Bombay High Court
Housing Development And ... vs Mumbai International Airport ... on 29 November, 2012
Bench: S. J. Kathawalla
1 ARBPL 1538-12-Judgment.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
ARBITRATION PETITION (L) NO.1538 of 2012
Housing Development and Infrastructure Limited. ] ... Petitioner
Versus
Mumbai International Airport Private Limited ]
and others. ] ... Respondents
Mr. T. N. Subramaniam, Senior Advocate, a/w Mr. Gaurav Joshi, Mr. Piyush
Raheja, Mr. Satyen Vora, Mr. Atul Kshatriya, Mr. Sanmish Gala & Mr. Chetan
Yadav i/b Markand Gandhi & Co. for Petitioner.
Mr. Virag Tulzapurkar, Senior Advocate, a/w Dr. Birendra Saraf, Ms. Shoma
Maitra & Mr. Atharva Dandekar i/b Wadia Gandhy & Co. for Respondent No1.
Mr. Snehal Shah a/w Ms. Dipti Panda & Ms. Amita Jasani i/b Purnanand &
Co. for Respondent No.2 - Punjab & Maharashtra Co-operative Bank Limited.
Mr. A. Ketkar for Respondent No.4.
CORAM :- S. J. KATHAWALLA, J.
DATE :- NOVEMBER 29, 2012
ORAL JUDGMENT :-
1. Mentioned. Not on board, taken on board.
2. The Petitioner has filed the above Arbitration Petition under Section 9
of the Arbitration and Conciliation Act, 1996, inter alia, for an order and
injunction restraining the Respondent No.1 from invoking or encashing or
receiving payments under the Bank Guarantee No.3023/4018/152/07-08
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read with Extension Bank Guarantee No.3023/4018/229/09-10 dated 11th
May 2012 or further extended bank guarantees as may be furnished to the
Respondent No.1 from time to time. The Petitioner has also sought an order
and injunction against the Respondent No.2 bank from making payment or
otherwise causing payment to be made under the said Bank Guarantees.
3. An application for urgent orders was made before this Court today at
11.00 a.m. by the learned Senior Advocate appearing for the Petitioner
without giving notice to the Respondents. However, the Respondent No.1
appeared through their Advocates and informed the Court that a copy of the
petition should be served on them, and necessary orders be passed only after
giving them a hearing in the matter. The matter was therefore kept at 3.00
p.m. and it was ordered that in the meantime, the Respondent No.2 Bank
shall not act on the letter received from Respondent No.1 dated 27 th
November 2012. The matter was taken up at around 5.00 p.m., and it was
decided by consent that the arbitration petition be decided finally. In view
thereof, the Respondents have not filed any Affidavits-in-Reply and are
allowed to proceed in the matter on the basis of denials.
4. The facts, as narrated by the Petitioner, are briefly set out herein :
5. The Petitioner - Housing Development and Infrastructure Limited
(HDIL) is a renowned real estate company which is executing several large
residential and commercial projects in the city of Mumbai, including various
SRA projects. The Respondent No.1 Mumbai International Airport Private
Limited (MIAPL) is a Private Limited Company selected by the Airports
Authority of India (AAI) to operate, manage, develop, design, upgrade and
modernize the Chhatrapati Shivaji International Airport ('the Airport') at
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Mumbai. Respondent No.2 Punjab and Maharashtra Co-operative Bank
Limited is a Bank which has provided the performance guarantee ('the said
bank guarantee') to the Respondent No.1, at the request of the Petitioner in
the circumstances set out hereinafter. Respondent No.3 is Mumbai
Metropolitan Regional Development Authority (MMRDA) and has been
appointed by the Respondent No.1 as the project implementation agency for
undertaking slum clearance. Respondent No.4 is the State of Maharashtra
joined as a party through the Collector, Mumbai Suburban District. According
to the Petitioner, it is the duty of the Respondent No.4, inter alia, to determine
the eligibility of slum dwellers who are entitled to be rehabilitated in the
premises constructed/to be constructed by the Petitioner under its Agreements
with the Respondent No.1. The Respondent No.5 is Slum Rehabilitation
Authority established under the Maharashtra Slum Areas (Improvements,
Clearance and Redevelopment) Act, 1971 and acts as the planning authority
for the slum rehabilitation project.
