Unit 2 on 18.02.2017, as the first
respondent put the facility to commercial operations from that day
onwards; as per the EPC contracts and the co-ordination
agreement, all the disputes are required to be resolved through
mutual discussions and negotiation in an equitable manner; the
appellant intended to go for arbitration for adjudication of the
subject disputes; in reply to the first respondents letter dated
23.02.2017 they had, by their letter dated 08.03.2017, disputed
levy of liquidated damages, and had denied all the allegations made
therein; and the first respondent could not set off liquidated
damages, or encash the securities, for damages which were
arbitrarily levied or were disputed as not due.
In his order in C.O.P. No.63 of 2017 and batch dated
18.04.2017, (against which these appeals are preferred), the
Learned Judge, Commercial Court-cum-XXIV Additional Chief
Judge, City Civil Court, Hyderabad observed that there was no
dispute with regards existence of an arbitration clause in the On-
Shore Services Contract agreement and the Co-ordination
agreement; the appellant had furnished the schedule bank
guarantees in favour of the first respondent, and they were being
extended from time to time; according to Clause 10.6 of the co-
ordination agreement, it was agreed between the parties that the
contracts were independent and separate contracts; and the co-
ordination agreement was solely for the purpose of co-ordination
and completion of the combined work in accordance with the
master project schedule in a seamless manner.
The Learned Judge referred to Clause 2.3, 2.4, 3.1, 3.2 and
4.1 of the co-ordination agreement, and then observed that the
appellant had not filed any documentary evidence to show that
they had taken measures to ensure that the delay of CTC was not
caused on account of their failure or breaches; and the appellant
had failed to establish that there was egregious fraud on the part of
the first respondent by producing cogent and convincing
documentary evidence. After referring to Ansal Engineering
Projects Limited v. Tehri Hydro Development Corporation Ltd ,
Gujarat Maritime Board v. L&T Infrastructure Development
Projects Ltd , and Hindustan Steel Works Construction Ltd v.
Tarapore & Co. , the Learned Judge held that, in the instant case,
the appellant had contended that the first respondent was due
around Rs.300 crores to them in all the contracts; reliance placed
by them on Gangotri Enterprises Ltd. v. Union of India was
misplaced; reliance placed by them on Union of India v. Raman
Iron Foundry was also misplaced; in the instant case the dispute,
among the parties, was an arbitral dispute, and had to be
adjudicated by the arbitral tribunal; the appellant had not
established a strong prima facie case; the balance of convenience
was also not in its favour; and the appellant had also failed to
establish that irreparable loss and injury would be caused to them
if the relief of injunction sought for was not granted in their favour.
The Learned Judge dismissed all the petitions filed by the
appellant under Section 9 of the 1996 Act.
Elaborate oral submissions were made by Sri D.Prakash
Reddy, Learned Senior Counsel appearing on behalf of the
appellant and Sri C.V. Mohan Reddy, Learned Senior Counsel
appearing on behalf of the first respondent. Written arguments
have been filed by Sri Avinash Desai, Learned Counsel for the
appellant, and Sri Thoom Srinivas, Learned Counsel for the first
respondent.
I. OBJECT AND PURPOSE OF FURNISHING BANK
GUARANTEE:
As the dispute, in the present batch of appeals, relates to the
first respondents right to invoke the bank guarantees, furnished
as security for guaranteeing performance of the contract by the
appellant, it is necessary, at the outset, to examine the purpose for
which a bank guarantee is furnished. 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. (U.P. State Sugar Corpn. v. Sumac International Ltd. ).
Between the bank and the beneficiary, the moment there is a
written demand for invoking the bank guarantee, pursuant to a
breach of the covenants, the bank is bound to make payment
under the guarantee. (Gujarat Maritime Board2).
The commercial purpose, for which the system of confirmed
irrevocable documentary credit has been developed in international
trade, is to give to the seller an assured right to be paid before he
parts with the control of the goods, and that does not permit of any
dispute with the buyer, as to the performance of the contract being
used as a ground for non-payment or reduction or deferment of
payment. (U.P. Cooperative Federation Ltd. v. Singh Consultants
and Engineers (P) Ltd. ; UCM (Investment) v. Royal Bank of
India ). Performance guarantees are virtually promissory notes
payable on demand. So long as an honest demand is made, the
banks are bound to pay. They will rarely, if ever, be in a position
to know whether the demand is honest or not. At any rate they will
not be able to prove it to be dishonest. So they will have to pay.
(Singh Consultants and Engineers (P) Ltd.7; Edward Owen
Engineering Ltd. v. Barclay's Bank International Ltd., ; Centax
(India) Ltd. v. Vinmar Impex Inc ).
A bank, issuing a guarantee, is not concerned with the
underlying contract between the parties to the contract. The duty
of the bank, under a guarantee, is created by the document itself.
Once the documents are in order, the bank giving the guarantee
must honour the same and make payment. Ordinarily, Courts will
not interfere, directly or indirectly, to withhold payment for,
otherwise, trust in commerce, internal and international, would be
irreparably damaged. (State of Maharashtra v. National
Construction Co. ; United Commercial Bank v. Bank of
India ; Centax (India) Ltd.10; ICICI Bank Ltd, Hydeabad v. IVRCL
Ltd, Hyderabad ; Singh Consultants and Engineers (P) Ltd.7). A
bank, which gives a performance guarantee, is not concerned with
the relations between the supplier and the customer: nor with the
question whether the supplier has performed his contractual
obligation or not; nor with the question whether the supplier is in
default or not. The bank must pay according to its guarantees, on
demand if so stipulated, without proof or conditions. If the
documentary credits are irrevocable and independent, the banks
must pay when demand is made. (Singh Consultants and
Engineers (P) Ltd.7; Edward Owen Engineering Ltd.9; Centax
(India) Ltd.,10). Bearing the purposes, for which bank guarantees
are issued, in mind let us now examine the rival submissions,
urged by Learned Senior Counsel on either side, under different
heads.
II. CONTRACT OF BANK GUARANTEE IS AN INDEPENDENT
CONTRACT:
Sri C.V. Mohan Reddy, Learned Senior Counsel appearing
on behalf of the first respondent, would submit that the contract of
guarantee is a complete and separate contract by itself; and the
court/tribunal would only interfere if the invocation is against the
terms of the guarantee itself. On the other hand Sri D.Prakash
Reddy, Learned Senior Counsel appearing on behalf of the
appellant, would submit that, in Tarapore & Co.3, the Supreme
Court examined the disputes, with respect to the parent
contract/underlying contract, to ascertain the existence of special
equities.
A bank guarantee constitutes a separate, distinct and
independent contract. This contract is between the Bank and the
beneficiary. It is independent of the main contract between the
person who has furnished the bank guarantee and the beneficiary.
(Hindustan Construction Co. Ltd. v. State of Bihar ; Tarapore &
Co.3). A bank guarantee is the common mode of securing payment
of money in commercial dealings as the beneficiary, under the
guarantee, is entitled to realise the whole of the amount under that
guarantee in terms thereof, irrespective of any pending dispute
between the person on whose behalf the guarantee was given and
the beneficiary. A bank guarantee constitutes an independent
contract between the Bank and the principal. (Hindustan
Construction Company Ltd14; Singh Consultants & Engineers
(P) Ltd.7; Bolivinter Oil SA v. Chase Manhattan Bank ; Svenska
Handelsbanken v. Indian Charge Chrome ; Larsen & Toubro
Ltd. v. Maharashtra SEB ; Hindustan Steel Workers
Construction Ltd. v. G.S. Atwal & Co. (Engineers) (P)
Ltd. .; National Thermal Power Corpn. Ltd. v. Flowmore (P)
Ltd ; National Construction Co.11; Tarapore & Co.3; Sumac
International Ltd6; ICICI Bank Ltd13).
A bank guarantee is, ordinarily, a contract quite distinct and
independent of the underlying contract, the performance of which
it seeks to secure. To that extent it can be said to give rise to a
cause of action separate from that of the underlying contract.
(National Construction Co.,11; United Commercial
Bank12; Centax (India) Ltd.10; ICICI Bank Ltd13; Singh
Consultants and Engineers (P) Ltd.7). A bank guarantee is not
qualified by the underlying transaction, or the validity of the
primary contract between the person at whose instance the bank
guarantee was given and the beneficiary. (Ansal Engineering
Projects Ltd.1). The bank guarantee must be honoured in
accordance with its terms. The bank, which gives the guarantee, is
not concerned with the relations between the supplier and the
customer; nor with the question whether the supplier has
performed his contractual obligation or not, nor with the question
whether the supplier is in default or not. The bank must pay
according to the tenor of its guarantee on demand without proof or
condition. (Sumac International Ltd.,6; United Commercial
Bank12; Singh Consultants and Engineers (P) Ltd.7).
Reliance placed on behalf of the appellant, on Hindustan
Construction Co. Ltd.14, is misplaced. In the said case, the
appellant was awarded a contract for construction of a dam to be
completed within a period of 42 months, for which they were
required to furnish a bank guarantee for 10% of the contract price
as performance guarantee. On the bank guarantee being invoked
by the respondent, the appellant filed a Suit in the Bombay High
Court, and an interim order was initially passed restraining
invocation of the bank guarantee which was confirmed later. The
order passed by the Learned Single Judge was challenged before
the Division Bench of the Bombay High Court which vacated the
injunction with respect to mobilisation advance, but maintained
the injunction in respect of the performance guarantee. The
respondents preferred an appeal against that part of the order of
the Division Bench wherein the injunction order, in respect of the
performance guarantee, was upheld. The Supreme Court noted
that, while the bank guarantee used the expression "agree
unconditionally and irrevocably" to guarantee payment to the Executive
Engineer on his first demand without any right of objection, it had
thereafter qualified it by using the expression in the event that the
obligations expressed in the said clause of the abovementioned contract had not
been fulfilled by the contractor giving the right of claim to the employer for
recovery of the whole or part of the Advance Mobilisation Loan from the
contractor under the contract"; this condition clearly referred to the
original contract between the appellant and the respondent, and
postulated that, if the obligations expressed in the contract were
not fulfilled by the appellant, it gave the respondent the right to
claim recovery of the whole or part of the advance mobilisation
loan, then the Bank would pay the amount due under the
guarantee; by referring specifically to Clause 9, the Bank had
qualified its liability to pay the amount covered by the guarantee,
relating to advance mobilisation loan to the Executive Engineer,
only if the obligations under the contract were not fulfilled by the
appellant, or the appellant had misappropriated any portion of the
advance mobilisation loan; the bank guarantee thus could be
invoked only in the circumstances referred to in Clause 9
whereunder the amount would become payable only if the
obligations were not fulfilled or there was misappropriation; that
being so, the bank guarantee could not be said to be unconditional
or unequivocal in terms; the defendant could not be said to have
had an unfettered right to invoke that guarantee, and demand
immediate payment thereof from the Bank; the performance
guarantee was furnished in terms of clause 5 of the agreement; the
bank guarantee, in respect of performance guarantee, was
furnished to the Chief Engineer; the said bank guarantee could be
invoked by none other than the Chief Engineer; and invocation of
the bank guarantee by the Executive Engineer was not in terms of
the bank guarantee. On examining the contents of the subject
bank guarantees, the Supreme Court was satisfied that the
Government of Bihar could not encash the bank guarantees as
they were neither unconditional nor unequivocal.
It is necessary, therefore, for us to examine the relevant
clauses in the agreements between the appellant and the first
respondent which require bank guarantees to be furnished towards
guaranteed performance of the contract by the appellant, and the
relevant clause in the contract of bank guarantee between the
concerned bank and the first respondent, to ascertain whether or
not these bank guarantees are unconditional and unequivocal.
The appellant and the first respondent entered into six
agreements and, in addition, a bipartite agreement called the co-
ordination agreement. The second amendment to the on-shore
service contract dated 10.04.2011 provided, in Article 2.7, for the
addition of a new Article 4.8 to be added to the on-shore service
contract. Clause 4.8 stipulated that, to secure the appellants
performance of its obligations, the appellant acknowledged and
agreed that the first respondent shall have the right to hold the
Contract Performance Guarantee, issued by a reputable commercial
bank acceptable to the first respondent, as security for the
performance of the appellants obligations under the agreement.
The Article further records the appellants acknowledgment that, in
the event amounts are due under the agreement (including late
completion liquidated damages, and ancillary power guarantee
liquidated damages and any amount due and payable from the
appellant to the first respondent or to be paid by the appellant on
behalf of the first respondent, and such amounts are not paid
when due), the first respondent shall have the unconditional and
irrevocable right to demand and draw such amounts under the
Contract Performance Guarantee equal to the amount owing by the
appellant without prejudice to the first respondents rights and/or
which are the remedies accrued under the agreement.
Article 2 of the co-ordination agreement, entered into
between the appellant and the first respondent, are the covenants
of the appellant, and the rights of the first respondent. Clause 2.1
stipulates that the co-ordination agreement and the contracts are
complementary and (except to the extent provided in the co-
ordination agreement) are to be treated as independent and
separate contracts; the appellant assumed full responsibility for,
and guaranteed on a turnkey basis for, the performance of
obligations and responsibilities under the contracts; they agreed to
coordinate the works, services, equipment and other items to be
performed under each of the contracts in an integrated manner for
seamless and uninterrupted interface among all activities and
obligations; both the parties agreed that the actions or omissions
that constituted a default by the appellant, under one or more of
the contracts, shall constitute a default under all of the contracts
and entitle the first respondent to all the remedies provided for in
the contracts, and to draw on any performance security under any
and/or all of the contracts.
Clause 2.10 of the co-ordination agreement required the
appellant to provide performance bonds in the form of on- demand
bank guarantees or standby letters of credit as set out thereunder.
It is useful, in this context, to refer to Contract Performance Bank
Guarantee No.1303914 dated 24.09.2014 issued by the State Bank
of India which records that, in consideration of the first respondent
having awarded the appellant a contract (onshore service contract),
and the appellant having agreed to provide a contract performance
guarantee for faithful performance of the entire contract equivalent
to Rs.8.5 crores to the first respondent, the State Bank of India
guaranteed and undertook to pay the first respondent on demand
any, and all the, monies payable by the appellant upto the sum
mentioned in the bank guarantee. The relevant portion of the said
bank guarantee reads thus:
We State Bank of India..do hereby guarantee and undertake
to pay the Owner, on demand any and all monies payable by the
Contractor to the extent of .. as aforesaid at any time upto
........... without any demur, reservation, contest, recourse or protest
and/or without any reference to the Contractor. Any such demand
made by the Owner on the Bank shall be conclusive and binding
notwithstanding any difference between the Owner and the Contractor
or any dispute pending before any Court, Tribunal, Arbitrator or any
other authority. The Bank undertakes not to revoke this Guarantee
during its currency without previous consent of the Owner and
further agrees that the Guarantee herein contained shall be
enforceable till ninety (90) days after expiry of its validity.
The bank guarantee also records that the first respondent
shall have the fullest liberty, without affecting in any way the
liability of the bank under the guarantee, from time to time, to
extend the time for performance of the contract by the appellant;
the first respondent shall have the fullest liberty, without affecting
the guarantee, to postpone, from time to time, the exercise of any
power vested in them or of any right which they might have
against the appellant, and to exercise the same at any time in any
manner; the bank would not be released of their obligations under
the bank guarantee by any exercise by the first respondent of its
liberty with reference to all the matters mentioned therein, or by
reason of any other act or forbearance or other act of omission or
commission on the part of the first respondent or any other
indulgence shown by the first respondent or by any other matter or
thing which under law would, but for the provision, have the effect
of relieving the bank.
While this bank guarantee has no doubt been issued on
behalf of the appellant, it is independent of the underlying contract
between the appellant and the first respondent. The said bank
guarantee is an independent agreement between the bank and the
first respondent in terms of which the bank agreed to pay, on
demand by the first respondent, the monies payable by the
appellant to the extent of the sum indicated in the bank guarantee.
A bank guarantee is unconditional and unequivocal when
the Bank, unconditionally and irrevocably, promises to pay, on
demand, the amount of liability undertaken in the guarantee
without any demur or dispute in terms of the bank guarantee.
(Ansal Engineering Projects Ltd.1). Bank guarantees which are
irrevocable in nature, in terms, provide that they are payable by the
guarantor to the appellant on demand without demur. They
further provide that the appellant shall be the sole judge of
whether, and to what extent, the amount has become recoverable
from the respondent or whether the respondent has committed any
breach of the terms and conditions of the agreement. The
guarantor shall immediately pay the guaranteed amount on
demand. (Sumac International Ltd.6). In an unconditional bank
guarantee, the beneficiary is entitled to invoke it and seek
encashment of the amount specified therein. It does not depend
upon the result of the decision in the dispute between the parties,
in the case of breach. The underlying object is that an irrevocable
commitment in the form of a bank guarantee, solemnly given by
the bank, must be honoured, and respect for free flow of commerce
and trade, and faith in the commercial banking transactions, is
inculcated unhedged by pending disputes between the beneficiary
and the contractor. (Ansal Engineering Projects Ltd.1).
As is evident from the recitals hereinabove extracted, the
bank guarantees, in the present case, are unconditional and, in
terms thereof, the bank agreed to pay the first respondent, on
demand, any or all monies payable by the appellant, to the extent
referred to in the bank guarantees, without any demur, and even
without reference to the appellant. The demand made by the first
respondent on the bank, in terms of the contract of bank
guarantees, was to be conclusive and binding notwithstanding any
difference between the appellant and the first respondent or any
dispute pending between them before any Court, Tribunal,
arbitrator or any other authority.
III. EXCEPTIONS, TO THE RULE THAT AN INJUNCTION
SHOULD NOT BE GRANTED AGAINST INVOCATION OF
BANK GUARANTEES, ARE NOT LIMITED TO FRAUD, AND
CANNOT BE PLACED IN A STRAIT JACKET:
Sri D. Prakesh Reddy, Learned Senior Counsel appearing on
behalf of the appellant, would submit that, besides fraud,
encashment of the bank guarantees can be injuncted in cases of
irretrievable injury, extra-ordinary special equities, and invocation
of bank guarantee not being in terms of the bank guarantee itself;
a straight jacket formula cannot, universally, be applied to all
cases; and every case has to be decided with reference to the facts
involved therein. On the other hand Sri C.V.Mohan Reddy,
Learned Senior Counsel appearing on behalf of the first
respondent, would submit that the only two exceptions,where
invocation of the bank guarantee can be restrained, is if there is
clear fraud of which the bank has notice, and the fraud is of the
beneficiary who seeks to benefit; the second exception is when
there are special equities in favour of injunction, such as when
irreparable injury or irreparable injustice would occur.