6. According to the Petitioner, as already stated hereinabove, under an
Agreement dated 4th April 2006 executed between the AAI and the
Respondent No.1, AAI granted to the Respondent No.1 exclusive right to
operate, maintain, develop, design, construct, upgrade, modernize finance
and manage the Airport. Thereafter AAI also executed a Lease Deed dated
26th April 2006, in favour of Respondent No.1 wherein certain land (the
Airport Land) was leased in favour of the Respondent No.1. At the time of the
aforesaid Agreement, nearly 276 acres of the Airport Land was encroached
upon by the slums. Accordingly Respondent No.1 desired to have the said
slums cleared from the Airport Land.
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7. Pursuant to an Agreement dated 12th December 2006, the Respondent
No.1 appointed MMRDA as the project implementation authority for
undertaking slum clearance. Thereafter on 18th April 2007, the Respondent
No.1 issued an invitation seeking expression of interest from bidders for
undertaking a slum rehabilitation project for clearing the said encroachments
on the Airport Land. The Petitioner responded to the said invitation and by a
Letter of Intent dated 15th October 2007, the Respondent No.1 awarded the
said slum rehabilitation project to the Petitioner. Simultaneously on the same
day i.e. on 15th October 2007, the Petitioner and the Respondent No.1 entered
into an Agreement (the said Agreement) setting out the terms and conditions
for execution of the said slum rehabilitation project by the Petitioner, a copy of
which Agreement is annexed at Exhibit 'D' to the petition.
8. Clause 3 of the said Agreement sets out the scope of work which was to
be undertaken by the Petitioner for completion of the said slum rehabilitation
project, which work included eviction of ineligible slum dwellers and
rehabilitation of protected slum dwellers, demolition of hutments,
construction of rehabilitation buildings and handing over of vacant land to
Respondent No.1. Clause 4 sets out the consideration to be received by the
Petitioner for executing the said slum rehabilitation project. The said clause
provided that the Petitioner is entitled to receive 65.20 acres of land from the
Airport Land, upon the same being released from the encroachments. No
monetary consideration was payable under the said Agreement to the
Petitioner.
9. Clause 8 of the said Agreement provided for a performance security and
reads as under :
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"8. PERFORMANCE SECURITY
8.1 The Developer has submitted an unconditional irrevocable
and on demand bank guarantee dated October 15, 2007 for Rs.25
(Twenty Five) crores from Punjab and Maharashtra Co-operative
Bank Limited in favour of MIAL and an on demand promissory
note dated October 15, 2007, for Rs.275 (two hundred and seventy
five) crores as performance security, for performance of its
obligations hereunder. The said bank guarantee and promissory
note shall be retained as security for performance by the Developer
of its obligations (including warranties). The Developer shall, no
later than 12 (twelve) months from the date of the LOI, replace the
bank guarantee and the said promissory note by an interest free
cash deposit of Rs.300 (three hundred) crores. Such deposit shall
be made by way of a demand draft / pay order or wire transfer
and the said bank guarantee and promissory note shall be released
simultaneously with the receipt of the demand draft / pay order or,
in the case of a wire transfer, simultaneously with the cash deposit
being received by MIAL (the said bank guarantee together with the
promissory note or the interest free cash deposit in lieu thereof is
hereinafter referred to as the "Performance Security"). The
Performance Security shall be refunded to the Developer, subject to
such set offs and deductions as MIAL may be entitled to make
under this Agreement or otherwise, 5 (five) years from the date of
deposit or 12 (twelve) months after Project Completion, whichever
is later or upon the earlier termination of this Agreement.
URS 5 of 25
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8.2 The Performance Security may be invoked, drawn down,
appropriated or adjusted by MIAL at the sole discretion of MIAL for
non performance by the Developer, and non performance includes
the following events :
(i) Breach of or failure by the Developer to comply with any of
the terms and conditions of this Agreement or any further
agreement to be executed between MIAL and the Developer
amounting to a material breach of this Agreement or such
further agreements; and
(ii) Failure of the Developer to replace the bank guarantee and
the promissory note by the cash deposit as mentioned in this
Clause hereinabove.
8.3 If at any time the Performance Security is invoked, drawn
down, appropriated or adjusted, the Developer shall ensure that
the value of the Performance Security is always maintained at the
level indicated hereinabove by replenishing or issuing additional
security as above Invocation, draw down, appropriation or
adjustment of the Performance Security does not absolve the
Developer from its obligations to perform the Scope of Work, under
the agreement."