The two main exceptions, for grant of an order of injunction
to restrain enforcement of a bank guarantee, are (1) the fraud
committed is in the notice of the bank, and is such as to vitiate the
very foundation of the guarantee; and (2) injustice of the kind
which would make it impossible for the guarantor to reimburse
himself. (Techtrans Construction India Pvt Ltd & Ksheeraabad
Constructions Pvt. Ltd. v. Reliance Utility Engineers Ltd. ;
Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co., ;
Sunac International Ltd6). As injunction against encashment of a
bank guarantee is an exception and not the rule, cases of such
exceptions must be evidenced by documents and pleadings on
record, and should compulsorily fall within any of the following
limited categories (i) if there is a fraud in connection with the bank
guarantee which would vitiate the very foundation of such
guarantee and the beneficiary seeks to take advantage of such
fraud; (ii) the applicant, in the facts and circumstance of the case,
clearly establishes a case of irretrievable injustice or irreparable
damage; (iii) the applicant is able to establish exceptional or special
equities of the kind which would prick the judicial conscience of
the Court; and (iv) when the bank guarantee is not invoked strictly
in its terms, and by the person empowered to invoke it under the
terms of the guarantee. In other words, the letter of invocation is in
apparent violation of the specific terms of the bank guarantee.
(Punj Lloyd Insulations Ltd. v. State Bank of India ). While
cases of irretrievable injury, fraud, extraordinary special equities
and invocation of bank guarantee contrary to the terms of the bank
guarantee itself, are exceptions to the rule, it is difficult to draw
any straitjacket formula which would universally apply to all cases.
(Synthetic Foams Ltd. v. Simplex Concrete Piles (India) Pvt.
Ltd. and Hindustan Construction Co. Ltd. v. Satluj Jal Nigam
Ltd. ; State Trading Corporation of India Ltd. v. State Bank of
India ). Let us now examine whether the appellant has
conclusively established that, in the present batch of cases, the
exceptions, to the Rule against injuncting invocation of the bank
gurantees, are attracted. Before doing so, it is necessary to
examine whether, and to what extent, the documents filed at a
stage posterior to the filing of the O.Ps, under Section 9 of the 1996
Act on 06.03.2017, can be looked into, and then consider the rival
contentions on whether or not the first respondent has committed
breach of the contract justifying grant of temporary injunction on a
prima facie case being made out.
IV. CAN DOCUMENTS, FILED SUBSEQUENT TO THE FILING OF
THE O.P, BE RELIED UPON?
Sri C.V. Mohan Reddy, Learned Senior Counsel appearing
on behalf of the first respondent, would submit that the additional
documents, that the appellant is now relying upon to establish
special equities, were filed before the Commercial Court only as an
afterthought, that too because the first respondent had, in its reply
to the Section 9 petition, contended that these allegations were
unsupported by evidence; this Court should first consider whether
these documents were filed following the procedure prescribed
under the amended Order XI Rule 4 and 5 CPC, mentioned in the
Schedule to the 2015 Act; these provisions require the appellant to
seek prior leave of the Court for filing additional documents; the
appellant has belatedly filed additional documents before this
Court, including the provisional balance sheet of the first
respondent as at March 31, 2017, and the first respondents letter
dated February 02, 2017 which were issued to the appellant as a
regular exercise carried out as part of their audit; and the contents
of the provisional balance sheet of the first respondent cannot be
considered as they are still pending approval by the shareholders.
On the other hand Sri D. Prakash Reddy, Learned Senior
Counsel appearing on behalf of the appellant, would submit that
the appellant filed as many documents as they could at the time of
filing the petition in support of their contention; they subsequently
brought in various other relevant documents in answer to the
defence set up by the first respondent in its counter; they are (a)
Design Coal Communications: (b) Extension of Time (c) More than
Rs.300 Crores payable and (d) Respondent is making losses; Order
XI Rule 5 applies to Suits, and not to O.P.s which are in the nature
of interim applications; Order XI Rule 1 (1) (c) permits additional
documents to be filed, even though they are in the possession of
the petitioner at the time of filing of the petition, in answer to any
case set up by the respondent subsequent to the filing of the
petition; and this Court is empowered to receive additional
documents, as evidence at the appellate stage, under Order 41 Rule
27 CPC for any other substantial cause.
Section 10 of the 2015 Act relates to the jurisdiction in
respect of arbitration matters and, under Sub-Section (3) thereof,
where the subject matter of arbitration is a commercial dispute of a
specified value and, if such arbitration is other than an
international commercial arbitration, all applications or appeals
arising out of such arbitration under the provisions of the 1996
Act, that would, ordinarily, lie for settlement in a District Court,
shall be filed in, and be heard and disposed of by, the Commercial
Court exercising territorial jurisdiction over such arbitration where
such Commercial Court has been constituted. Since the
application made by the appellant herein, under Section 9 of the
1996 Act, is more than the specified value, they had invoked the
jurisdiction of the Commercial Court under Section 10(3) of the
2015 Act.
Section 9(1)(ii) of the 1996 Act enables a party to apply to a
Court for interim measures with respect to the matters specified in
Clauses (a) to (e) thereunder, and confers the same power on the
Court for making orders as it has for the purpose of, and in
relation to, any proceedings before it. Consequently the
Commercial Court, before which the application under Section 9 of
the 1996 Act was made, would have the same power to make
orders under Section 9(1)(ii) of the 1996 Act as it has in relation to
any proceedings before it. Section 2(e)(1) of the 1996 Act defines
Court to mean, in case of an arbitration other than an
international commercial arbitration, the principal Civil Court of
original jurisdiction in a district, and includes the High Court in
the exercise of its ordinary original civil jurisdiction, having
jurisdiction to decide the questions forming the subject-matter of
the arbitration, if the same had been the subject matter of a suit.
Consequently an application, under Section 9(1)(ii) of the 1996 Act,
can be filed by a party only before the principal Civil Court of
original jurisdiction in a district. Where a statute provides a
remedy before an ordinary Civil Court, the rules of procedure that
would apply are the ordinary rules of the Civil Procedure Code.
Where the principal Court of original jurisdiction is the District
Court, the procedural provisions of the CPC govern the proceedings
before the said Court (Ashapura Minechem Ltd. v. Pacific Basin
IHX (UK) Ltd ). Since the power exercised by the Court, under
Section 9 of the 1996 Act, is akin to the power which the District
Court exercises in proceedings before it, there is no reason why the
provisions of the Civil Procedure Code, which are applicable to
proceedings before the District Court, should be held not to apply
to petitions filed under Section 9 of the 1996 Act.
Chapter VI of the 2015 Act relates to the amendments of the
provisions of the Code of Civil Procedure. Section 16(1) stipulates
that the provisions of the CPC shall, in their application to any
Suit in respect of a commercial dispute of a Specified Value, stand
amended in the manner as specified in the Schedule. Section 16(2)
stipulates that the Commercial Court shall follow the provisions of
the CPC, as amended by 2015 Act, in the trial of a Suit in respect
of a commercial dispute of a specified value. The word Suit in
Sections 16(1) & (3) of the 2015 Act would bring, within its ambit,
petitions filed under Section 9 of the 1996 Act because all
applications under the 1996 Act (which would include a petition
under Section 9 thereof) are, in view of Section 10(3) of the 2015
Act, required to be filed in, and to be heard and disposed of by, the
Commercial Court exercising territorial jurisdiction over such
arbitration.
Section 16(3) of the 2015 Act stipulates that, where any
provision of any rule of the jurisdictional High Court or any
amendment to the CPC by the State Government is in conflict with
the provisions of the CPC as amended by the 2015 Act, the
provisions of the CPC, as amended by the 2015 Act, shall prevail.
The Schedule to the 2015 Act has substituted Order XI of the Code
of Civil Procedure (which relates to disclosure, discovery and
inspection of documents) in Suits before the Commercial Court.
Order XI Rule 1(a) requires the plaintiff to file a list of all
documents and photocopies of all documents in its power,
possession, control or custody, pertaining to the Suit, along with
the plaint, including (a) documents referred to and relied on by the
plaintiff in the plaint; (b) relating to any matter in question in the
proceedings, in the power, possession, control or custody of the
plaintiff, as on the date of filing of the plaint, irrespective of
whether the same is in support of or adverse to the plaintiffs case.
Clause (c) of Order XI Rule 1 stipulates that nothing in Rule (1)
shall apply to documents produced by the plaintiff, and relevant
only (i) for examination of the defendants witness, or (ii) in answer
to any case set-up by the defendant subsequent to the filing of the
plaint, or (iii) handed over to a witness merely to refresh his
memory.
The submission, made on behalf of the appellant, that Order
XI Rule 1 does not apply, since the appellants case falls within the
ambit of clause (c)(ii) of Order XI Rule 1 is only to be noted to be
rejected. The appellant was required to plead and prove fraud of an
egregious nature or special equities or irretrievable injury in order
to obtain an order of injunction restraining the first respondent
from invoking the bank guarantees. It was obligatory for them,
therefore, to plead and prove their case. The documents filed by
them along with their reply to the counter filed before the
Commercial Court by the first respondent, the documents filed by
them at the time of arguments, and the documents filed along with
their appeal before this Court, to establish their claim of egregious
fraud/special equities/irretrievable injury, is not in answer to the
case set up by the first respondent subsequent to the filing of the
petition, but are those which the appellant was obligated to file,
along with their Section 9 petition, before the Commercial Court on
06.03.2017 itself.
Order XI Rule 3, as substituted by the 2015 Act, requires the
plaint to contain a declaration on oath from the plaintiff that all
the documents in their power, possession, control or custody,
pertaining to the facts and circumstances of the proceedings
initiated by him have been disclosed, and copies thereof annexed
with the plaint; and that the plaintiff does not have any other
documents in its power, possession, control or custody. Under the
Explanation thereto, a declaration on oath under Rule (3) of Order
XI is required to be contained in the statement of Truth as set out
in the Appendix. No such declaration was furnished along with
the Section 9 petition filed before the Commercial Court.
Order XI Rule 4 enables a plaintiff, in the case of urgent
filings, to seek leave to rely on additional documents, as part of the
declaration on oath; and, subject to grant of such leave by the
Court, the plaintiff is required to file such additional documents in
Court, within thirty days of filing the Suit, along with a declaration
on oath that the plaintiff has produced all documents in its power,
possession, control or custody, pertaining to the facts and
circumstances of the proceedings initiated by the plaintiff; and that
the plaintiff does not have any other documents in its power,
possession, control or custody. Order XI Rule (5) stipulates that
the plaintiff shall not be allowed to rely on documents, which were
in the plaintiffs power, possession, control or custody, and not
disclosed along with the plaint or within the extended period set
out above, save and except by leave of the Court and such leave
shall be granted only upon the plaintiff establishing reasonable
cause for non-disclosure along with the plaint. Neither did the
appellant, while filing the Section 9 petition, seek leave of the
Court to file such additional documents within thirty days of filing
the O.P nor was leave sought by them at any time thereafter. It is
only if leave had been sought would the question of the Court
being satisfied, that the appellant had established reasonable cause
for non-disclosure along with the plaint, arise for consideration.
The appellant filed the O.P. before the Commercial Court on
06.03.2017. Along with the O.P, they filed a copy of the certificate
of incorporation; a copy of the coordination agreement between
them and the first respondent dated 23.03.2014; a copy of the on-
shore service contract dated 10.04.2011; a copy of the Supply (FOB
contract) between the appellant, the first respondent and CTC
dated 20.01.2012; a copy of the letter addressed by the first
respondent separately to them, and to the CTC, on 23.03.2017
claiming liquidated damages; a copy of the letter addressed by the
appellant to the first respondent on 02.01.2017 seeking extension
of the contract period; and a copy of the bank guarantee dated
27.09.2014.
After the first respondent filed its counter-affidavit in the
O.Ps before the Commercial Court, the appellant filed its reply
thereto on 28.03.2017, to which it enclosed (1) copy of the letter
dated 27.03.2017 extending the bank guarantee; (ii) a copy of the
letter dated 25.07.2014 addressed by the first respondent to CTC
seeking early delivery of the BTG equipment as it was delaying the
overall project completion schedule; (iii) copy of a similar letter
addressed by the appellant to the first respondent informing them
that failure to declare provisional acceptance was because of factors
beyond their control, and for release of the amount due on
provisional acceptance test for Unit I; (iv) a copy of the letter dated
02.12.2016, addressed by the appellant to the first respondent,
requesting them to issue provisional acceptance test certificate for
Unit I, and to release the payments due; (v) a copy of the letter
dated 06.12.2016 addressed by CTC to the first respondent
regarding use of design coal; (vi) a copy of the letter dated
18.01.2017 addressed by the appellant to the first respondent
wherein they stated that the boiler efficiency could not be
measured as the coal used was different from the one stipulated in
the specifications; (viii) a copy of the Regional Energy Account of
Central Electricity Authority, Bangalore dated 03.02.2017; (viii) a
copy of the monthly progress report of the Southern Regional
Power Committee of the Central Electricity Authority dated
06.03.2017; (ix) a copy of the Region-wise Generation Report dated
19.03.2017; and (x) copy of the E-mail dated 04.07.2016 regarding
firing of Indonesia coal.
Subsequently, at the stage of arguments in the O.P. on
06.04.2017, the appellant filed the following documents without
seeking leave of the Court to do so i.e (i) a copy of the letter dated
27.03.2017 addressed by the first respondent to the appellant that
Coal was heterogeneous in nature, it could not exactly match the
design coal, the first respondent held sufficient quantity of design
coal, and was willing to make available design coal for the purpose
of conducting performance guarantee tests as and when the
appellant was ready to conduct such tests; (ii) a copy of the letter
dated 01.04.2017 stating that the use of non-design coal by the
first respondent had made CTC suffer great losses for which CTC
could claim extension of time and additional costs; (iii) a copy of
the Directors report of the first respondent wherein it is stated
that, as at 31.07.2016, the first respondent had achieved overall
EPC progress of 97.67%.
It is only at the stage of filing an appeal, against the order of
the Court below, i.e on 08.06.2017, have the appellants filed (i) a
copy of the provisional balance sheet of the first respondent as at
31.03.2017; (ii) a copy of the balance confirmation letter of the first
respondent as on 31.03.2017 forwarding a copy of the extract of
the ledger balance of the appellant in the books of accounts of the
first respondent as on 31.03.2017; (iii) a copy of the arbitration
notice issued by the appellant to the first respondent dated
27.05.2017; (iv) a copy of the first respondents e-mail dated
02.06.2017 to discuss the possibility of an amicable settlement;
and (v) a copy of the e-mail sent by the appellant to the first
respondent on 05.06.2017.
While some of the aforesaid documents relate to a period
posterior to the filing of the O.P. on 06.03.2017, the fact remains
that even with regards documents anterior to the filing of the O.P,
neither did the appellant seek leave of the Commercial Court, to file
the documents, which they had filed, along with their reply to the
counter-affidavit of the first respondent, on 28.03.2017 nor was
leave sought for filing the documents at the stage of arguments on
06.04.2017. As no leave was sought, the question of leave being
granted by the Commercial Court does not arise. Consequently, in
terms of the aforesaid provisions, the appellant would not be
entitled to place reliance on these documents, for which leave of the
Commercial Court was neither sought nor granted. A party has to
plead the case and produce/adduce sufficient evidence to
substantiate his submissions made in the petition. (Ritesh Tewari
v. State of U.P., ). When a point is ostensibly a point of law,
which is required to be substantiated by facts, the party raising the
point must plead and prove such facts by evidence which must
appear from the petition. If the facts are not pleaded, or the
evidence in support of such facts is not annexed, the Court will not
entertain the point. (Ritesh Tewari27; Bharat Singh v. State of
Haryana ). As documents, for which leave of the Commercial
Court was not obtained, cannot be considered, it is only if the
documents filed on 06.03.2016, along with the petition,
substantiate the pleadings in the petition, can such pleas be
examined.
In any event most of the documents, on which reliance is
placed on behalf of the appellants, were filed in support of their
claim that it is the first respondents failure to abide by its
obligations under the underlying agreements which resulted in
their inability to perform their obligations of conducting a
provisional acceptance test. We shall now briefly note the rival
contentions, urged by Learned Senior Counsel appearing on behalf
of the appellant and the first respondent, on merits to buttress our
conclusion that these rival claims necessitate detailed examination
in the arbitral proceedings, before it can be conclusively
determined as to which of the parties to the agreement had caused
breach of its terms.
V. WHEN CAN A PRIMA-FACIE CASE, FOR GRANT OF
INJUNCTION RESTRAINING THE INVOCATION OF BANK
GUARANTEE, BE SAID TO HAVE BEEN MADE OUT?
While the appellant had sought a temporary injunction in
the O.Ps, to restrain the first respondent from encashing the bank
guarantee pending its disposal, the O.Ps themselves were
dismissed by the Commercial Court. The discretion of the Court is
exercised to grant a temporary injunction only when the following
requirements are made out by the plaintiff: (i) existence of a prima
facie case as pleaded, necessitating protection of the plaintiffs
rights by issue of a temporary injunction; (ii) when the need for
protection of the plaintiffs rights is compared with or weighed
against the need for protection of the defendants rights or likely
infringement of the defendants rights, the balance of convenience
tilting in favour of the plaintiff; and (iii) clear possibility of
irreparable injury being caused to the plaintiff if the temporary
injunction is not granted. In addition, temporary injunction being
an equitable relief, the discretion to grant such relief will be
exercised only when the petitioners conduct is free from blame and
he approaches the court with clean hands. (Seema Arshad Zaheer
v. Municipal Corpn. of Greater Mumbai ).
While the aforesaid factors must be borne in mind in
examining an application seeking temporary injunction, an
application to injunct encashment of a bank guarantee stands on a
different footing. Courts must not lose sight of the fact that the
commitment of banks must be honoured free from interference
(Tarapore & Co.3), and the Court would, ordinarily, not interfere
with enforcement of the bank guarantee except only in cases where
fraud or special equity or irretrievable injustice is, prime facie,
made out in the case as a triable issue by strong evidence so as to
prevent irretrievable injustice to the parties. The trading operation
should not be jettisoned, and faith of the people in the efficacy of
banking transactions should not be eroded or brought to disbelief.
(Ansal Engineering Projects Ltd.1). 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. Courts should, therefore, be slow in granting an
injunction to restrain realization of such a bank guarantee.
(Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering
Works (P) Ltd., ; Svenska Handelsbanken16; Larsen & Toubro
Ltd.17; G.S. Atwal & Co. (Engineers) (P) Ltd.18 and Sumac
International Ltd.6).
An unconditional bank guarantee can be invoked in terms
thereof by the person in whose favour the bank guarantee is given,
and Courts would, ordinarily, be reluctant to grant an injunction
against invocation of a bank guarantee. (Tarapore & Co.3; Singh
Consultants & Engineers (P) Ltd.7; Bolivinter Oil SA15; Svenska
Handelsbanken16; Larsen & Toubro Ltd.17; G.S. Atwal & Co.
(Engineers) (P) Ltd.18; Flowmore (P) Ltd.19; National Construction
Co.11; Tarapore & Co.3; ICICI Bank Ltd13). While the sound
banking system may require more caution in the issuance of
irrevocable documentary credits, it would be for the banks to
safeguard themselves by other means, and generally not for the
Court to come to their rescue with injunctions. (Singh
Consultants and Engineers (P) Ltd.7).
The Courts usually refrain from granting injunction
to restrain the performance of contractual obligations arising out of
a letter of credit or a bank guarantee between one bank and
another. If such temporary injunctions were to be granted in a
transaction between a banker and a banker, restraining a bank
from recalling the amount due when payment is made under
reserve to another bank, or in terms of the letter of guarantee or
credit executed by it, the whole banking system in the country
would fail. In view of the banker's obligation under an irrevocable
letter of credit to pay, his buyer- customer cannot instruct him not
to pay. (Singh Consultants and Engineers (P) Ltd.7; United
Commercial Bank12). The Court should not lightly interfere with
the operation of irrevocable documentary credit, except where there
is a serious dispute to be tried, and there is a prima facie act of
fraud. (Edward Owen Engineering Ltd.9; Singh Consultants and
Engineers (P) Ltd.7).
Injunctions against the negotiating banks, for making
payment to the beneficiary, must be given cautiously as constant
judicial interference, in the normal practices of the market, can
have disastrous consequences since it affects the trustworthiness of
the Indian banks and markets. (Millenium Wires (P) Ltd. v. State
Trading Corporation of India Ltd ; ICICI Bank Ltd.13). Only in
exceptional cases would the Courts interfere with the machinery of
irrevocable obligations assumed by banks. In the case of a
confirmed performance guarantee, just as in the case of a
confirmed letter of credit, the bank is only concerned with ensuring
that the terms of its mandate and confirmation has been complied
with. It is in no way concerned with any contractual disputes
which might have arisen between the buyer and the seller.
(Tarapore & Co.3; R D,. Harbottle (Mercantile) Ltd. v. National
Westminster Bank Ltd. ).
The following principles should be noted, in the matter of
injunction to restrain encashment of a bank guarantee, (i) while
dealing with an application for injunction in the course of
commercial dealings, and when an unconditional bank guarantee
is given or accepted, the beneficiary is entitled to realise such a
bank guarantee in terms thereof irrespective of any pending
disputes relating to the terms of the contract; (ii) the bank giving
such guarantee is bound to honour it as per its terms irrespective
of any dispute raised by its customer; (iii) the Courts should be
slow in granting an order of injunction to restrain the realisation of
a bank guarantee; (iv) since a bank guarantee is an independent
and a separate contract, and is absolute in nature, existence of any
dispute between the parties to the contract is not a ground for
issuing an order of injunction to restrain enforcement of bank
guarantees; (v) fraud should be of an egregious nature which
would vitiate the very foundation of such a bank guarantee or letter
of credit, and the beneficiary has sought to take advantage of the
situation; and (vi) allowing encashment of an unconditional bank
guarantee would result in irretrievable harm or injustice to one of
the parties concerned. (Gujarat Maritime Board2; Techtrans
Construction India Pvt Ltd & Ksheeraabad Constructions Pvt.
Ltd.20). The Court should look into the terms of the bank
guarantee, and the letter of invocation, in deciding the fate of a
prayed injunctive relief. (Continental Construction Ltd. v. Satluj
Jal Vidyut Nigam Ltd ).
As the appellant has sought an injunction to restrain the
first respondent from invoking the bank guarantee in the Section 9
petition, and in the appeal now filed before us, the scope and ambit
of the contract of bank guarantee primarily necessitates
examination, and not the underlying contract, for the rival claims,
based on disputes arising from the underlying contract, are
matters for examination and resolution in arbitral proceedings.
Nonetheless, the contentions urged by the Learned Senior Counsel
on either side are being noted to show that the appellant does not
have a fool proof case of even the underlying contract being vitiated
by fraud justifying an injunction being granted to restrain the first
respondent from invoking the bank guarantees.
(a) THE FIRST RESPONDENT HAS COMMENCED COMMERCIAL
OPERATIONS:
Sri D. Prakash Reddy, Learned Senior Counsel appearing on
behalf of the appellant, would submit that the appellant has
completed all erection works, and has fulfilled all its obligations
ordained by the EPC Contracts, except conducting performance
guarantee tests; the first respondent had stated that, as on
31.07.2016, the appellant had achieved overall EPC progress of
97.67%; according to the monthly progress report, of the Southern
Regional Power Committee for the month of January 2017,
commercial operations started on 17.11.2016 for Unit 1 and on
21.02.2017 for Unit II; the purpose of the performance guarantee
tests, pre-commissioning tests etc. are to ensure that the Plant is
put to commercial use; and, as commercial operations have started,
provisional acceptance is deemed to have been achieved.
On the other hand Sri C.V. Mohan Reddy, Learned Senior
Counsel appearing on behalf of the first respondent, would submit
that till date the appellant has not achieved Provisional Acceptance
of Units 1 and 2, in terms of the EPC Contracts; they have not even
issued the 20 days prior written notice to the first respondent, as
required under Article 6.2 of the Onshore Services Contract,
conveying its intention to commence Provisional Acceptance
Testing; the appellant has not complied with the amended Articles
6.3.1.1 and 6.3.1.2 of the Onshore Services Contract which provide
for the tests required to be conducted for successful completion of
Provisional Acceptance; they have not complied with the terms of
the amended Article 6.3.2 of the Onshore Services Contract which
requires them to deliver, to the first respondent, a notice of
provisional acceptance; for the appellants failure to achieve
provisional acceptance, the first respondent is entitled to claim
delay liquidated damages from the appellant, and to invoke the
bank guarantees in lieu thereof; the Performance Guarantee Test is
a stage subsequent to the Provisional Acceptance Test, which has
not been undertaken till date; the issue of Performance Guarantee
Test is not relevant, for the purposes of the Provisional Acceptance
Test and its related milestone payment; the appellant has also
failed to achieve Final Acceptance in terms of Article 6.4 of the
Second Amendment to the On-Shore Services Contract Agreement;
commencement of commercial operation of the power plant does
not establish that provisional acceptance has been achieved, till the
prescribed conditions are fulfilled, and a provisional acceptance
test certificate is issued by the first respondent; and the tripartite
discussion held on February 22, 2017, and the letter dated
January 02, 2017 show that the progress could not have been
97.67% complete as on July 31, 2016.
In the Directors Report, presented to the shareholders as
part of the 8th Annual Report together with audited financial
statements for the year ending 31.03.2016, the Directors of the
first respondent stated that, as on July 31st 2016, the first
respondent had achieved over all EPC progress of 97.67%; all BTG
and BOP material supply had been completed, and supply of
balance mandatory spares were on going. The fact, however,
remains that, subsequently, the appellant, in its letter dated
2.01.2017, informed the first respondent that over a year had
elapsed since they had lodged their first request for extension in
the contract period without any constructive response from the
first respondent, despite which they had continued to render
services under the contract; and a number of delay events had
occurred in the project which were beyond their control, and for
reasons not attributable to them, but they had claimed only a few
of them as justification for extension of time. This letter dated
02.01.2017 acknowledges that the appellant was likely to achieve
provisional acceptance test for Unit -2 by 31.03.2017 by
implementing various expediting measures at a considerably
higher cost.
The tripartite discussions held on 22.02.2017 between the
appellant, the first respondent and the CTC records the action plan
to achieve provisional acceptance test, and the target completion
dates for various items to be completed by the appellant and the
CTC by the end of February, 2017 for all most all the items such as
reliability test run; minimum performance guarantee test on
auxiliary power not more than 105%; minimum performance
guarantee on test heat rate not more than 1.3%; emission limits;
finalization of the BTG manual; and bottom ash conveying not
possible through HCSD. While all the aforesaid defects were to be
completed by the appellant by 26.02.2017, the commissioning of
the fire alarm detection system was to be completed by the
appellant by 15.03.2017. It does appear, from the letter dated
02.01.2017 addressed by the appellant to the first respondent and
the tripartite discussions held on 22.02.2017, that the first
respondents claim, in the Directors Report, of having achieved a
progress of 97.67% by 31.07.2016, was highly exaggerated.
The on-shore services contract dated 10.04.2011 defines
performance guarantee to have the meaning set forth in Article 8.1;
performance guarantee liquidated damages to have the meaning set
forth in Article 8.1, and to be payable as liquidated damages and
not as a penalty; performance guarantee test to mean the
performance guarantee test conducted in accordance with the
provisions of Article 6.4.1 for the purpose of determining the
facilitys achievement of the performance guarantee; provisional
acceptance to mean, with respect to the facility, the achievement of
substantial performance in accordance with the provisions of
Article 6.4; provisional acceptance certificate to have the meaning set
forth in Article 6.4; and provisional acceptance test to mean the
provisional acceptance test conducted in accordance with the
provisions of Article 6.3.1.
Article 6.3.1.1 stipulates that the provisional acceptance tests
for the Units shall consist of the tests and achievements of the
performance levels mentioned thereunder, which are (a) the
operation of the Unit as a whole for fifteen continuous days and
during each such fifteen-day test period, the Unit shall be operated
for not less than 72 hours continuously at 100% STG MCR; (b) the
unit demonstrates an electrical output equal to or greater than
97.5% of the electrical output guarantee, and a gross heat rate
equal to or lower than 103% of the heat rate guarantee and, for the
purpose of demonstrating the achievement of the gross heat rate
and electrical output levels required for provisional acceptance for
the facility, the provisional acceptance test shall consist of the
operation of the units as a whole for not less than four hours at a
load condition of 100% STG MCR and 80% STG MCR; (c) the units
meets the ramp rates, reactive power capability, full load rejection
capability; maximum capacity at value wide open conditions as per
technical specifications; and (d) the units meet the guaranteed
emission limits. It further stipulates that, once the Unit has
successfully completed commissioning and start-up, and is capable
of safe operation in accordance with applicable laws, applicable
permits, prudent utility practices, the technical limitations and
requirements of the operating manual, the appellant shall be
entitled to perform a provisional acceptance test for the unit
control tuning, and the operation used during the provisional
acceptance test shall be identical to the control tuning and
operation that would be used during normal operation.
Article 6.3.1.2 provides that the provisional acceptance of the
Units shall be achieved upon the successful completion of the
factors mentioned in Clauses (a) to (f) thereunder. Clause 6.3.2
required the appellant, if it believed that it had achieved provisional
acceptance for the facility, to deliver to the first respondent a notice
of provisional acceptance which is required to contain a report, in
the form previously agreed by the appellant and the first
respondent, of the results of the acceptance test, and the works
completed, with sufficient detail to enable the first respondent to
determine whether provisional acceptance for the facility had been
achieved.
Article 6.4 relates to the performance guarantee test and
Article 6.4.1 stipulates that final acceptance of the units shall be
achieved if the conditions mentioned thereunder are met. Sub-
clause (a) required the appellant to have concluded a single test for
the units in accordance with the testing protocol and standards as
set out in the technical specifications (the performance guarantee
test) in which the facility demonstrates a level of achievement of (i)
100% (or higher) of the electrical power electrical output guarantee
and (ii) 100% (or lower) of the heat rate guarantee, for the facility,
and the facility demonstrates 100% (or lower) of the auxiliary
power guarantee as set forth in Appendix V. Final acceptance also
requires the conditions, in clauses (b) to (f) mentioned thereunder,
to be met.
Article 6.4.2 required the appellant to deliver to the first
respondent a notice of provisional acceptance. It is evident,
therefore, that the performance guarantee test, which is among the
tests to determine whether the unit has achieved final acceptance,
is to be undertaken subsequent to the provisional acceptance test
to be conducted by the appellant in terms of Article 6.3.1.2. The
aforesaid clauses disclose that the provisional acceptance test for
Units I and II consist of several tests, achievements and
performance levels. The first respondent claimed liquidated
damages by their notice dated 23.02.2017, a day after 22.02.2017
when the tripartite discussions were held between the appellant,
the first respondent and CTC. From the minutes of the tripartite
discussions held on 22.02.2017 it does appear that several items of
works had not been completed by the appellant by then. Whether
or not these works, which the appellant was required to complete,
and had agreed to do so, by the last week of February and by mid
March, 2017, are significant are again matters for consideration in
the arbitral proceedings, and not in a Section 9 petition wherein
the relief, of injunction against encashment of bank guarantee, was
sought. While the first respondent does appear to have commenced
commercial operations, it does also seem that the appellant did not
conduct the provisional acceptance test for Units 1 and 2 till the
filing of the O.P on 06.03.2017, or at any time thereafter. Whether
inability of the appellant to conduct the provisional acceptance test
is due to the failure of the first respondent to fulfill their
obligations under the Contract, is for the arbitral tribunal to
consider, and are not matters for examination either in Section 9
petition, or in an appeal arising from an order passed therein.
(b) EFFECT OF THE DELAY ATTRIBUTABLE TO THE CHINESE
CONSORTIUM, AND FAILURE TO CLAIM DAMAGES IN THE
MONTHLY BILLS DURING EXECUTION OF THE WORKS:
Sri D. Prakash Reddy, Learned Senior Counsel appearing on
behalf of the appellant, would submit that liquidated damages can
be levied only if the delay attributable to CTC was lesser than that
attributed to the appellant; the first respondent has, itself, claimed
that the delay was on the part of the CTC to supply the BTG
equipment material, which covers the whole period of delay of 555
days for Unit 1 and 495 days for Unit 2; the delay, attributed to the
appellant in achieving Provisional Acceptance, is allegedly 471 days
for Unit 1 and 379 days for Unit 2, which is lesser than the period
of delay alleged against the CTC; this amounts to claiming
damages for the same delay twice i.e. both from the CTC and the
appellant; there cannot be any delay on the part of the appellant in
erection when, admittedly, supply of the BTG Equipment was
delayed; the appellant cannot be held responsible for the alleged
delays in the supply of BTG Equipment by the CTC; from the letter
of the CTC dated 01.04.2017, it is evident that the BTG equipment
could not be supplied on time only because the first respondent did
not open a letter of credit within the agreed time schedule; the first
respondent is making these false claims only to avoid making
payment of the admitted amounts due; in view of Section 58 of the
Indian Evidence Act, 1872, the appellant need not prove an
admitted fact, established by the documents of the first respondent
itself; and the delay notified by the appellant, vide its letter dated
02.01.2017, was uptil 24.05.2016 only, whereas the delay
calculated for 471 days was till 23.02.2017.
On the other hand Sri C.V. Mohan Reddy, Learned Senior
Counsel appearing on behalf of the first respondent, would submit
that the EPC Contracts confer a right on the first respondent to
claim delay liquidated damages from the appellant, in case
provisional acceptance test is not completed for Unit 1 by
November 10, 2015, and for Unit 2 by February 10, 2016; Article
7.2 of the second amendment, to the Onshore Services Contract,
extends the right to claim Late Completion Liquidated Damages in
case the appellant fails to achieve provisional acceptance of Units 1
and 2 within time; invocation of the bank guarantees, in lieu of
delay liquidated damages, is a right which has been granted to the
first respondent under the EPC Contracts, and the Co-ordination
Agreement; the liquidated damages, claimed from the parties i.e.
the Petitioner and CTC, have become due on account of the delay
caused in performing different obligations under different
agreements; the two claims are independent of each other, and can
be invoked simultaneously without prejudice to one another; the
appellant became liable to pay liquidated damages to the first
respondent for failure to complete the works under the EPC
Contracts, and for failure to achieve Provisional Acceptance; Clause
10.6 of the Co-ordination Agreement stipulates that the EPC
Contracts are independent and separate contracts; irrespective of
the belated supply of the BTG equipment by CTC, the appellant
was bound to complete other works under the EPC Contracts
which were not dependant on the supply of BTG equipment; the
said works were not completed by the appellant on time; they
caused delay in supply and erection of foundations, delay in
construction of civil and steel structures, and delay in delivery of
equipment; they failed to augment all necessary resources
including skilled manpower, plant and tools, as a result of which
the Project got delayed, and the first respondent had to incur
significant losses; as time was of essence, the first respondent had
requested the appellant-petitioner to perform its obligations
including the obligation to expedite the works to meet the
completion schedule; due to various delays, inactions, omissions
and breach of contractual obligations by the appellant, the first
respondent has suffered substantial losses and damages, including
in respect of Works to be completed by the appellant on behalf of
the first respondent, settlement of land and labour related issues,
significant increases in financing costs, and various penalties to
third parties; because of the failure of the appellant to execute the
works within time, the first respondent had to carry out certain
works, and procure certain material and equipment, the cost of
which is recoverable from the appellant; the first respondent is also
entitled to recover costs incurred towards de-scoping of works,
labour cess, pending roads/drains/painting works and purchase
of spare parts etc; and such costs/losses, added up together, far
exceeds the pre-estimated liquidated damages provided under the
EPC Contracts or the amount of Rs. 304.5 Crores which the
appellant claims is allegedly payable by the first respondent to
them.
By their letter dated 23.02.2017, the first respondent
informed the CTC that they were under an obligation to ensure
delivery of BTG equipment within 27 months and 29 months for
Units-1 and 2 respectively; it was agreed, among the parties, that
time would be of essence for delivery of the BTG equipment; there
had been a delay in completion of delivery of the equipment by 555
days for Unit-1, and 495 days for Unit-2, as against the firm and
committed delivery schedule; and, as a result, there had been a
delay in provisional taking over and final taking over for Units 1
and 2, which had caused additional direct losses to the appellant
over and above the pre-estimated liquidated damages provided
under the supply (FOB) Contract. For reason of the CTCs failure
to meet the delivery schedule, the first respondent demanded that
CTC pay liquidated damages for the amounts specified in the letter.