10. As agreed under said Clause 8, the Petitioner furnished to the
Respondent No.1, a Bank Guarantee dated 15th October 2007 for Rs.25 crores,
issued by the Respondent No.2 Bank. A copy of the said Bank Guarantee is
annexed and marked as Exhibit 'E' to the petition. The Petitioner has also
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furnished a Demand Promissory Note of Rs.275 crores to the Respondent No.
1. According to the Petitioner, the said Bank Guarantee has been continuously
renewed by the Petitioner at the request of Respondent No.1, the last renewal
being made in May 2012.
11. Clause 24 of the said Agreement sets out the events of default, and
Clause 25 pertains to termination of the Agreement.
12. Clause 35 of the said Agreement provides for resolution of disputes
between the parties by arbitration which clause is reproduced hereunder :
"35. ARBITRATION
Any and all claims, disputes, questions or controversies involving
the Parties and arising out of or in connection with or relating to
this Agreement, or the execution, interpretation, validity,
performance, breach or termination hereof (including, without
limitation, the provisions of this Clause (collectively, (Disputes")
shall, in the first instance be resolved by mediation by the
mediators namely the Managing Director of MIAL and, the
Chairman of the Developer. In the event that the Dispute is not
resolved through mediation then it shall be submitted to
arbitration in accordance with the Arbitration and Conciliation
Act, 1996 and any rules, regulations made thereunder, or
amendments thereto or re-enactment thereof".
13. Mr. T. N. Subramaniam, the Learned Senior Advocate appearing for the
Petitioner submitted that upon execution of the said Agreement, pursuant to
Clause 8.1 thereof, the Petitioner, through Respondent No.2, furnished a Bank
Guarantee in the sum of Rs.25 crores and also executed a Demand Promissory
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Note of Rs.275 crores in favour of Respondent No.1. The Petitioner, with all
earnestness, also commenced the work of the said rehabilitation project. The
Petitioner constructed 7,000 tenements and is completing construction of
20,000 flats. The Petitioner has incurred an expenditure in excess of Rs.3000
crores in respect of the said project, including money expended for acquisition
of lands, construction of tenements, provision of facilities to the Respondent
No.4 and its officers to carry out eligibility surveys etc. The Petitioner also
shifted approximately 650 slum dwellers and provided permanent alternate
accommodation to them. However the Respondent No.1, along with
Respondent Nos. 3 to 5, has failed and neglected to fulfill their various
statutory obligations, as a result whereof the list of eligible slum dwellers is
not finalized, due to which more than approximately 7,000 tenements which
are fully constructed by the Petitioner are lying vacant. It is submitted that
the Petitioner was required to give a cash deposit of Rs.300 crores to the
Respondent No.1 in place of the said Bank Guarantee of Rs.25 crores and the
Demand Promissory Note of Rs.275 crores, within 12 months from the date of
the said Agreement. However, the said condition came to be waived by
Respondent No.1 who repeatedly accepted renewal of the said Bank
Guarantee without protest, the last renewal was on 11th May 2012. It is
submitted that as late as in October 2012, in a meeting held with Respondent
No.4, the issue regarding the submission of the list of slum dwellers through
Respondent Nos.1 and 3 to the office of the Collector for verification was
discussed, inter alia, in order to enable the Collector to determine the
eligibility of the slum dwellers particularly in the priority areas determined by
Respondent No.1. The Minutes of the said meeting are annexed and marked
as Exhibit 'B' to the petition. It is submitted that Respondent No.1 and its
representatives who attended the said meeting, never disputed the obligations
set out thereunder, but thereafter have not complied with what was agreed.