They also stated that they had the right to offset the liquidated
damages against payments to the CTC, in case the liquidated
damages were not paid on or before 09.03.2017. It is relevant to
note that this letter was addressed by the first respondent to the
CTC on 23.02.2017, a day after the tripartite meeting held between
the appellant, the first respondent and the CTC on 22.02.2017
wherein the appellant and the CTC had acknowledged that several
requirements were yet to be completed; and they would be
completed on the dates, mentioned in the minutes, which are from
23.02.2017 till 15.03.2017.
By their letter dated 23.02.2017, the first respondent
informed the appellant that they had, time and again, requested
the latter to expedite completion of the works under the EPC
contracts, but they had not, till date, claimed liquidated damages
from the appellant because of cash flow issues of the appellant, and
in the interest of achieving project completion at the earliest; the
appellant was yet to complete the works under the EPC contracts,
and there had been inordinate delay in achieving provisional
acceptance, as set forth in detail in Annexure-I; and the first
respondent was invoking its right to claim the following liquidated
damages in accordance with the terms of each contract i.e., (a)
Rs.134 crores under the Civil and Construction Works Contract;
(b) Rs.145.75 crores under the Supply (Ex-Works) Contract; (c)
Rs.9.04 Million US Dollars under the Supply (C&F) Contract; and
(d) Rs.8.5 crores under the ON-Shore Services Contract.
The appellant was requested to pay the aforesaid amounts
under the relevant EPC contracts on or before 10.03.2017 against
each of the EPC contracts and were informed that, in the event
they failed to make payments on or before the said date, the
appellant would have the right to set off the liquidated damages
against any payment due to the appellant, and this letter was
being issued without prejudice to the rights, approved rights or
other rights of the first respondent under the EPC contracts. The
letter of the appellant dated 02.01.2017 shows that they
themselves have attributed the delay in completion of the project to
several factors, and have not confined it merely to the delay on the
part of the CTC to supply the BTG equipment. The first
respondent claims that the appellant had caused delay in supply
and erection of foundations, delay in construction of civil and steel
structures, and delay in delivery of equipment; they failed to
augment all necessary resources, skilled manpower, plant and
tools; because of the failure of the appellant to execute works
within time, the first respondent had to carry out certain works,
and procure certain material and equipment, the cost of which was
recoverable from the appellant; and they were also entitled to
recover the costs incurred, towards de-scoping of works, labour
cess, pending roads/drains/painting works and purchase of spare
parts etc, from the appellant. These rival claims, by the appellant
and the first respondent, that the other was responsible for the
delay in completion of Provisional Acceptance test are also required
to be considered by the arbitral tribunal, and are not matters for
elaborate examination in an appeal arising out of an order passed
in a Section 9 petition.
(c) CLAUSES 3.1 AND 3.2 OF CO-ORDINATION AGREEMENT
AND CLAUSE 7 OF THE ONSHORE AGREEMENT:
Sri D. Prakash Reddy, Learned Senior counsel appearing on
behalf of the appellant, would submit that clauses 3.1 and 3.2 of
the co-ordination agreement, which starts with a non-obstante
clause, prohibit the appellant contractor being made liable for
delay liquidated damages, if the delay is attributable to CTC; in
terms of clause 7.2.2 of the On-shore services Agreement, only the
undisputed amount can be set off for Late Completion Liquidated
Damages; neither the impugned notice dated 23.02.2017, nor any
of its previous communications, contain any allegation that the
appellant is not entitled for the benefits of the exclusionary clause;
the appellant is, therefore, not legally required to plead that they do
not fall under any one of the said exceptions; and, at any rate, the
appellant has pleaded that, according to the co-ordination
agreement, it is entitled for exclusion of the delay caused by the
CTC in supply of the BTG Equipment.
On the other hand Sri C.V. Mohan Reddy, Learned Senior
Counsel appearing on behalf of the first respondent, would submit
that Clauses 2.3 and 2.4 of the co-ordination agreement make it
clear that the contractual obligations of the appellant, under the
co-ordination agreement, were much wider than mere facilitating
co-ordination between the first respondent and the CTC; in terms
of the proviso to Clauses 3.1 and 3.2 of the Co-ordination
Agreement, the appellant is barred from claiming exclusion from
liability for any delay liquidated damages and/or for delay in
completion of Provisional Acceptance Test for Units 1 and 2, if such
delay is attributable to them; in the present case the appellant has
delayed completion of works; the appellant is, therefore, not
entitled to claim exemption from liability simply by placing reliance
on the introductory part of Clauses 3.1 and 3.2; the appellant has
not pleaded, in the Section 9 petition, that it is not liable to pay
delay Liquidated Damages because Clause 3.1 (A) to (D) is not
applicable; and the first respondent neither had the opportunity to
rebut such a claim of the appellant nor could it have been expected
to disclose its entire defense in its letter dated February 23, 2017,
and to have stated that, despite the delay on the part of CTC, the
appellant is liable to pay Liquidated Damages on account of
application of Clauses 3.1 (A) to (D) and 3.3 of the Co-ordination
Agreement.
Clause 3 of the co-ordination agreement relates to breach or
failure of the CTC and, under Clause 3.1, notwithstanding
anything contrary in the co-ordination agreement, the first
respondent agreed that the appellant shall not be liable for delay,
or for any delay liquidated damages, due to failure of the CTC to
achieve the boiler, turbine and generator (BTG) delivery dates on
FOB basis of 27 months from 5th March, 2012 for Unit-I and 29
months from 5th March, 2012 for Unit-II (BTG FOB Delivery),
provided always that this exclusion would not apply if and where:
(A) delay was attributable to the appellants lack of proper and
timely coordination on shipping or transit or transportation of
material from FOB port of loading to unloading at the project site;
or (B) delay was due to interfacing or lack of interfacing between
the CTC and the appellant; or (C) the delay was attributable to the
appellants breach or default of any of the contracts; or (D) the
appellant did not make every reasonable effort to mitigate such
delay.
Clause 3.2 provided that, notwithstanding anything to the
contrary in the co-ordination agreement, the first respondent
agreed that the appellant shall not be liable for delay in achieving
and due completion of provisional acceptance tests for Unit-1 by
10th November, 2015 and for Unit-2 by 10th February, 2016, and if
such delay and such non-achievement were solely due to the CTC,
provided always that this exclusion would not apply if and
where:(A) the appellant did not properly handle and/or store
and/or install the BTG equipment, material or components
supplied by the CTC; or (B) delay was due to interfacing or lack of
interfacing between the CTC and the appellant; or (C) the delay or
such non-achievement of provisional acceptance tests for Unit -1
by 10th November, 2015 and Unit 2 by 10th February, 2016 was
attributable to the appellants breach or default of any of the
contracts; or (D) the appellant did not make every reasonable effort
to mitigate the effect of such delay or non-achievement.
Clause 3.3 stipulated that, where any delay by the CTC in
meeting the BTG FOB delivery dates set out in Clause 3.1 did not
fall under any of the exclusions set out in sub-clauses 3.1(A), (B),
(C) and (D), or where any delay by the CTC, in meeting the
performance test dates set out in Clause 3.2, did not fall under any
of the exclusions set out in clause 3.2(A), (B), (C) or (D), the
appellant should be granted a day-for-day extension on the overall
completion schedule without any entitlement to any damages for
prolongation costs in respect of any part of the work under the
contracts in respect of such extension of time. Clause 3.3 places
the onus of proving, that the delay was solely on account of CTC,
on the appellant at all times.
Clause 4.1 stipulated that, notwithstanding any provision to
the contrary in the contracts, the appellant agreed that any trigger
for late completion liquidated damages, in any of the contracts,
would automatically trigger all late completion liquidated damages
payments under all the contracts unless such delays were
attributable to the CTC under Clauses 3.1 or 3.2; the amount of
late completion liquidated damages per day of delay shall not
exceed Rs.1.56 Crores for Unit 1 and Rs.1.04 Crores for Unit 2,
and the total late completion liquidated damages under the
contracts shall not exceed 10% of the aggregate of the contract
prices. In terms of Clause 4.1 the appellant agreed that it shall not
be entitled for any extension of time beyond 10.11.2015 for Unit -1
and 10.02.2016 for Unit -2 or for any additional costs under the
contracts or under the co-ordination agreement by reason of any
failure or delay in deliveries based on sequential delivery schedule
arrangements between the CTC and the first respondent; Clause
4.4 of the Co-ordination Agreement permits the first respondent to
draw on any performance security under any of the EPC Contracts, in
case of any outstanding liability or claim of the first respondent
against the appellant.
Article 7, of the on-shore service contract dated 10.04.2011,
relates to late completion liquidated damages and extension of
time. Article 7.1, thereunder, stipulates that time is the essence of
the contract with respect to each unit, the project and the contract;
each unit shall achieve provisional taking over and final taking
over by a date certain in accordance with clauses (a) to (d)
thereunder. Article 7.2 stipulates that, if the provisional
acceptance does not occur by the scheduled completion date for
each unit, the appellant shall pay to the first respondent, subject to
the limitation set forth in Article 9.1 as liquidated damages and not
as a penalty, the amount of 0.5% of the contract price of each unit
per week after the 30th calendar day by which the provisional
acceptance for each unit is later than the scheduled completion
date. This is subject to the timely sequential deliveries guaranteed
under the Owners Supply (C & F) Contract having been met and
the delay in provisional acceptance not attributable to short
supplies or failure during erection and commissioning of supplies
under the Owners Supply (C & F) Contract.
Article 7.2.2 stipulates that the appellant shall pay the late
completion liquidated damages, required to be paid under Article
7.2, monthly in arrears, against the first respondents debit note,
by wire transfer on the tenth day of each month, with the last such
payment to occur on provisional acceptance with respect to the
facility; if the appellant is obligated to pay any late completion
liquidated damages to the first respondent under Article 7.2, and
such undisputed amount is not paid within the time period
referred to above, the first respondent shall have the right to offset
any such amount against any amounts then or thereafter due from
the first respondent to the appellant, or to exercise its rights
against any security provided by the appellant, in such order as
the first respondent may elect in its reasonable discretion.
The construction of the aforesaid clauses, to determine
whether or not the appellant is liable for liquidated damages, for
the delay in achieving provisional acceptance test by the prescribed
dates, is again a matter for the arbitral tribunal to consider.
Suffice it to note that Clause 4.1 of the co-ordination agreement
confers, on the first respondent, the right to claim late completion
liquidated damages for each days delay subject to the limit of 10%
of the aggregate of the contract price; and Article 7.2.2 of the on-
shore service contract confers power on the first respondent to off-
set any amount due from them to the appellant, or to exercise their
right against any security provided by the appellant, on failure of
the appellant to pay late completion liquidated damages.
(d) IS NON-SUPPLY OF DESIGN COAL, THE REASON FOR THE
APPELLANTS FAILURE TO ACHIEVE PROVISIONAL
ACCEPTANCE TEST?
Sri D. Prakash Reddy, Learned Senior Counsel appearing on
behalf of the appellant, would submit that Article 5.7 of the On-
shore Services Contract stipulates that it is the duty of the first
respondent to arrange for the specified fuel to be delivered to the
site to enable the Contractor to perform the start-up and testing of
the facility; the fuel to be supplied by the first respondent was
termed as Design Coal, which contains various technical
specifications as mentioned in AppendixX of the On-shore
services contract; various parameters, stipulated under the EPC
Contracts, entered into between the first respondent and the
appellant for the performance guarantee tests, could not be
achieved by the use of non-design coal; the performance guarantee
tests could not be conducted since the respondent did not supply
design coal, which is an essential ingredient for conducting the
tests; the first respondent did not have the design coal, and only
had supplies of Indonesian coal; the first respondent itself sought a
clarification, with respect to the suitability of Indonesian Coal from
the CTC which supplied the BTG equipment, vide its email dated
10.08.2015; the CTC, vide its email dated 24.08.2015, conveyed
the opinion of the manufacturer of the boiler equipment i.e. Harbin
Boiler Company Ltd. (HBC), and made it clear that it would lead
to disastrous effects if they used anything other than design coal as
specified in the contract; however, the first respondent continued
to fire the non-design coal after synchronizing Unit-1 on
26.05.2016; CTC sent an email dated 23.06.2016 to the first
respondent, marking a copy to the appellant, stating that
performance of the boiler would be affected because of the actions
of the first respondent in firing non-design coal; the first
respondent has used non-design coal in gross violation of the
agreed terms and conditions, because of which the boiler
equipment has already been damaged, and is not fit for
performance guarantee tests; it is the responsibility of the supplier
to test the performance of the boiler and related equipment, and
the appellant is required to act merely as a facilitator for the
conduct of the tests; in their letter dated 27.03.2017 the first
respondent stated that coal was heterogeneous in nature, it could
not exactly match the design coal, they had obtained, and were
now holding sufficient quantity of the design coal and were willing
to make available such design coal for the purposes of conducting
the performance guarantee tests; and this was said after running
the units commercially using non-design coal.
On the other hand Sri C.V. Mohan Reddy, Learned Senior
Counsel appearing on behalf of the first respondent, would submit
that the appellant has neither pleaded in the Section 9 petition,
nor have they proved on the basis of any supporting document,
that the contractual conditions have been complied with by them
till date; the appellant has not even issued a notice of provisional
acceptance, supported with a preliminary report, to claim
completion of Provisional Acceptance; at the stage of arguments it
was contended, for the first time (without any pleading to that
effect), that the preliminary report (which is to accompany the
Notice of Provisional Acceptance) could not be prepared because of
non-supply of design coal by the first respondent to conduct the
tests necessary to prepare the said report; such an argument has
been made by the appellant without pointing out any document or
material on record to establish that the appellant had requested the
first respondent to supply design coal to enable them to conduct
the tests necessary to prepare the preliminary report; they have
neither mentioned in the petition details of the design coal that
was to be used by the first respondent in terms of any agreed
technical specification, nor have they explained how the actual
coal, being used by the first respondent, did not match the design
coal; the appellant has also failed to explain how alleged non-usage
of design coal has adversely affected achievement of provisional
acceptance; the allegation, regarding design coal, was made in the
Section 9 petition without filing any documents in its support; and
some e-mail exchanges, regarding design coal, were belatedly filed
by the appellant with their rejoinder only as an afterthought, and
without prior permission of the Court.
Clause 6.1 of the coordination agreement stipulates that any
dispute, controversy, claim or difference or any kind between the
appellant and the first respondent, whether found in contract, tort
or otherwise, arising out of or relating to any of the, or all the,
contracts and/or the coordination agreement, shall be referred to,
at the written request of a party, to be resolved at a meeting of the
Chief Executives of each party through mutual consultation and
negotiation, such meeting to take place within fourteen days of the
date of such notice being served on the other party. Clause 6.2
stipulates that, if the parties fail to resolve such dispute,
controversy, claim or difference by such mutual consultation and
negotiation within the next thirty days, then any party may submit
the dispute, controversy, claim or difference for resolution by
arbitration at the request of either the appellant or the first
respondent upon written notice to that effect to the other. Clause
6.3 stipulates that such arbitration shall be finally and exclusively
settled in accordance with the Arbitration and Conciliation Act,
1996; and the place of arbitration shall be in Hyderabad in India.
Clause 6.4 stipulates that the arbitration panel shall consist of
three arbitrators; one to be appointed by the appellant and the
other by the first respondent; and the two arbitrators, appointed by
the parties, shall in turn jointly appoint the third arbitrator.
The disputes, claims/differences arising out of any of the
contracts or the coordination agreement are required, on failure of
such dispute being resolved by mutual consultation and
negotiation, to be resolved by an arbitral Tribunal consisting of
three arbitrators. Disputes, such as whether the appellant is liable
to pay liquidated damages; whether they are deemed to have
achieved provisional acceptance consequent upon the first
respondent having commenced commercial operations; whether the
appellants delay in completing the project, and in achieving
provisional acceptance, is because of the failure of the first
respondent to supply design coal; whether the delay in supply of
BTG equipment by the CTC would absolve the appellant of
payment of liquidated damages etc., all arise out of the
contracts/coordination agreement, and are required to be resolved
by way of arbitration before the arbitral tribunal. As both the
appellant and the first respondent have already appointed an
arbitrator each, the arbitral tribunal will, on appointment of the
third arbitrator by both the arbitrators, proceed to resolve the
disputes, arising under these contracts, between the appellant and
the first respondent.
It would be wholly inappropriate for us, therefore, to examine
the rival claims of the appellant on the one hand, and the first
respondent on the other, firstly because these are all matters for
the arbitral tribunal to resolve; and, secondly, because the present
appeal arises out of an order passed by the Commercial Court
exercising jurisdiction under Section 9 of the 1996 Act. The
jurisdiction of the Commercial Court was invoked by the appellant
herein seeking interim measures under Clause (ii) of Section 9(1) of
the 1996 Act which enables the party, before or during arbitral
proceedings, to request the Court to grant an interim measure of
protection which, in the present case, is to restrain the first
respondent from invoking the bank guarantees furnished by the
bank at the behest of the appellant. We must, therefore, confine
our enquiry only to the question whether or not the bank
guarantee, furnished by the bank to the first respondent at the
behest of the appellant, is vitiated by fraud or special equities; and
not to undertake an elaborate examination of whether or not there
was a breach of the contracts by the appellant or the first
respondent or even the CTC, and whether they had failed to
perform their respective obligations under these contracts.
VI. CAN THE FIRST RESPONDENT BE A JUDGE IN ITS OWN
CAUSE AND UNILATERALLY HOLD THE APPELLANT
RESPONSIBLE FOR THE DELAY, AND ENCASH THE BANK
GUARANTEE TOWARDS THEIR CLAIM FOR DELAY
LIQUIDATED DAMAGES?
Sri D. Prakash Reddy, Learned Senior Counsel appearing on
behalf of the appellant, would submit that the amounts, claimed by
the first respondent as liquidated damages, have been disputed by
the appellant vide its letter dated 08.03.2017; the first respondent
cannot be allowed to be a judge in its own cause, it cannot
unilaterally invoke the performance guarantees, and set off the
monies payable to the appellant, towards its false and disputed
claim of liquidated damages; a claim for liquidated damages by a
party is only a claim, and does not entitle the party to unilaterally
adjust what it claims as liquidated damages from the amounts
payable to the contractor; and in Gangotri Enterprises Limited4
the Supreme Court, following Raman Iron Foundry5, has held
that, in the event the sum claimed by the beneficiary from the
guarantor is in the nature of damages, which is not yet adjudicated
upon in arbitration proceedings and which is not the sum
admitted by the guarantor, injunction may be granted against
encashment of the bank guarantee, subject to a prima-facie case
being made out on merits that the guarantor has a strong ground
to succeed in the arbitration or any competent forum of law.
On the other hand Sri C.V. Mohan Reddy, Learned Senior
Counsel appearing on behalf of the first respondent, would submit
that, under the EPC Contracts and the Co-ordination Agreement,
the appellant is required to pay liquidated damages to the first
respondent for delay in the agreed delivery schedule, and/or if the
project does not achieve provisional acceptance by the specified
dates; as the appellant failed to comply with their request for
payment of liquidated damages, the first respondent has
contractually and lawfully become entitled to encash the bank
guarantees in lieu of liquidated damages for the delay; the
argument that, as the amount of Late Completion Liquidated
Damages has not been determined and is disputed, it needs to be
adjudicated by the Court, is erroneous and misplaced; in Gangotri
Enterprises Ltd.4, the respondent had sought to invoke the
performance bank guarantees given by the appellant under a
contract (which had been completed) for sums claimed in relation
to another contract entered into with the appellant for which no
performance guarantee was given; the respondent therein was
restrained from encashing the performance bank guarantees given
in an unrelated contract; and as, that is not the case herein, the
present appeal should be decided on the basis of the guiding
principles laid down by the Supreme Court in Gujarat Maritime
Board2 which was rendered subsequent to Gangotri Enterprises
Ltd.4.
In Raman Iron Foundry5, the scope of Clause 18 of the
general conditions of the contract, entered into by the Central
Purchase Organization of India for purchase of stores from third
parties, arose for consideration. The tender for supply of certain
quantity of foam compound was accepted by the appellant, and
Clause 18 of the agreement, which provided for recovery of sums
due, read thus:
18. RECOVERY OF SUMS DUE: Whenever any claim for the
payment of a sum of money arises out of or under the contrat
against the contractor, the purchaser shall be entitled to recover
such sum by appropriating in whole or in part, the security, if any,
deposited by the contractor, and for the purpose aforesaid, shall be
entitled to sell and/or realise securities forming the whole or part
of any such security deposit. In the event of the security being
insufficient, the balance and if no security has been taken from the
contractor, the entire sum recoverable shall be recovered by
appropriating any sum then due or which at any time thereafter
may become due to the contractor under the contract or any other
contract with the purchaser or the Government or any person
contracting through the Secretary, if such sum even be not
sufficient to cover the full amount recoverable, the contractor shall
on demand pay to the purchaser the balance remaining due.
While the respondent contended that the appellant had
committed the breach, the appellant contended that it was the
respondent which had committed breach of contract, and was
liable to pay damages to the appellant. On being called upon to
make payment, the respondent failed to do so. The respondent
filed an application under the Arbitration Act before the Delhi High
Court. They also sought an injunction restraining the appellant
from recovering the amount, claimed by them as damages, from the
pending bills of the respondent. The claim of the respondent
against the appellant, and the counter-claim of the appellant
against the respondent, was the subject matter of reference to
arbitration. During the pendency of the arbitration some amounts
became payable by the appellant in respect of the contracts entered
into between the parties. Apprehending that the appellant would
appropriate these amounts claimed by it, even though their claim
for damages was disputed by the respondent, an application was
made by the respondent requesting the Delhi High Court to
restrain the appellant from recovering its claim for damages from
the amounts due and payable to the respondent in respect of the
pending bills. The Delhi High Court took the view that Clause 18
did not authorise the appellant to appropriate the amounts of any
pending bills of the respondent towards satisfaction of its claim for
damages against the respondent, unless such claim for damages
was either admitted by the respondent or adjudicated upon in an
arbitration or in a suit before the civil court. Aggrieved thereby, the
appellant carried the matter in appeal to the Supreme Court which
held that the claim for liquidated damages did not give rise to a
debt until the liability was adjudicated, and the damages were
assessed by a decree or order of a Court or other adjudicatory
authority; when there was a breach of contract, the party which
committed the breach did not, eo instanti, incur any pecuniary
obligation, nor did the party complaining of the breach become
entitled to a debt due from the other party; the only right which
the party aggrieved by the breach of the contract had, was the right
to sue for damages; this was not an actionable claim; and the
appellant was not entitled to recover the amount, of its claim for
damages, by appropriating other sums due to the contractor under
Clause 18. Encashment of a bank guarantee, which is a contract
independent of the underlying agreement between the parties, was
not in issue in Raman Iron Foundry5.
In Gangotri Enterprises Ltd4, the respondent issued a letter
of acceptance to the appellant and the contract agreement, which
was signed pursuant thereto, required the work to be completed
within the specified time. Subsequently the appellant was
entrusted a second work by the respondent-North Central Railway
for construction of a New Station Building for which the appellant
submitted a bank/performance guarantee from its bankers. Since
the work relating to the earlier contract was not completed, the
respondent terminated the contract, invited fresh tenders, and
allotted the remaining part of the work to another company. With
respect to the second work, the appellant was given a completion
certificate on completion of the works. The appellant requested the
respondent-North Central Railway to return its bank guarantee,
pursuant to which the respondent issued a circular directing all its
departments to withhold payment to the appellant under the
subsequent contract stating that the earlier contract was cancelled,
and such cancellation had resulted in a loss of more than five and
half crores. The respondent also sought encashment of the bank
guarantee. The appellant invoked the arbitration clause, and then
moved an application under Section 9 of the 1996 Act seeking
injunction against encashment of the bank guarantee, contending
that the respondent had no right to encash the bank guarantee
furnished by the appellant in relation to a dispute arising out of
another contract. The respondent, however, contended that Clause
62(1) of the general conditions of contract enabled it to recover any
dues from the appellant even if such claim was not for the sum
due and sum payable; and it was a claim for damages, though
disputed by the appellant, and remained to be adjudicated in a
Court.
The Supreme Court relied on its earlier judgment in Raman
Iron Foundry5, and held that Clause 62 of the contract in issue
was identical to Clause 18 of the contract in Raman Iron Foundry5
which stipulated that the amounts to be forfeited or recovered may
be deducted from any moneys then due or which, at any time
thereafter, may become due to the Contractor by the Railways
under this work or any other contract or otherwise; the arbitration
proceedings, in relation to the earlier contract, was still pending;
the sum claimed by the respondent from the appellant did not
relate to the contract for which the bank guarantee had been
furnished, but it related to another contract for which no bank
guarantee had been furnished; the sum claimed by the respondent
was in the nature of damages which was not yet adjudicated in the
arbitration proceedings; the sum claimed was neither a sum due in
the present, nor a sum payable by the respondent; it was not an
admitted sum; and as the Bank Guarantee was in the nature of a
performance guarantee furnished for executing the work under the
subsequent contract, and the work having been completed to its
satisfaction, the respondent had no right to encash the Bank
Guarantee. The Supreme Court further held that the case on
hand was similar to the facts in Raman Iron Foundry5, and hence
the law laid down in that case was applicable to the case before it;
and both the Learned Counsel did not bring to their notice the law
laid down in Raman Iron Foundry5.
In Tarapore & Co.3, the appellant awarded a contract to the
respondent for construction of civil works in the Visakhapatnam
Steel Plant. The contract was to be completed within a specified
duration. The respondent-contractor sought extension of time, but
could not complete the work even during the extended period.
Disputes arose between them. The respondent appointed an
arbitrator and the disputes were pending before the arbitrator.
Thereafter, by mutual agreement, the contract work was reduced,
but this reduced work was also not completed within the extended
time. At the request of the respondent, the contract period was
extended further, despite which the work was not completed,
resulting in the appellant rescinding the contract. On the very
same day, on which the contract was rescinded, the appellant
sought to invoke the bank guarantee and called upon the bank to
pay the amounts thereunder. The petition for injunction, filed by
the respondent under the Arbitration Act, was dismissed.
Thereafter, the respondent filed two revisions before this High
Court (A.P. High Court).
Relying on the decision of the Supreme Court in Raman Iron
Foundry5, this High Court held that any term in the agreement,
that one of the parties shall be the sole Judge to quantify the same,
had to be held as invalid; the liability to pay damages would arise
only after it was established that there was a breach of the
contract; it was for the Court or the arbitrator to decide as to who
had committed the breach; and till the liability was ascertained, it
could not be said that there was a debt due or debt owing. On these
grounds, this High Court rejected the contention, urged on behalf
of the appellant, that it was the sole Judge to decide as to whether
the contractor had committed a breach of the contract, and what
was the extent of damage caused to it.
This High Court further held that, in the absence of any
determination by the Court or the arbitrator, no amount could be
said to be payable by the respondent to the appellant by way of
damages; it was, therefore, just and proper to restrain the appellant
from enforcing the bank guarantees; no irretrievable injustice
would be caused to the appellant as it could recover damages, from
the bank and the contractor, in case it succeeded in the case; and
the interest of the appellant could be safeguarded by directing the
contractor to keep on extending the bank guarantees till the matter
was settled by the arbitrator. The appellant was restrained from
enforcing the bank guarantee. Aggrieved thereby, the appellant
carried the matter in appeal and the Supreme Court, in Tarapore &
Co3, observed:
..The High Court also committed a grave error in
restraining the appellant from invoking bank guarantees on the
ground that in India only reasonable amount can be awarded by
way of damages even when the parties to the contract have
provided for liquidated damages and that a term in a bank
guarantees making the beneficiary the sole judge on the
question of breach of contract and the extent of loss or damages
would be invalid and that no amount can be said to be due till
and adjudication in that behalf is made either by a court on an
arbitrator, as the case may be. In taking that view the High
Court has overlooked the correct position that a bank
guarantees is a independent and distinct contract between the
bank and the beneficiary and is not qualified by the underlying
transaction and the primary contract between the person at
whose instance the bank guarantee is given and the beneficiary.
What the High Court has observed would applicable only to the
parties to the underlying transaction or the primary contract
but can have no relevance to the bank guarantee given by the
bank, as the transaction between the bank and the beneficiary
is independent and of a different nature. In case of an
unconditional bank guarantee the nature of obligation of the
bank is absolute and not dependent upon any dispute or
proceeding between the party at whose instance the bank
guarantee is given and the beneficiary. The High Court thus
failed to appreciate the real object and nature of a bank guarantee.
The distinction which the High Court has drawn between a
guarantee for due performance of a works contract and guarantee
given towards security deposit for that contract is also
unwarranted. The said distinction appears to be the result of the
same fallacy committed by the High Court of not appreciating the
distinction between the primary contract between contract between
the parties and a bank guarantee and also the real object of a bank
guarantee and the nature of bank's obligation thereunder.
Whether the bank guarantee is towards security deposit or
mobilisation advance or working funds or for due performance
of the contract if the same is unconditional and if there is a
stipulation in the bank guarantee that the bank should pay on
demand without demur and that the beneficiary shall be the
sole judge not only on the question of breach of contract but
also with respect to the amount of loss or damages, the
obligation of the bank would remain the same and that
obligation has to be discharged in the manner provided in the
bank gurantee. In General Electric Technical Services Company
Inc. vs. Punj Sons (p) Ltd. (1991 (4) SCC 230) while dealing with
a case of bank guarantee given for securing mobilisation
advance it has been held that the right of a contractor to
recover certain amounts under running bills would have no
relevance to the liability of the bank under the guarantee given
by it. In that case also the stipulations in the bank guarantee
were that the bank had to pay on demand without demur, and
the beneficiary was to be the sole judge as regards the loss or
damage caused to it. This Court held that notwithstanding the
dispute between the contractor and the party giving the
contract, the bank was under an obligation to discharge its
liability as per the terms of the bank guarantee. Larsen and
Toubro Limited vs. Maharashtra State Electricity Board (6) SCC
68 and Hindustan Steel Workers Construction Ltd. Vs. G.S.
Atwal & Co (Engineers) Pvt. Ltd. 1995 (6) SCC 76 were also
cases of work contracts wherein bank guarantees were given
either towards advances or release of security deposits or for
due, performance of the contract. In both those cases this Court
held that the bank guarantees being irrevocable and
unconditional and as the beneficiary was made the sole judge
on the question of breach of performance of the contract and
the extent of loss or damages an injunction restraining the
beneficiary from invoking the bank guarantees could not have
been granted. The above referred three subsequent decisions of
this Court also go to show that the view taken by the High
Court is clearly wrong.. (emphasis supplied).
In G.S. Atwal & Co. (Engineers) Pvt. Ltd.18, the appellant
and the respondent had entered into several contracts whereby the
respondent was required to construct 11 schools in Libya for which
they had furnished two bank guarantees to the appellant.
Disputes arose between the appellant and the respondent
regarding performance of the contract, resulting in a reference to
arbitration. While the reference was pending, the respondent
requested the Court to grant injunction restraining the appellant
from encashing the bank guarantees. An order of injunction was
granted by the Learned Single Judge of the Calcutta High Court
taking the view that the second bank guarantee was a performance
guarantee and, before invoking the same, the appellant was
required to assess the quantum of loss and damages, and should
mention the ascertained figure in the letter of invocation; and, if
this was not so done, the guarantee could not be invoked.
Aggrieved thereby, the matter was carried in appeal. It is in this
context that the Supreme Court observed that in the dispute,
pending adjudication in arbitration between the appellant and the
respondent, the Bank was not a party; in case of confirmed Bank
Guarantees/Irrevocable Letters of Credit, the Court would not
interfere with the same unless there was fraud or irretrievable
injury was involved; the bank guarantees required the bank to pay
the amount without demur, and without requiring the appellant to
invoke any legal remedy; it was further specifically provided that
the appellant would be the sole judge of, and as to, whether the
respondent, a party to the contract, had committed any breach; the
decision of the appellant, as to the outstanding amount due, was
final and binding; the bank guarantees, furnished by the Bank to
the appellant, were unconditional; the appellant was the sole judge
regarding the question as to whether any breach of contract had
occurred and, if so, the amount of loss to be recovered by the
appellant from the respondent; the entire dispute was pending
before the Arbitrator; whether and if so what was the amount due
to the appellant was to be adjudicated in the arbitration
proceeding; and the reasoning of the Learned Single Judge of the
Calcutta High Court that, before invoking the performance
guarantee, the appellant should assess the quantum of loss and
damages, and mention the ascertained figure, was not a ground to
restrain invocation of the bank guarantee.
In Ansal Engineering Projects Limited1, the appellant
sought an injunction, under the Arbitration Act, 1940 to restrain
the respondent from invoking the bank guarantee. The contract
was for construction of residential quarters. While a period was
stipulated for its completion, the construction was not completed
by then. The contract was terminated by the first respondent. As
the respondent sought to encash the bank guarantee, after
termination of the contract, the petitioner approached the Delhi
High Court contending that the amount due and payable by the
petitioner was required to be determined in the Suit; and till then,
the bank guarantee could not be invoked and payment could not
be made. The Delhi High Court rejected the contentions and
dismissed the petition. Aggrieved thereby, the petitioner carried the
matter in appeal to the Supreme Court. It is in this context that a
three Judge Bench of the Supreme Court observed:
It is settled law that bank guarantee is an
independent and distinct contract between the bank and the
beneficiary and is not qualified by the underlying transaction
and the validity of the primary contract between the person at
whose instance the bank guarantee was given and the
beneficiary. Unless fraud or special equity exists, is pleaded and
prime facie established by strong evidence as a triable issue, the
beneficiary cannot be restrained from encashing the bank
guarantee even if dispute between the beneficiary and the
person at whose instance the bank guarantee was given by the
Bank, had arisen in performance of the contract or execution of
the Works undertaken in furtherance thereof. The Bank
unconditionally and irrevocably promised to pay, on demand, the
amount of liability undertaken in the guarantee without any
demur or dispute in terms of the bank guarantee. The object
behind is to inculcate respect for free flow of commerce and trade
and faith in the commercial banking transactions unhedged by
pending disputes between the beneficiary and the contractor.
It is equally settled law that in terms of the bank
guarantee the beneficiary is entitled to invoke the bank
guarantee, and seek encashment of the amount specified in the
bank guarantee. It does not depend upon the result of the
decision in the dispute between the parties, in case of the
breach. The underlying object is that an irrevocable commitment
either in the form of bank guarantee or letters of credit solemnly
given by the bank must be honoured
..It is next contended by Shri G. Nageshwara Rao,
learned counsel for the petitioner that unless the amount due
and payable is determined by a competent court or tribunal by
mere invocation of bank guarantee or letter of credit pleading
that the amount is due and payable by the petitioner, which
was disputed, cannot be held to be due and payable in- a case.
The Court has yet to go into the question and until a finding
after trial, or decision is given by a court or tribunal that
amount is due and payable by the petitioner, it cannot be held
to be due and payable. Therefore, the High Court committed
manifest error of law in refusing to grant injunction as the
petitioner has made out a prima facie Strong case. We find no
force in the contention. All the clauses of the contract of the
bank guarantee are to be read together. Bank guarantee/letters
of credit is an independent contract between the bank and the
beneficiary. It does not depend on the result of the dispute
between the person on whose behalf the bank guarantee was
given by the bank and the beneficiary. Though the question
was not elaborately discussed, it was in sum answered by this
Court in Hindustan Steel Workers Construction Ltd. v. G.S.
Atwal & Co. (Engineers) Pvt. Ltd.. [1995] 6 SCC 76 at 79. This
Court had held in part 6 that the entire dispute was pending
before the arbitrator. Whether, and if so, what is the amount
due to the appellant was to be adjudicated in the arbitration
proceedings. The order of the learned Single Judge proceeds on
the basis that the amounts claimed were not and cannot be said
to be due and the bank has violated the understanding between
the respondent and the Bank in giving unconditional guarantee
to the appellant
..Similarly, the reasoning of the learned Single Judge
that, before invoking the performance guarantee, the appellant
should assess the quantum of loss and damages and mention
the ascertained figure cannot be put forward to restrain the
appellant from invoking the unconditional guarantee. This
reasoning would clearly indicate that the final adjudication is
not a pre-condition to invoke the bank guarantee and that is
not a ground to issue injunction restraining the beneficiary to
enforce the bank guarantee.. (emphasis supplied)
In Sumac International Ltd.,6, the appellant had entered
into an agreement with the respondent to design and prepare an
engineering layout, and to manufacture, procure and supply to the
appellant the machinery and equipment for a complete sugar plant.