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14. Mr. Subramaniam on behalf of the Petitioner further submitted that
despite the aforestated facts, the Respondent No.1 without any notice as
contemplated under the contract between the parties or even otherwise, has
sought to surreptitiously invoke the bank guarantee by its letter 27th
November 2012 addressed to the Respondent No.2. alleging non performance
by the Petitioner herein. Relying on the decision of the Hon'ble Supreme
Court in the case of Hindustan Construction Co. Ltd. Versus State of Bihar And
Others, reported in (1999) 8 Supreme Court Cases 436, Mr. Subramaniam
submitted that the said bank guarantee issued by the Respondent No.2 in
favour of the Petitioner, at the instance of the Respondent No.1 is a
conditional bank guarantee and the same has been invoked without
complying with the condition contained therein viz. to establish that the
Petitioner has failed to perform any of its obligations (including warranties),
under the Letter of Intent or the said Agreement. Mr. Subramaniam has
submitted that therefore the Respondent No.1 has sought to fraudulently and
unjustifiably enrich itself at the expense of the Petitioner. He submitted that
the fraudulent conduct of Respondent No.1. is further fortified by Clause 8.3
of the said Agreement which requires the Petitioner, after invocation of the
said guarantee, to give further securities/guarantees to the Respondent No.1
which again Respondent No.1 is entitled to invoke. Mr. Subramaniam has
submitted that therefore the fraud perpetrated by the Respondent No.1 is of
such an egregious nature that it would vitiate the very foundation of the
contract as well as the bank guarantee and render the bank guarantee
ineffective, null and void. He submitted that in any event, irretrievable
injustice would be caused to the Petitioner if the invocation of the bank
guarantee is not stayed, inter alia, as the invocation is not attributable to any
fault of the Petitioner. Relying on the decision of the Hon'ble Supreme Court
in the case of Svenska Handelsbanken Versus M/s. Indian Charge Chrome And
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Others, reported in (1994) 1 Supreme Court Cases 502, he submitted that even
the special equities in the present case are in favour of the Petitioner. He
therefore submitted that the arbitration petition be allowed and the
Respondent No.1 be restrained from invoking or encashing or receiving
payments under the said bank guarantee.
15. Mr. Virag Tulzapurkar, the Learned Senior Advocate appearing for
Respondent No.1, without prejudice to the contention of the Respondent No.2
submitted that since the Respondent No.2 Bank is not a party to the main
contract dated 15th October 2007, and that the contract of guarantee does not
contain an Arbitration Agreement, the present petition filed by the Petitioner
under Section 9 of the Act is not maintainable, proceeded to make his
submissions on behalf of the Respondent No.1 on merits. Mr. Tulzapurkar first
submitted that the reliance placed by the Petitioner upon the Judgment of the
Hon'ble Supreme Court in Hindustan Construction Co. Ltd. Versus State of
Bihar And Others (supra) is misplaced, as the language of the guarantee in
that case was materially different from the language of the guarantee in the
present case. He therefore submitted that the submission made on behalf of
the Petitioner that the suit guarantee is conditional and the conditions
stipulated therein have not been met, are untenable and baseless and that the
guarantee is in fact unconditional and irrevocable, containing an unequivocal
promise to pay a sum of Rs.25 crores to the Respondent No.1 without any
demur or protest, and the same ought to be encashed.
16. Mr. Tulzapurkar has, without prejudice to his contention that an
unconditional and irrevocable bank guarantee is an independent contract and
whether encashment of the same ought to be permitted or not has to be
considered without any reference to the underlying or main contract or to the
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disputes/claims thereunder, has taken me through some of the provisions of
the said Agreement. Mr. Tulzapurkar, referring to Clause 3.1 of the said
Agreement which pertains to the scope of work of the petitioner, pointed out
that the said clause categorically provides that the Petitioner is required to
take all the necessary steps for completion of the slum rehabilitation project
and make available to the Respondent No.1 the encroached Airport Land, free
of any encroachments/hutments, in accordance with the provisions of the said
Agreement, including the time lines prescribed therein. Further, the steps
required to be taken by the Respondent No.2 would include completion of the
plane table survey in a timely manner. "Plane Table Survey" is defined in the
Agreement to mean "the survey to determine the eligibility of slum dwellers
for rehabilitation and finally verified under the Applicable Law". Mr.
Tulzapurkar submitted that the Petitioner has attempted to give an incorrect
interpretation to the Minutes of the Meeting held on 17th October 2012 and
that a proper construction and interpretation of the Minutes shows that the
Petitioner has failed to give its submissions and conduct survey qua several
plots of lands as set out in the said Minutes. Mr. Tulzapurkar has also drawn
my attention to Clause 4 of the said Agreement wherein the Petitioner has
agreed to remove the encroachments in a phased manner. Phase 1 itself is
divided into 3 phases and the Petitioner was obliged to remove at least 28,000
hutments in Phase 1. Mr. Tulzapurkar submitted that the Petitioner has failed
to remove a single hutment out of the said 28,000 hutments till date and
construction of 7000 tenements is of no consequence in the absence of
removal of the hutments from the lands encroached upon. The 650 hutments
allegedly removed by the Petitioner are not part of these 28,000 hutments.