The respondent was required to set-up the plant, and make it ready
for commercial production, by the stipulated date. The agreement
stipulated that time was the essence of the contract. In terms of
the agreement, the respondent furnished bank guarantees to the
appellant all of which were payable on demand. The respondent
did not complete the project even within the extended period. The
appellant cancelled the agreement, and claimed refund of the
advance paid by it. It, thereafter, invoked the bank guarantees in
respect of advance payment and the delivery guarantee. The
respondent filed a petition under the Arbitration Act for
appointment of an arbitrator, and two applications for interim relief
seeking stay of encashment of the bank guarantees. On the
application being dismissed by the Civil Court, they approached
the Allahabad High Court, and an injunction was granted
restraining the appellant from enforcing the bank guarantee.
Aggrieved thereby the appellant carried the matter in appeal and
the Supreme Court followed its earlier judgment in Singh
Consultants and Engineers (P) Ltd.7, wherein it was held that the
bank which gives the guarantee is not concerned with the relations
between the supplier and the customer, nor with the question
whether the supplier had performed his contractual obligation or
not, nor with the question whether the supplier is in default or not;
and the bank must pay according to the tenor of its guarantee on
demand without proof or condition. Thereafter the Supreme Court,
in Sumac International Ltd6, observed:
. Our attention was invited to a number of decisions on
this issue -- among them, to Larsen & Turbro Ltd. v. Maharashtra
State Electricity Board & Ors. (1995 [6] SCC 58), Hindustan Steel
Workers Construction Ltd. v. G.S. Atwal & Co. (Engineers) Pvt. Ltd.
(1995 [6] SCC 76) and to National Thermal Power Corporation Ltd.
v. Flowmore Pvt. Ltd. & Anr. (1995 [4] SCC 515). The latest
decision is in the case of State of Maharashtra & Anr. v. M/s
National Construction Company, Bombay & Anr. (JT 1996 [1] SC
156) where this Court has summed up the position by stating,
"The rule is well established that a bank issuing a guarantee is
not concerned with the underlying contract between the parties
to the contract. The duty of the bank under a performance
guarantee is created by the document itself. Once the
documents are in order the bank giving the guarantee must
honour the same and make payment ordinarily unless their is
an allegation of fraud or the like. The courts will not interfere
directly or indirectly to withhold payment, otherwise trust in
commerce internal and international would be irreparably
damaged. But that does not mean that the parties to the
underlying contract cannot settle the disputes with respect to
allegations of breach by resorting to litigation or arbitration as
stipulated in the contract. The remedy arising ex-contract is
not barred and the cause of action for the same is independent
of enforcement of the guarantee." The other recent decision is
in Hindustan Steelworks Construction Ltd. v. Tarapore & Co. &
Anr. (JT 1996 [6] SC 295).
Clearly, therefore, the existence of any dispute between
the parties to the contract is not a ground for issuing an
injunction to restrain the enforcement of bank guarantees.
There must be a fraud in connection with the bank guarantee.
In the present case we fail to see any such fraud. The High Court
seems to have come to the conclusion that the termination of the
contract by the appellant and his claim that the time was of the
essence of the contract, are not based on the terms of the contract
and, therefore, there is a fraud in the invocation of the bank
guarantee. This is an erroneous view. The disputes between the
parties relating to the termination of the contract cannot make
invocation of the bank guarantees fraudulent.. (emphasis
supplied).
In Gujarat Maritime Board2, the appellant invited bids for
the development of a port and, pursuant thereto, a letter of intent
was issued to the first respondent. The conditions of the LOI
required, among others, for lead promoters to submit a detailed
project report and to obtain several clearances. Towards
performance guarantee, a bank guarantee of Rs.5 crores (Rupees
five crores only) was required to be submitted to ensure submission
of the Detailed Project Report within twelve months, and obtaining
environment and other clearances within 18 months, failing which
the appellant was entitled to cancel the letter of intent, and the
bank guarantees was to stand forfeited. When the appellant
sought to invoke the bank guarantee, the first respondent invoked
the jurisdiction of the Gujarat High Court which allowed the Writ
Petition holding that, as there was a shift in the initial project
envisaged in the letter of intent, the contention that forfeiture must
follow notwithstanding any difficulty in execution of the contract
could not be accepted; and the parameters, for avoiding payment of
bank guarantee by the bank, could not be applied as, if the
decision of the appellant to cancel the contract and to award the
penalty of forfeiture was found to be erroneous and was set aside,
the question of allowing the appellant to encash the bank
guarantee would not arise. Aggrieved thereby the appellant carried
the matter in appeal, and it is in this context that the Supreme
Court observed that the bank guarantee is an independent contract
between the guarantor-bank and the guarantee-appellant; the
guarantee was unconditional; no doubt, the performance
guarantee was against the breach by the lead promoter viz. the first
respondent, but between the bank and the appellant, the specific
condition incorporated in the bank guarantee was that the decision
of the appellant, as to the breach, was binding on the bank; and
the justifiability of the decision was a different matter between the
appellant and the first respondent. After referring briefly to its
earlier judgment, in Himadri Chemicals Industries Ltd.21, the
Supreme Court observed:-
..The guarantee given by the Bank to the appellant
contains only the condition that in case of breach by the lead
promoter viz. the first respondent of the conditions of LoI, the
appellant is free to invoke the bank guarantee and the Bank
should honour it without any demur, merely on a demand from
GMB (appellant) stating that the said lead promoter failed to
perform the covenants. It has also been undertaken by the Bank
that such written demand from the appellant on the Bank shall be
conclusive, absolute and unequivocal as regards the amount
due and payable by the Bank under this guarantee. Between the
appellant and the first respondent, in the event of failure to
perform the obligations under the LoI dated 6-2-2008, the
appellant was entitled to cancel the LoI and invoke the bank
guarantee. On being satisfied that the first respondent has failed
to perform its obligations as covenanted, the appellant
cancelled the LoI and resultantly invoked the bank guarantee.
Whether the cancellation is legal and proper, and whether on
such cancellation, the bank guarantee could have been invoked
on the extreme situation of the first respondent justifying its
inability to perform its obligations under the LoI, etc. are not
within the purview of an inquiry under Article 226 of the
Constitution of India. Between the Bank and the appellant, the
moment there is a written demand for invoking the bank
guarantee pursuant to breach of the covenants between the
appellant and the first respondent, as satisfied by the appellant,
the Bank is bound to honour the payment under the guarantee.
.. (emphasis supplied)
As noted hereinabove, in Tarapore & Co.3, the A.P. High
Court had, relying on the judgment of the Supreme Court in
Raman Iron Foundry5, observed that any term in the agreement,
that one of the parties should be the sole Judge to quantify
damages, was invalid; and the liability to pay damages would arise
only if there was a breach of the contract which was for the
arbitrator to decide. This judgment of the A.P. High Court,
wherein reliance was placed on Raman Iron Foundry5, was later
set aside by the Supreme Court, in Tarapore & Co.3, holding that
the bank guarantee was an independent and distinct contract, and
was not qualified by the underlying transaction or the validity of
the primary contract between the person at whose instance the
bank guarantee was given and the beneficiary; what the High
Court had observed would apply only to the parties to the
underlying transaction or to the primary contract, but could have
no relevance to the bank guarantee given by the bank, as the
transactions between the bank and the beneficiary were
independent, and of a different nature; and in the case of an
unconditional bank guarantee, the nature of obligation of the bank
was absolute, and was not dependent upon any dispute or
proceeding between the party, at whose instance the bank
guarantee was given, and the beneficiary.
A similar view has been taken in the subsequent judgment of
the Supreme Court in G.S. Atwal & Co. (Engineers) Pvt. Ltd.18;
Ansal Engineering Projects Ltd.1; Sumac International Ltd.,6;
and Gujarat Maritime Board2. Reliance placed, on behalf of the
appellant, on Raman Iron Foundry5 and Gangotri Enterprises
Ltd.4, to contend that, till the claim of the first respondent for delay
liquidated damages is adjudicated by the arbitral tribunal, there
was no debt due justifying invocation of bank guarantee is only to
be noted to be rejected.
Even otherwise in Gangotri Enterprises Ltd.4 the bank
guarantee furnished by the appellant was with respect to a
contract which had been completed, but was sought to be
encashed for failure of the same contractor to perform their
obligations under another contract for which no bank guarantee
was furnished. Unlike in Gangotri Enterprises Ltd.4, in the
present case the bank guarantee sought to be encashed by the first
respondent is on the basis of their claim that the appellant had
failed to perform its obligation under the agreement for the
performance of which these bank guarantees were furnished.
Further the law laid down by the two Judge Bench of the Supreme
Court in Gangotri Enterprises Ltd.4 runs contrary to the law
declared by a three Judge Bench of the Supreme Court in Ansal
Engineering Projects Ltd1. When conflicting judgments of the
Supreme Court are brought to its notice, the High Court is bound
to follow the three Judge Bench judgment of the Supreme Court as
against the judgment delivered by a two Judge Bench.
As has been noted in the judgment in Gangotri Enterprises
Ltd.4 itself, the law laid down in Raman Iron Foundry5 was not
brought to the notice of the Court by the Learned Counsel
appearing for the parties. It is also evident that the fact that, in
Tarapore & Co3, the Supreme Court had over-ruled the judgment
of this High Court (which had followed the judgment of the
Supreme Court in Raman Iron Foundry5), and had held that the
contract of bank guarantee was independent of the underlying
contract; and the beneficiary, while invoking the bank guarantee,
could be the sole judge of the question of breach of contract was
not brought to the notice of the Supreme Court in Gangotri
Enterprises Ltd.4. Reliance placed on behalf of the appellant, on
Gangotri Enterprises Ltd.4, is therefore misplaced.
The contentions that, a term in a bank guarantee making the
beneficiary the sole judge on the question of breach of contract and
the extent of loss or damages would be invalid, and no amount can
be said to be due till an adjudication in that behalf is made either
by a court or a arbitrator, would be applicable only to the parties to
the underlying transaction or the primary contract, but can have
no relevance to the bank guarantee given by the bank, as the
transaction between the bank and the beneficiary is independent
and of a different nature. In the case of an unconditional bank
guarantee, the nature of obligation of the bank is absolute and not
dependent upon any dispute or proceeding between the party at
whose instance the bank guarantee is given and the beneficiary.
(Tarapore & Co.3; G.S. Atwal & Co. (Engineers) Pvt. Ltd.18; Ansal
Engineering Projects Ltd.1).
Where the bank gurantee is irrevocable and unconditional,
and the beneficiary is made the sole judge on the question of
breach of performance of the contract and the extent of loss or
damages, an injunction restraining the beneficiary from invoking
the bank guarantees cannot be granted. (Tarapore & Co.3; Larsen
and Toubro Limited17; G.S. Atwal & Co (Engineers) Pvt. Ltd.18).
Notwithstanding the dispute between the contractor and the party
giving the contract, the bank is under an obligation to discharge its
liability as per the terms of the bank guarantee. (Tarapore & Co.3;
General Electric Technical Services Company Inc. v. Punj
Sons (p) Ltd. ). Whether the bank guarantee is unconditional or if
there is a stipulation in the bank guarantee that the bank should
pay on demand without demur or that the beneficiary shall be the
sole judge not only on the question of breach of contract but also
with respect to the amount of loss or damages, the obligation of the
bank would remain the same. This obligation must be discharged
in the manner provided in the bank gurantee. (Tarapore & Co.3).
The Bank guarantee/letter of credit does not depend on the
result of the dispute between the person on whose behalf the bank
guarantee was given by the bank and the beneficiary. The final
adjudication is not a pre-condition to invoke the bank guarantee,
and that is not a ground to issue injunction. (Tarapore & Co.3;
G.S. Atwal & Co. (Engineers) Pvt. Ltd.18; Ansal Engineering
Projects Ltd.1).
The duty of the bank, under the guarantee, is created by the
document itself. Once the documents are in order, the bank giving
the guarantee must ordinarily honour the same and make
payment. Courts will not interfere directly or indirectly to withhold
payment, otherwise trust in commerce (internal and international)
would be irreparably damaged. But that does not mean that the
parties to the underlying contract cannot settle the disputes with
respect to allegations of breach by resorting to litigation or
arbitration as stipulated in the contract. The remedy arising ex
contractu is not barred, and the cause of action for the same is
independent of enforcement of the guarantee. (Sumac
International Ltd.6; National Construction Co.11; Tarapore &
Co.3; United Commercial Bank12; Centax (India) Ltd.10; ICICI
Bank Ltd13; Singh Consultants and Engineers (P) Ltd.7).
VII. FRAUD:
Sri D. Prakash Reddy, Learned Senior Counsel appearing on
behalf of the appellant, would submit that, if their claim was
genuine, the first respondent would have imposed liquidated
damages in the monthly bills of the appellant as required under
the contracts; two days after commencement of commercial
operations of Unit-II, the first respondent made a false claim for
liquidated damages for the alleged delay in execution of the works
by the appellant; this conduct is fraudulent, and a false claim is
made only to avoid making payment of the amounts legitimately
due to the appellant, and to encash the performance guarantees
illegally; and the first respondent has simultaneously claimed
liquidated damages from the appellant and CTC, though the entire
delay is attributable to CTC alone.
On the other hand Sri C.V. Mohan Reddy, Learned Senior
Counsel appearing on behalf of the first respondent, would submit
that the delay liquidated damages are claimed under two contracts
which are neither inter-linked/connected nor dependent on each
other; the quantum of damages has been calculated on the basis of
different contract prices, and different number of days of delay in
completing separate works; and the appellant has not established
fraud, much less a fraud in relation to the contract of bank
guarantee which is independent of the underlying contract; it is
not even the case of the appellant that the first respondent had
obtained bank guarantees from the banks on the basis of
fraudulent representations, and the banks had knowledge of such
fraud when it issued the bank guarantees; simultaneous letters
claiming Liquidated Damages from CTC and the appellant does not
constitute fraud; and it may, possibly, be considered a disputed
question regarding liability for Liquidated Damages which can only
be the subject matter of arbitration.
The fraud must be in connection with the bank guarantee
itself. (Sumac International Ltd6). If the bank detects, with a
minimal investigation, the fraudulent action of the beneficiary,
payment can be refused. (Edward Owen Engineering Ltd.9; Singh
Consultants and Engineers (P) Ltd.7). As a Bank Guarantee
constitutes an agreement between the Banker and the Principal,
albeit, at the instance of the promisor, it is primarily for the bank
to plead a case of fraud when a contract of guarantee is sought to
be invoked, and not for a promisor to set up a case of breach of
contract. (Techtrans Construction India Pvt Ltd & Ksheeraabad
Constructions Pvt. Ltd.20; Reliance Salt Ltd. v. Cosmos
Enterprises ; Sumac International Limited6; ICICI Bank Ltd13).
In Dwarikesh Sugar Industries Ltd.30, the Supreme Court
held:-
Coming to the allegation of fraud, it is an admitted fact that in
the plaint itself, there was no such allegation. It was initially only in the
first application for the grant of injunction that in a paragraph it has been
mentioned that the appellant herein had invoked the bank guarantee
arbitrarily. This application contains no facts or particulars in support of the
allegation of fraud. A similar bald averment alleging fraud is also contained
in the second application for injunction relating to Bank Guarantee No.
40/47. This is not a case where Defendant 1 had at any time alleged fraud
prior to the filing of injunction application. The main contract, pursuant to
which the bank guarantees were issued, was not sought to be avoided by alleging
fraud, nor was it at any point of time alleged that the bank guarantee was issued
because any fraud had been played by the appellant. We have no manner of
doubt that the bald assertion of fraud had been made solely with a view to
obtain an order of injunction. In the absence of established fraud and not a
mere allegation of fraud and that also having been made only in the
injunction application, the court could not, in the present case, have
granted an injunction relating to the encashment of the bank
guarantees.. (emphasis supplied)
Pleadings are only allegations or averment of facts. Mere
pleading do not make a strong case of prima facie fraud. The
material and evidence has to show it. (Svenska Handelsbanken16).
A mere allegation in the pleadings that the contractee,
fraudulently, invoked the bank guarantee would not amount to
establishing clear fraud or fraud of an egregious nature.
(Techtrans Construction India Pvt Ltd & Ksheeraabad
Constructions Pvt. Ltd.20; Himadri Chemicals Industries
Limited21). Fraud, like any other charge of a criminal offence
whether made in civil or criminal proceedings, must be established
beyond reasonable doubt. A finding as to fraud cannot be based on
suspicion and conjecture. (Svenska Handelsbanken16; A.L.N.
Narayanan Chettyar v. Official Assignee, High Court Rangoon ).
Unless fraud is pleaded and, prime facie, established by
strong evidence as a triable issue, the beneficiary cannot be
restrained from encashing the bank guarantee even if the dispute
between the beneficiary and the person, at whose instance the
bank guarantee was given by the Bank, had arisen in the
performance of the contract or execution of the works undertaken
in furtherance thereof. (Ansal Engineering Projects Ltd.1).
The established exception to the contractual obligations of
the confirming bank to the seller, is that where the seller, for the
purpose of drawing on the credit, fradulently presents, to the
confirming bank, documents that contain (expressly or by
implication) material representations of fact that to his knowledge
are untrue. This exception of fraud on the part of the beneficiary,
seeking to avail himself of the credit, is a clear application of the
maxim ex trupi cause non oritur actio or 'fraud unravels all', the
Courts will not allow their process to be used by a dishonest
person to carry out a fraud. (Singh Consultants and Engineers (P)
Ltd.7; UCM (Investment)8).
The disputes between the parties, relating to the termination
of the contract, cannot make invocation of the bank guarantees
fraudulent, nor is it a ground for issuing an injunction to restrain
the enforcement of the bank guarantees. (Sumac International
Ltd.6). Clear fraud, of which the bank has notice, is an exception
to the rule that the bank guarantee must be honoured in
accordance with its terms. (Sumac International Ltd.6; Singh
Consultants and Engineers (P) Ltd.7).