Mr. Tulzapurkar has submitted that the Petitioner has agreed under the said
Agreement that the scope of work shall be complete at the sole cost and
expense of the Petitioner and the Petitioner now cannot make a grievance
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about the same and cannot allege that Respondent No.1, not having spent any
amount on the redevelopment project, is fraudulently invoking the bank
guarantee. Mr. Tulzapurkar submitted that Respondent No.1 is justified in
invoking the bank guarantee since the Petitioner has failed to perform its
obligations under the said Agreement.
17. Mr. Tulzapurkar has further submitted that under Clause 8 of the said
Agreement, the Petitioner agreed to furnish an unconditional irrevocable and
on demand bank guarantee to Respondent No.1 for Rs.25 crores and an on
demand Promissory Note for Rs.275 crores as performance security for
performance of its obligations under the said Agreement. Under the said
clause, the Petitioner also agreed that within 12 months from the date of the
LOI (which is dated 15th October 2007), the Petitioner shall replace the bank
guarantee and the said Promissory Note by an interest free cash deposit of Rs.
300 crores and upon the Petitioner providing the said cash deposit, the said
bank guarantee and the said Promissory Note shall be released simultaneously.
Mr. Tulzapurkar has submitted that under Clause 8.2 of the Agreement, the
parties have agreed that the performance security may be invoked in the event
of breach or failure of the Petitioner to comply with any of the terms and
conditions of the said Agreement including failure of the Petitioner to replace
the bank guarantee and the Promissory Note by cash deposit of Rs.300 crores.
Mr. Tulzapurkar submitted that under Clause 8.3, the Petitioner has agreed
that if at any time the performance security is invoked, the Developer shall
ensure that the value of the performance security is always maintained at the
level indicated (i.e. Rs.300 crores), by replenishing or issuing additional
security. Mr. Tulzapurkar submitted that having agreed to maintain the level
of the performance security up to Rs.300 crores, the Petitioner cannot make a
grievance that after invocation of the present bank guarantee, the Petitioner
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will have to provide further security, which may also be invoked by the
Petitioner.
18. Mr. Tulzapurkar has, whilst dealing with the submission advanced on
behalf of the Petitioner that the Respondent No.1 has failed to show the
alleged non performance by the Petitioner, drawn my attention to the letter
written by Respondent No.1 to the Petitioner dated 26th June 2011, inter alia,
recording that the Petitioner has failed to perform various obligations required
to be performed by it under the captioned Agreements. The obligations set
out in the said letter, which according to the Respondent No.1 were breached
by the Petitioner, are set out hereinbelow :
"
Sl. Obligation Agreement Clause Ref.
No
1. Replacement of bank guarantee of Rs.25 crores 8.1 of the said
and promissory note of Rs.275 crores, with a Agreement, as amended
cash deposit of Rs.300 crores, by 30th November, by Deed of Confirmation
2008. dated October 14, 2008.
2. Reimbursement to MIAL of the amount of Rs. 25 3.1(q)(v) of the said
crores paid by MIAL to MMRDA under Agreement.
Agreement dated December 12, 2006 between
MIAL and MMRDA by 14th April, 2008
3. Completion of Phase 1(i) (by April 14, 2009), 7.1(a) of the said
Phase 1(ii) (by October 14, 2009) and Phase Agreement.
1(iii) (by October 14, 2010).
4. Commencement of Phase 2 by October 14, 2010. 7.1(b) of the said
Agreement.
5. Payment of fees to the PMC (M.M. Consultants 3.1(h) of the said
Pvt. Ltd.). As on date we have been informed Agreement.
that the PMC's invoices for a total amount of Rs.
15 lakhs are outstanding.
URS 13 of 25
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Sl. Obligation Agreement Clause Ref.
No
6. Payment to M. M. Consultants Pvt. Ltd. of the 3.1(a) read with 301(h)
amount of Rs.16,16,152/- for Plane Table and 3.1(q) of the said
Survey, an activity which was to be taken over Agreement.
and completed by HDIL under the Agreement.