A fraud, in connection with a bank guarantee, should be
such as to vitiate its very foundation. If there is such a fraud, of
which the beneficiary seeks to take advantage, he can be restrained
from doing so. (Dwarikesh Sugar Industries Ltd.30; Svenska
Handelsbanken16; Larsen & Toubro Ltd.17; G.S. Atwal & Co.
(Engineers) (P) Ltd.18 and Sumac International Ltd.6). The bank's
obligations do not extend to protect the person responsible for the
fraud. But, the banker must be sure of his ground before declining
to pay. The nature of the fraud that the Courts talk about is fraud
of an "egregious nature as to vitiate the entire underlying
transaction". (Edward Owen Engineering Ltd.9; Singh
Consultants and Engineers (P) Ltd.7). The fraud perpetrated
would be of an egregious nature when it is of a gross nature which
shakes the conscience of the Court, and the said fraud is known to
the parties, including the party representing as well as the bank.
(Bhandari Engineers and Builders Pvt. Ltd. v. Vijaya Bank ).
The Court would be slow in granting an order of injunction,
restraining realisation of a bank guarantee, except when it is
clearly shown that a fraud of a grievous nature has been committed
and to the notice of the Bank. (Millenium Wires (P) Ltd.31; ICICI
Bank Ltd13).
Commission of fraud must be confined to acts committed by
a party to a contract with the intention to deceive another party or
to induce him to enter into a contract. Fraud, which vitiates the
contract, must have a nexus with the acts of the parties prior to
entering into the contract. Subsequent breach of contract on the
part of a party would not vitiate the contract itself. (Reliance Salt
Ltd.35; ICICI Bank Ltd13). Fraud, which vitiates the contract, must
have a nexus to the acts of the parties prior to entering into the
contract. No such allegation is made by the appellant in the
petition filed by them under Section 9 of the 1996 Act. They have
not even stated that the bank-guarantees were obtained by fraud.
Fraud alleged against the contractee is under the contract between
the contractor and the contractee. (ICICI Bank Ltd13).
An injunction may be granted where it is proved that the
bank knew that any demand for payment already made, or which
may thereafter be made, will clearly be fraudulent. The evidence
must be clear, both as to the fact of fraud and as to the banks
knowledge. It would, normally, not be sufficient that this rests on
the uncorroborated statement of the customer, for irreparable
damage can be done to a banks credit in the relatively brief time
which must elapse between the granting of such an injunction,
and an application by the bank to have it discharged. (Dwarikesh
Sugar Industries Ltd.30; Bolivinter Oil SA15; Singh Consultants
and Engineers (P) Ltd7; Millenium Wires (P) Ltd.31; ICICI Bank
Ltd13; Techtrans Construction India Pvt Ltd & Ksheeraabad
Constructions Pvt. Ltd.20; Sumac International Ltd.6).
It is not the bank which is pleading fraud, but the appellant
at whose behest the bank had furnished the bank-guarantees to
the first respondent. The appellant has not even stated, in the
petition filed by them before the Commercial Court, that the fraud,
allegedly committed by the first respondent, was to the knowledge
of the banks. Vague allegations of fraud cannot form the basis for
grant of an injunction restraining invocation of the bank-
guarantee. The duty cast on the banks is created by the bank
guarantee itself, and they are not concerned with the underlying
contract between the appellant and the first respondent. (ICICI
Bank Ltd13).
As noted hereinabove, fraud must not only be pleaded but
must also be established. The fraud must be in connection with
the bank guarantee itself. It must also be established that the
bank knew that any demand for payment already made, or which
may thereafter be made, will be clearly fraudulent. The duty cast
on the bank to make payment on demand is in terms of the bank
guarantee itself, and is not related to the underlying contract
between the person at whose behest the bank guarantee was
furnished and the beneficiary. Further the fraud must be of an
egregious nature which shocks the conscience of the Court. Such
fraud must be known to the parties and to the bank.
The appellant does not allege fraud on the part of the first
respondent in obtaining the bank guarantee. Their entire case is
founded on the allegation that the first respondent made a false
claim for liquidated damages in execution of the works by the
appellants two days after the commencement of commercial
operations of Unit II, and such a false claim was made only to avoid
making payment of the amounts due to the appellant, and to
illegally encash the bank guarantee. The appellant alleges fraud
because the first respondents claim for liquidated damages is
contrary to the terms of the underlying contract. The amounts
which the appellant claims as due to them is also based on their
claim of having performed their obligations under the primary
contracts. It is not even pleaded by the appellant, much less
proved, that the first respondent had fraudulently obtained the
bank guarantee. It is evident, therefore, that the first exception to
rule against grant of injunction for invocation of bank guarantee,
i.e., the bank guarantee has been obtained by fraud, is not
attracted.
VIII. SPECIAL EQUITIES:
Sri D. Prakash Reddy, Learned Senior Counsel appearing on
behalf of the appellant, would submit that the expression
extraordinary special equities, or irretrievable injustice / injury,
have such meaning as may be justified with reference to the facts
and circumstances of each case; the expression special equities
extends to cases which would prick the judicial conscience of the
Court; issues and disputes, arising out of the parent/underlying
contract, can be looked into in order to ascertain whether or not
special equities exist in favour of the party seeking injunction; the
total amount which would be wrongfully gained by the first
respondent, by its wrongful exercise of unilaterally adjusting
monies towards liquidated damages, would be around Rs.700.00
Crores; this would cause severe and irreparable loss to the
appellant, its liquidity and its entire business as such a huge
amount would be wiped out from its available cash flows; this
could also result in the account of the appellant becoming a non-
performing asset, besides crippling their business; on the other
hand, if stay on unilateral adjustment of such amounts and
invocation of performance guarantees is granted, the first
respondent would be well protected as the bank guarantees would
be kept alive; the appellant also undertakes to keep the bank
guarantees alive throughout the period of arbitration, and is also
willing to furnish a bank guarantee for the interest amount
calculated at the rate offered by banks, ordinarily, on savings; the
appellant has already invoked the arbitration clause; it has issued
arbitration notice on 27.05.2017, and has appointed Justice Cyriac
Joseph (former Judge of the Supreme Court) as its nominee
arbitrator; the first respondent has also replied to the arbitration
notice, and has appointed Justice T.S. Thakur (Former Chief
Justice of India) as their nominee arbitrator vide their letter dated
25.06.2017; the interests of the parties would be well protected,
and the ends of justice met, if encashment of the bank guarantee is
injuncted pending the decision of the Arbitral Tribunal; and the
appellant would not be able to recover damages from the first
respondent as all the assets of the first respondent have been
mortgaged to its secured creditors, it has been suffering abnormally
escalating losses, etc.
Learned Senior Counsel would also submit that the
appellant would not be able to recover the said monies from the
first respondent even if they succeed before the arbitral tribunal;
the Directors Report, of the first respondent for the year 2015-
2016, establishes that the first respondent made a loss of Rs.15.48
crores for the year ending 31.03.2015, and by the year ending
31.03.2016 the losses jumped to more than Rs.42.76 crores; the
audited Balance Sheet of the first respondent for the year 2016-
2017, as e-mailed by the officer of the first respondent upon the
request of their shareholder, establishes that the first respondent
has suffered losses of around Rs. 328.46 Crores during the
Financial Year 2016-17; the accumulated losses of the first
respondent, for the three years 2014-15 to 2016-17, exceed
Rs.386.49 Crores; it is clear that they have been supplying
electricity incurring huge losses, and the losses would continue to
mount year on year; the details of the Mortgaged Assets in the Directors
Report, and the Audited balance sheet, establish that all its
movable and immovable assets have been mortgaged to
banks/secured creditors against loans exceeding Rs.6000 crores;
even the performance bank guarantees, furnished by the appellant,
have been assigned by the first respondent to the banks; they do
not have any other independent assets, the main promoter of the
first respondent i.e., Sembcorp Pte Ltd is a Singapore based
company, and holds 88% shares in it; the first respondent is
distinct and independent of its parent company; and the secured
debt of banks would take priority over any other debt, including
the amounts that would be payable to the appellant by the first
respondent, in the event of their succeeding in the arbitration
proceedings.
Learned Senior Counsel would further submit that the
Balance Sheet of the first respondent for the year 2016-17 reflects
retention moneys of Rs.304 crores, and Rs.27 crores towards
unpaid bills payable by the first respondent to the appellant; the
letters dated 02.02.2017 and 31.03.2017 sent by the first
respondent itself shows that the amount payable to the appellant,
including the retention money and running account bills, are
Rs.367.47 Crores; the maximum liquidated damages that can be
claimed is already retained by the first respondent from the
amounts payable to the appellant; if the first respondent is allowed
to encash the bank guarantees illegally, they would be in
possession of more than Rs.700 crores (Rs. 367.47 crores + Rs.
343.1 crores) belonging to the appellant; the future of thermal
electricity generating companies is bleak as supply is far in excess
of demand; in view of the drastic fall in the price of power being
sold by generating companies, particularly renewable energy, most
of the thermal power companies are not able to recover even the
cost of fuel, let alone the interest cost payable to the lenders, and
the employee costs; rating agencies, including CRISIL, estimate
that around 46,000 mw of power generation projects (36,000 mw
coal-based and 10,000 mw gas based) are in distress, and loans to
these projects, of around Rs.2.1 lakh crores, is at complete risk;
none of the cases, cited by the first respondent, have dealt in detail
with the aspect of special equities/irretrievable injury or damages
in close reference to the facts of the present case; and the appellant
herein is substantially relying on the exceptions relating to special
equities and irretrievable damage that would be caused to the
appellant in the event illegal encashment of the bank guarantees
are permitted.
On the other hand Sri C.V. Mohan Reddy, Learned Senior
Counsel appearing on behalf of the first respondent, would submit
that no case of irretrievable/irreparable injury was pleaded, or
established. by the appellant to seek an injunction against
encashment of the Bank Guarantees; the nature of irretrievable
injury, required to be established in the case of bank guarantees,
must be of the nature referred to in Itek Corporation v. First
National Bank of Boston ; in the present case, admittedly, the
facility is into commercial operation and is generating revenue; the
appellant has an adequate remedy available in law, in the form of
arbitration, to recover its dues, if any, from the first respondent;
the first respondents parent company i.e Sembcorp Utilities Pvte.
Limited has extended its Corporate Guarantee (to the tune of Rs.
7604 Crores) as part of the overall security package to the lenders,
which covers the term loan and the working capital facilities
enjoyed by the first respondent; in addition, Sembcorp Utilities
Pvte. Limited has infused Rs. 4,240 Crores into the first respondent
to repay part of the term loan facilities, and to support the cash
flows; this demonstrates the parent companys commitment
towards the projects, and forms the back-bone of the first
respondents financial resources; due to the delay caused by the
appellant, the first respondent has already suffered irretrievable
losses in terms of reputation and business, monetary losses,
including payment of interest during construction to its lenders,
cost overruns over and above the project cost, increase in pre-
operative expenses, payment of penalty to Power Grid Corporation
of India Limited, the Telangana DISCOM due to delay in evacuation
of power, and Krishnapatnam Port Company Limited under a Port
Services Agreement; due to various delays, inactions, omissions
and breach of its contractual obligations by the appellant, the first
respondent has incurred losses which are recoverable from the
appellant, including costs incurred towards de-scoping of works
from the contract price, labour cess, pending
roads/drains/painting works and purchase of spare parts etc;
such costs/losses are of a value which exceeds the pre-estimated
liquidated damages; in the event injunction is granted by this
Court, it is the first respondent which would suffer further
irretrievable injury, and not the appellant; most of the
averments/submissions made by the appellant, claiming special
equities in its favour, are also disputed questions of fact, and
ought to be dealt with in the arbitration; the appellant has not filed
any supporting document, along with the Section 9 petition, to
establish special equities; it was only when the first respondent
pointed this out in its counter to the Section 9 petition that, as an
afterthought, the appellant has filed additional documents along
with its reply thereto; the first respondent has always been, and
continues to be committed to, making regular payments to the
appellant, subject to their achieving the respective payment
milestones; all dues have been paid till date; in terms of the
payment terms, agreed under Appendix B of the EPC Contracts,
nothing is due till successful achievement of the provisional
acceptance of Units 1 and 2, as evidenced by the issuance of the
provisional acceptance certificate by the first respondent; the
appellant has deliberately not mentioned that payment, under the
EPC Contracts, were progressive in nature and dependant on
completion of the respective milestones; payment, which was to
become due upon successful completion of the milestone of
provisional acceptance, has not become due as on date since
provisional acceptance has not been achieved by the appellant;
since the conditions stipulated in Article 6.3 has not been satisfied,
and provisional acceptance has not been achieved as on date, the
said amount is not payable to the appellant; the amounts,
mentioned in the first respondents letter dated February 02, 2017,
are not retention amounts, but milestone payments which are to be
paid only upon successful completion of the milestone of
provisional acceptance test, and not otherwise; and the same ought
not to be treated as an admission of outstanding liability by the
first respondent to the appellant.
In Gammon-OJSC Mosmetrostroy JV v. Chennai Metro
Rail Limited , the Madras High Court held:-
.It is claimed that 60% of the work was already completed by Joint
Venture and therefore, the remaining work to be completed is only 37%. Even to
complete the said work, the lead party namely GAMMON sought permission from
CMRL to exercise the step in right as contemplated under Clause 19.11. The said
request was not considered by CMRL for various reasons. Admittedly, the CMRL
has extended the time for completion of the contract and the extended time has
not admittedly expired on the date of issuing the termination order. The
GAMMON has not simply sought for permission to bring in a third party by
exercising the step in right without making any bonafide attempt. On the other
hand, it is a matter of fact that GAMMON sought to bring in an Italian company
for completing the remaining work. This was also not considered by CMRL. Such
attempt of GAMMON certainly, show the bonafide on their part in completing the
project. It is also claimed that the CMRL has not settled some bills in respect of
the works already completed to the tune of Rs. 100 crores. However, this claim is
denied by CMRL by stating that the applicant cannot expect CMRL to pump in a
sum of Rs. 100 crores when the JV has admittedly failed and its JV partner had
abandoned the project. Needless to say that this claim by the applicant and
denial by the respondent is a matter to be gone into by the Arbitral Tribunal.
These are all the facts prima facie indicate that termination of the contract
followed by the attempt to invoke the bank Guarantee would certainly cause
irretrievable injury to the applicant. Inspite of all those facts, if injunction is
refused, in my considered view, it would cause to the applicant not only an
irretrievable injury but also irretrievable injustice. In fact, the very termination of
contract, not stayed by this Court, has already caused irretrievable injury.
Whether termination is valid or not is to be decided by the Arbitral Tribunal.
However, as the termination, not stayed by this Court has caused irretrievable
injury to the applicant, pending disposal of the arbitral proceedings, further
injury can be averted by granting the injunction against invoking Bank
Guarantees. It should also be noted that not granting of stay of termination by
this Court in this proceedings is not based on merits of the rival contentions of
the parties, but on the reason that termination has already come into force and
staying the same would revive the party to their original position. Further, it is a
matter of fact that already the CMRL has invoked two bank guarantees which are
the subject matter in other two applications in Application Nos. 730 & 733 of
2015. As the Bank Guarantees have been invoked in those matters, those
applications were dismissed by this Court on 07.08.2015.
.Admittedly, the Bank Guarantees given by the applicant are alive
and the CMRL can at any time, invoke the same. Therefore, the interest of
the CMRL is well protected by the Bank Guarantees furnished by the
applicant. If those Bank guarantees are continued to be alive during the
arbitral proceedings and even thereafter, during the pendency of the
proceedings under Section 34 of the said Act, the interest of the CMRL is in
no way be affected or prejudiced. On the other hand, if the Bank guarantees
are invoked in the mean time, certainly, the applicant would be put to great
financial strain as the concerned Banks which had given Bank Guarantee
would ultimately, bounce upon the applicant to pay the money. In my
considered view, this would certainly make the applicant to suffer even
before the Arbitral Tribunal decides the main dispute between the
parties (emphasis supplied)
In P.D. Alkaram Pvt. Ltd. v. Canara Bank , the Delhi High
Court held:-
The plaintiff has also placed on record sufficient material, in the
form of various invoices issued by M/s. Hindalco Industries Ltd.; bill-wise details
of aluminium procured, corresponding to drawings filed per Annexure P-1
(Colly.), which, prima facie, shows that it had procured fabrication material
worth more than Rs.20 lacs, advanced by the defendant. In the light of this
material, over-emphasis of learned counsel for the defendant on the above
extracted last part of the plaintiff's letter dated 29 May 1996, to the effect that it
would start mobilising itself for the job only when the site is ready, renders it of
no substance. It may not be out of place to mention that during the course of
hearing it was suggested to learned counsel for the defendant that the
purchased material stated to be lying at the premises of the plaintiff may be got
inspected by the defendant and if deemed fit it could be released to the
defendant for being used in the building under construction. It seems that the
inspection was carried out because it was stated at the bar by learned counsel
for the defendant that the material was not complete and it was on that plea
that the defendant did not show any interest in the material. In this view of
the matter, plaintiff's pleas of defendant's failures and fraudulent
misrepresentation apart, to be dealt with on merits later in due course,
when the plaintiff prima facie, seems to have utilised the entire
mobilization advance for procuring the material for use on the defendant's
building, as per the approved specifications, I feel that the plaintiff has
successfully brought out special circumstances which are sufficient to
make the present case an exceptional one justifying interference by
restraining defendant no.2 from enforcing the bank guarantee in question.
As a matter of fact having gained knowledge that the plaintiff has procured
substantial material, even invocation of the bank guarantee after oral
termination of the contract appears to be fraudulent. Bearing in mind all
these factors, I find that special equities are in favor of the plaintiff and if
the defendant is allowed to encash the bank guarantee in question, it
would amount to irretrievable injustice to the plaintiff. I am, Therefore,
satisfied that it is a fit case where defendant No.1 needs being interdicted from
encashing the bank guarantee in question (emphasis supplied).