Failure to make payment has resulted in M. M.
Consultants Pvt. Ltd. not refunding equivalent
amount which was paid to M. M. Consultants
Pvt. Ltd. by MIAL.
7. Amount of Rs.25 crores to be paid to MMRDA as 3.1(q)(v) of the said
per MMRDA's letter No.Airport/Cost/2001/ 72 Agreement."
dated 21st April 2011 which has till date not
been paid by HDIL.
By the said letter, the Respondent No.1 further informed the Petitioner that,
"In view of the non compliance of your various obligations under
the captioned Agreements, you are called upon within a period
of 30 days to comply with the same failing which we will have
no option but to take appropriate recourse under the captioned
Agreements and as available to us under law."
Mr. Tulzapurkar submitted that the Petitioner failed and neglected to reply to
the said letter and has, in the present petition, made incorrect submissions viz.
that the Petitioner had, in response to the said letter, purportedly made
representations and offered explanations to Respondent No.1 as alleged.
19. Mr. Tulzapurkar has further submitted that the submission advanced on
behalf of the Petitioner that the Respondent No.1 has waived the condition
qua the Petitioner substituting the bank guarantee of Rs.25 crores and the
Promissory Note of Rs.275 crores by a cash deposit of Rs.300 crores, is false
and incorrect to its knowledge. Mr. Tulzapurkar has in support of this
submission, relied on Clauses 31 and 33 which pertain to "Modifications" and
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"Waiver" and has submitted that under the said Agreement the parties have
expressly agreed that no modifications to the Agreement shall be permitted
unless they are in writing and signed by both the parties and that any waiver
of any provision of the said Agreement by the Respondent No.1 shall be
effective only if it is in writing. Mr. Tulzapurkar has submitted that it is
because of these provisions that when the Petitioner was unable to give a cash
deposit of Rs.300 crores to the Respondent No.1 within 12 months from the
date of the LOI, i.e. on or before 14th October 2008, and had sought extension
of time from Respondent No.1, that an extension up to 30th November 2008
was granted to the Petitioner, by a Deed of Confirmation dated 14 th October
2008 executed between the parties. Mr. Tulzapurkar has submitted that
thereafter the Respondent No.1 has not granted any extension to the
Petitioner for replacing the Bank Guarantee and the Demand Promissory Note
by cash deposit of Rs.300 crores.
20. Mr. Tulzapurkar further submitted that despite serving the aforestated
notice dated 24th June 2011, the Petitioner has not complied with its
obligations set out therein including the replacement of Bank Guarantee of Rs.
25 crores and Promissory Note of Rs.275 crores with a cash deposit of Rs.300
crores till date. He submitted that therefore the Respondent No.1 is fully
justified in invoking the said bank guarantee and there is no fraud involved as
alleged or otherwise, qua the said invocation. Mr. Tulzapurkar has further
submitted that no case of irretrievable injury or special equities is made out by
the Petitioner. Mr. Tulzapurkar submitted that it is a well settled principle that
except in cases of established fraud violating the very foundation of the bank
guarantee or encashment resulting in irretrievable harm or injustice, which
would make it impossible for the guarantor to reimburse itself if he ultimately
succeeds, the Court shall not grant any injunction restraining the beneficiary
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from invoking/encashing a bank guarantee. In support of his contention, Mr.
Tulzapurkar has relied on the decisions of the Hon'ble Supreme Court in the
cases of Dwarikesh Sugar Industries Ltd. Versus Prem Heavy Engineering Works
(P) Ltd. And Another1 and Himadri Chemicals Industries Ltd. Versus Coal Tar
Refining Co.2 Mr. Tulzapurkar has therefore submitted that the arbitration
petition deserves to be dismissed with costs.