In Hindustan Construction Co. Ltd.14, the Supreme Court
held:-
..We have scrutinised the facts pleaded by the parties in respect
of both the bank guarantees as also the documents filed before us and we
are, prima facie, of the opinion that the lapse was on the part of the
defendants who were not possessed of sufficient funds for completion of the
work. The allegation of the defendants that HCCL itself had abandoned the
work does not, prima facie, appear to be correct and it is for this reason that
we are of the positive view that the special equities are wholly in favour of
HCCL (emphasis supplied)
In Universal Publishers Pvt. Ltd. v. Australian Executor
Trustees Limited , the Supreme Court of New Southwales held:-
.According to AETs audited accounts for the year ended 30 June
2013, it had net assets of $33,029. AET however is a trustee. It is said that it
holds the land at Macquarie Park as custodian for Hyperion Properties
Syndicates Limited which in turn is a responsible entity of a managed investment
scheme. Prima facie, AET would be entitled to be indemnified out of the assets of
the trust, that is the managed investment scheme, in respect of liabilities it
properly incurred in discharge of its functions as trustee. There is nothing to
suggest that it would not be entitled to such an indemnity if it were liable to pay
damages or to make restitution to Universal if it received payment under the
bank guarantee but it was ultimately found that Universal had not been in
breach of the lease.
If that were the conclusion at the final hearing, it does not appear that
AETs right of indemnity out of the trust assets to meet its liability to pay damages
or to make restitution would be sufficient to provide it with the funds to pay
damages or makes restitution. If the bank guarantee were called on and AET
spent the money as it evidently proposes to do on site remediation, but it
was held at a final hearing that Universal was not in breach of the lease,
then it appears likely that AET would not be able to meet an award of
damages for restitution.
I conclude that damages are unlikely to be an adequate remedy if it
were ultimately held that AET was not entitled to call on the bank
guarantee. This is the governing consideration also when deciding where
the balance of convenience lies.. (emphasis supplied).
In Gammon39, the Madras High Court was of the view that
completion of 60% of the work by Gammon, termination of the
contract by the respondent before expiry of the extended time for
completion of the contract, and the bonafide attempt of Gammon to
bring in an Italian Company to complete the remaining work, were
all factors which, prima facie, indicated that the termination of the
contract, followed by the attempt to invoke the bank guarantee,
would cause irretrievable injury to Gammon.
In P.D. Alkaram Pvt. Ltd40, the Delhi High Court opined
that the documents placed on record, prima facie, showed that the
plaintiff had procured fabrication material from the amounts
advanced by the defendant; the plaintiff had, prima facie, utilized
the entire mobilization advance for procuring material for being
used on the defendants building as per the approved specification;
and these factors constituted special equities in favour of the
plaintiff.
In Hindustan Construction Company Ltd14, the Supreme
Court was, prima facie, of the opinion that the defendants did not
possess sufficient funds for completion of the work; their allegation
that the appellant had abandoned the work did not, prima facie,
appear to be correct; and they were of the view that special equities
were wholly in favour of the appellant. As noted hereinabove, the
Supreme Court, in Hindustan Construction Company Ltd14, was
satisfied that the subject bank guarantees were neither
unconditional nor unequivocal. As the Supreme Court was
satisfied that invocation of bank guarantee was subject to
fulfillment of certain conditions in the underlying contract, it took
note of the dispute between the parties, under the said contract, to
examine whether there were special equities in favour of the
appellant.
In Universal Publishers Pvt. Ltd41, the Supreme Court of
New South Wales observed that the respondent would not be able
to meet an award of damages for restitution; and damages were
unlikely to be an adequate remedy if it were ultimately held that
the respondent was not entitled to call on the bank guarantee. As
shall be detailed hereinafter, the Supreme Court, in Sumac
International Ltd6, has held that irretrievable injury must be of the
kind which was the subject matter of the decision in Itek
Corporation38. Before doing so, it would be useful to understand
what constitutes special equities and irretrievable
injustice/injury, as it is only if they are in favour of the appellant,
would this Court be justified in restraining the first respondent
from invoking the bank guarantees.
The expression 'extraordinary special equities', or
'irretrievable injustice/injury', are not defined expressions. A case
of special equities, in all circumstances, may not be a case of
irretrievable injustice/injury. (Continental Construction Ltd.33).
However, special circumstances, such as there is a serious dispute
on the question as to who has committed breach of the contract, or
the contractor has a counter claim against the contractee, or the
dispute between the parties has been referred to the arbitrators, or
that no amount can be said to be due and payable by the
contractor to the contractee till the arbitrator declares their award,
are not sufficient to make the case exceptional justifying
interference by restraining the contractee from enforcing the bank
guarantees. (Tarapore & Co.3).
An irrevocable commitment, either in the form of confirmed
bank guarantee or irrevocable letter of credit, cannot be interfered
with expect when a case of apprehension of irretrievable injustice
has been made out. (Tarapore & Co.3; Singh Consultants &
Engineers (Pvt.) Ltd7). Cases of grant of injunction, restraining
enforcement of the bank guarantee, arise when allowing
encashment of an unconditional bank guarantee would result in
irretrievable harm or injustice to one of the parties. Since, in most
cases, payment of money under such a bank guarantee would
adversely affect the bank, and its customer at whose instance the
guarantee is given, the harm or injustice contemplated under this
head must be of such an exceptional and irretrievable nature as
would override the terms of the guarantee, and the adverse effect of
such an injunction on commercial dealings in the country.
(Dwarikesh Sugar Industries Ltd.30; Svenska Handelsbanken16;
Larsen & Toubro Ltd.17; G.S. Atwal & Co. (Engineers) (P) Ltd.18
and Sumac International Ltd.6).
A mere apprehension, that the other party will not be able to
pay, is not enough. (Sumac International Ltd.6; Singh
Consultants and Engineers (P) Ltd.7). For irretrievable injury to
result, the circumstance must be such which would make it
impossible for the guarantor to reimburse himself, if he ultimately
succeeds, or when irretrievable harm or injustice, to one of the
parties concerned, has resulted. This should be decisively
established, and it must be proved to the satisfaction of the Court
that there would be no possibility, whatsoever, of recovery of the
amount from the beneficiary, by way of restitution. (Dwarikesh
Sugar Industries Ltd.30; Millenium Wires (P) Ltd.31; ICICI Bank
Ltd13).
The question, which necessitates examination, is whether
the appellant has made out a case of irreparable injury, by proof of
special equities for the Court to grant injunction to restrain the
first respondent from encashing the bank guarantee. As noted
hereinabove, mere apprehension that the first respondent would
not able to repay the amounts, which it would receive on
encashment of the bank guarantees, is not enough to restrain
them from invoking the bank guarantees. The appellant claims
that they would also suffer huge loss if the first respondent were to
unilaterally adjust the amount claimed as liquidated damages, with
the amounts they would receive on encashment of the bank
guarantees. This would, also, not constitute special equities
justifying grant of an order of injunction restraining the first
respondent from encashing the bank guarantees.
The allegation that the first respondent has suffered a loss of
Rs.328.46 Crores, during the financial year 2016-17, is based on
the figures reflected in their provisional balance sheet, which had
not been approved by their shareholders. While this accumulated
loss of the first respondent, for the three years 2014-15 to 2016-17,
is highlighted as exceeding Rs.386.49 Crores, and emphasis is
placed by the appellant on the fact that the movable and
immovable assets of the first respondent have been mortgaged to
the banks/secured creditors against loans exceeding Rs.6,000
Crores, it is contended, on behalf of the first respondent, that its
parent company-SembCorp Utilities Pte Ltd has extended a
corporate guarantee of Rs.7,604 Crores as part of the overall
security package to the lenders, which covers the term loan and the
working capital facilities enjoyed by the first respondent; and, in
addition, they had infused Rs.4,240 Crores into the first
respondent to repay a part of the term loan facilities, and to
support the cash flows of the first respondent.
As noted hereinabove, Irretrievable injury must be of the
kind which was the subject-matter of the decision in Itek
Corporation38. In that case an exporter in the USA entered into an
agreement with the Imperial Government of Iran, and sought an
order terminating its liability on stand by letters of credit issued by
an American Bank in favour of an Iranian Bank as part of the
contract. The relief was sought on account of the situation created
after the Iranian revolution when the American Government
cancelled the export licences in relation to Iran, and the Iranian
Government had forcibly taken 52 American citizens as hostages.
The US Government had blocked all Iranian assets under the
jurisdiction of the United States, and had cancelled the export
contract. The Court upheld the contention of the exporter that any
claim for damages against the purchaser, if decreed by the
American Courts, would not be executable in Iran under these
circumstances; and realisation of the bank guarantee/letters of
credit would cause irreparable harm to the plaintiff. (Sumac
International Ltd.6; Singh Consultants and Engineers (P) Ltd.7).
The exceptional circumstances which make it impossible for
the guarantor to reimburse himself, if he ultimately succeeds,
should be decisively established, and a mere apprehension, that
the other party will not be able to pay, is not enough. In Itek,
there was certainty on this issue and there was good reason in that
case for the Court to be, prima facie, satisfied that the guarantors
i.e. the bank and its customer would be found entitled to receive
the amount paid under the guarantee. In the cases on hand the
petitions, filed under Section 9 of the 1996 Act, do not conclusively
establish that the appellant is likely to suffer irretrievable injury, or
that it is impossible for them to reimburse themselves, from the
first respondent, even if they were to succeed later before the
arbitral Tribunal.
In Sumac International Ltd6, it was contended, on behalf of
the respondent, that irretrievable injustice would be caused to
them if the bank guarantees were allowed to be realised, because
the appellant was a sick industrial company in respect of which a
reference was pending before the BIFR under the Sick Industrial
Companies (Special Provisions) Act, 1985 (SICA for short); and
even if it succeeded before the Arbitrator, it would not be able to
realise its claim from the appellant. The Supreme Court held that
the mere fact that a reference under SICA was pending before the
BIFR was not sufficient to bring the case within the ambit of the
"irretrievable injustice" exception; under Section 16(4) of SICA,
where the BIFR deems it fit to make an inquiry or to cause and
inquiry to be made in this connection, it may appoint one or more
persons to be special directors for safeguarding the financial and
other interests of the company or in the public interest;
under Section 17 after making an inquiry, if the BIFR is satisfied
that a company has become a sick industrial company, it may then
decide, by an order in writing, whether it is practicable for the
company to make its net worth exceed the accumulated losses
within a reasonable time; if this is practicable, then the BIFR shall
give such company the opportunity to make its net worth exceed
the accumulated losses; under sub-section (3) of Section 17, if the
BIFR decided that this was not practicable within a reasonable
time, it may adopt measures specified in Section 18, and provide
for a scheme for appropriate measures in relation to that company;
there can, therefore, be no presumption that the company will, in
no circumstance, be able to discharge its obligations; there was no
material to show that the appellant could not make its net worth
positive; this was not a situation of the kind envisaged in the case
of Itek Corporation38 where there was no possibility whatsoever of
recovery of any amount from the purchaser; and, in the present
case, there was a good possibility of such recovery.
Even if we were to proceed on the premise that the first
respondent has, in fact, suffered losses in excess of Rs.326.5
Crores, and its assets are mortgaged to the bank as security for the
loans extended to them in excess of Rs.6,000 Crores, we cannot
also ignore the first respondents claim that their holding company
(which owns more than 88% shares of the first respondent) has
furnished corporate guarantees for a sum in excess of Rs.7,500
Crores and has, in addition, infused Rs.4,340 Crores into the first
respondent, among others, to support its cash flows. As in the case
of Sumac International6, no material has been placed by the
appellant to show that the first respondent would not, under any
circumstances, be in a position to repay the amount, received by
them on encashment of the bank guarantees, in case the appellant
were to succeed in the arbitration proceedings later. Unlike in
Itek Corporation38, where there was no possibility whatsoever of
recovering any amounts from the other party, the extent of support
extended to the first respondent by its parent company shows that
the appellants apprehension, to the contrary, is unfounded. The
appellants far fetched and outlandish prophecy of a complete
collapse, of the Indian thermal energy industry, would also not
constitute special equities justifying an order of injunction being
granted restraining the first respondent from invoking the bank
guarantees.
While claiming that the amounts due to it from the appellant
is far higher than the amounts which they have sought to recover
towards liquidated damages together with the retention money, the
first respondent also contends that the amounts, which the
appellant claims to be retention money and as payable to them in
excess of Rs.300 Crores, constitute amounts representing
milestone payment, which would fall due only on the appellant
achieving provisional acceptance; and, till they do so, they are not
entitled for the said sum. These are again matters which are
required to be examined by the arbitral tribunal, and not by this
Court in an appeal preferred against an order passed by the
Commercial Court in a petition filed under Section 9 of the 1996
Act. Suffice it to hold that the appellant has not made out a case of
special equities justifying an order of injunction being granted to
restrain the first respondent from invoking the bank guarantees.
IX. FALSE PLEA IN THE SECTION 9 PETITION FILED BY
THE APPELLANT : ITS CONSEQUENCE:
The appellant has alleged, in paragraph 8 of their Section 9
petition, that provisional acceptance has been achieved for Unit 1
on May 25, 2016 and Unit 2 on February 02, 2017; on provisional
acceptance being achieved, Rs.300 Crores was due from the first
respondent for the works done by them; and, in the event the bank
guarantee is allowed to be encashed, they would have no means of
recovering the amounts due, as the first respondent has no assets
in India. Sri C.V. Mohan Reddy, Learned Senior Counsel
appearing on behalf of the first respondent, would submit that
such averments are false to the appellants own knowledge; as the
appellant has come before this court with unclean hands, and has
lied on oath in the petition, they are not entitled to injunctive relief;
the Section 9 petition has been filed on the basis of a false affidavit;
and litigants must observe total clarity and candour in their
pleadings. He would rely on Seema Arshad Zaheer29; and Amar
Singh v. Union of India ).
In its e-mail dated November 18, 2016, the appellant has
admitted that the slow pace of commissioning activities on Unit-2
is likely to further delay the PAT (Provisional Acceptance Test). As
on November 18, 2016, provisional acceptance of Unit - II was,
admittedly, not achieved. In their letter dated January 02, 2017,
the appellant admits that they are likely to achieve PAT by 31st
March, 2017. A tripartite discussion was held on February 22,
2017 between the appellant, the first respondent and the CTC to
decide on the action plan to achieve provisional acceptance of Unit-
I. It does appear, from these documents, that provisional
acceptance of Units 1 and 2 were not achieved till the jurisdiction
of the Commercial Court was invoked by the appellant on
06.03.2017. It does appear that their plea, in the petition filed by
them under Section 9 of the 1996 Act, that provisional acceptance
was achieved for Unit I on 25.05.2016, and for Unit II on
02.02.2017, are false.
It is the duty of a party seeking injunction to bring to the
notice of the Court all facts material to the determination of his
right to that injunction; and it is no excuse for him to say that he
was not aware of the importance of any facts which he has omitted
to bring forward. (Amar Singh42; Dalglish v. Jarvie ). Litigants,
who come to Court with unclean hands, are not entitled to be
heard on the merits of their case. (Amar Singh42). A litigant, who
attempts to pollute the stream of justice, or who touches the pure
fountain of justice with tainted hands, is not entitled to any relief,
interim or final. (Amar Singh42; Dalip Singh v. State of U.P. ).
Litigants must observe total clarity and candour in their
pleadings, especially when it contains a prayer for injunction. A
prayer for injunction, which is an equitable remedy, must be
governed by the principles of uberrima fides. (Amar Singh42; Hari
Narain v. Badri Das ; Welcome Hotel v. State of A.P. ; G.
Narayanaswamy Reddy v. Govt. of Karnataka ; S.P.
Chengalvaraya Naidu v. Jagannath ; A.V. Papayya Sastry v.
Govt. of A.P. ; Prestige Lights Ltd. v. SBI ; Sunil Poddar v.
Union Bank of India ; K.D. Sharma v. SAIL ; G. Jayashree v.
Bhagwandas S. Patel and Dalip Singh44).
A plaintiff, applying ex-parte, comes under a contract with
the Court that he will state the whole case fully and fairly to the
Court. If he fails to do that and the Court finds, when the other
party applies to dissolve the injunction, that any material fact has
been suppressed or not properly brought forward, the plaintiff is
told that the Court will not decide on the merits; and, as he has
broken faith with the Court, the injunction must go. (Amar
Singh42; Castelli v. Cookf ).
If there is an important
misstatement, Courts should never hesitate to discharge the order
at once, so as to impress upon all Suitors, the importance of
dealing in good faith with the Court when ex-parte applications are
made. (Amar Singh42; Republic of Peru v. Dreyfus Bros. & Co. ).
It is the rule of the Court, and one which is of the greatest
importance to maintain, that when an applicant comes to the
Court, to obtain relief on an ex-parte statement, he should make a
full and fair disclosure of all material factsfacts, not law. He must
not misstate the law if he can help itthe Court is supposed to
know the law. But it knows nothing about the facts, and the
applicant must state fully and fairly the facts, and the penalty by
which the Court enforces that obligation is that, if it finds out that
the facts have not been fully and fairly stated to it, the Court will
set aside any action which it has taken on the faith of the imperfect
statement. (Amar Singh42; R. v. Kensington Income Tax
Commr., ex p Princess de Polignac ).
Suppression of facts by the party against the beneficiary, and
prima facie evidence to show that there is truth in these
allegations, would not entitle the party to seek injunction
restraining invocation of the bank guarantee. (Synthetic Foams
Ltd.23 and Satluj Jal Nigam Ltd.24; State Trading Corporation of
India Ltd.25).
While the ex facie false plea, of having already
achieved provisional acceptance, in the Section 9 petition filed by
the appellant, would have, by itself, necessitated denying them any
relief, and in non-suiting them on this short ground, we have
examined their claim on merits, including that the invocation of
the bank guarantee is fraudulent and special equities are in their
favour, as the increase in the number of cases seeking injunction,
restraining invocation of bank guarantees, under the 2015 Act,
made us feel the need to reiterate the law declared by the Supreme
Court on these aspects.
X. CONCLUSION:
Viewed from any angle, we see no reason to restrain the first
respondent from invoking the bank guarantees furnished by the
appellant, as these bank guarantees are unconditional and
unequivocal, and the appellant has neither made out a case of
fraud vitiating the contract of bank guarantee nor of special
equities justifying an order of injunction being granted restraining
invocation of the bank guarantees.
All the Civil Miscellaneous Appeals fail and are, accordingly,
dismissed. Miscellaneous Petitions pending, if any, shall also
stand dismissed. There shall be no order as to costs.
_________________________________
(RAMESH RANGANATHAN, ACJ)
______________
(T.RAJANI, J)
Date: 24-10-2017