21. I have considered the submissions advanced by the learned Senior
Advocates appearing for Petitioner as well as for Respondent No.1. The first
issue which needs determination by this Court is whether the bank guarantee
issued by Respondent No.2, at the instance of the Petitioner to the Respondent
No.1, is an unconditional bank guarantee. Clause 1 of the bank guarantee
provides as under:
"..... We Punjab & Maharashtra Co-op Bank Ltd. (Multi-
State Scheduled Bank ("Guarantor") unconditionally and
irrevocably agree to pay to MIAL immediately on its first
demand, whole or part of Rs.25,00,00,000/- (Rupees Twenty
Five Crore Only) (the "Guarantee Amount") without any
protest or demur, contestation, reservation, recourse or
reference to the Developer, upon demand by MIAL for the
breach or failure of the Developer to perform all or any of the
Developer's obligations (including warranties) under the
Letter of intent or the Agreement ..... shall not be questioned
and be final and conclusive. Upon written demand by MIAL,
the Guarantor shall forthwith make the payment of the sum
set out in such demand notice without any conditions,
1 (1997) 6 Supreme Court Cases 450
2 (2007) 8 Supreme Court Cases 110
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reservations, protest of requirement of any proof
whatsoever...."
Clause 4 of the said Bank Guarantee further provides,
"We Punjab & Maharashtra Co-op Bank Ltd. (Multi-State
Scheduled Bank), the Guarantor, agree and acknowledge
that our obligation under this guarantee shall be primary,
absolute, irrevocable, continuing and unconditional. We
Punjab & Maharashtra Co-op Bank Ltd. (Multi-State
Scheduled Bank), the Guarantor, also waive presentment to,
demand of payment form and protest by MIAL to the
developer before invocation of this guarantee."
From the above terms of the Bank Guarantee, it is clearly established that the
Respondent No.1 is entitled to invoke the same in case of failure on part of the
Developer to perform all or any of its obligations under the Letter of Intent or
the Agreement. The Respondent No.1 is only required to issue a letter to the
Respondent No.2 Bank stating that the Petitioner has failed to perform all or
any of its obligations (including warranties) under the Letter of Intent or
Agreement and the Bank shall not question the decision of the Respondent
No.1, which shall be final and conclusive. The Bank has unconditionally and
irrevocably agreed to forthwith make payment of the same as set out in the
demand notice by the Respondent No.1 without any protest, demur,
contestation, reservation, recourse or reference to the Petitioner or
requirement of any proof whatsoever. Therefore the stand taken by the
Petitioner that the Bank Guarantee is conditional and that the Respondent No.
1 is obliged to establish that the Developer has failed to perform all or any of
its obligations under the Letter of Intent and/or the said Agreement is
untenable and baseless. The language of the guarantee in the case of
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Hindustan Construction Co. Ltd. Versus State of Bihar And Others (supra) was
materially different from the language of the Bank Guarantee in the present
case and would therefore lend no assistance to the Plaintiff. In my view, the
said Bank Guarantee is an unconditional and irrevocable guarantee. The
submission therefore advanced on behalf of the Petitioner that the Bank
Guarantee is a conditional one or that the invocation is not in keeping with
the same, and is bad in law, therefore cannot be accepted and is rejected.
22. As regards the contention of the Petitioner that the conduct of
Respondent No.1 in encashing the Bank Guarantee is fraudulent, the
Petitioner has relied on the provisions of the said Agreement and has tried to
allege that though the Petitioner has performed its obligations under the said
Agreement, it is Respondent No.1 along with Respondent Nos. 3 and 4 who
have not complied with their obligations under the said Agreement. The fact
remains that the Petitioner has, despite having agreed under Clause 8.2 of the
Agreement to substitute the Bank Guarantee of Rs.25 crores and the
Promissory Note dated 15th October 2007 for Rs.275 crores, by cash deposit
of Rs.300 crores initially on or before 14th October 2008 and thereafter on or
before 30th November 2008, has not substituted the same till date. The
Petitioner has agreed under Clause 8.2 of the said Agreement that breach of or
failure by the Petitioner to comply with any of the terms and conditions of the
Agreement including the failure of the Petitioner to replace the bank
guarantee and the Promissory Note by cash deposit as mentioned in Clause
8.1of the Agreement would entitle the Respondent No.1 to invoke the bank
guarantee. Failure of the Petitioner to replace the bank guarantee and
Promissory Note with interest free cash deposit would also constitute an event
of default under Clause 24 of the said Agreement. The Respondent No.1 has,
by its letter dated 24th June 2011, set out the breaches committed by the
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Petitioner qua several clauses of the said Agreement including Clause 8.1 of
the said Agreement as amended by the Deed of Confirmation dated 14 th
October 2008, pertaining to replacement of the bank guarantee and the
Promissory Note with cash deposit of Rs.300 crores and, inter alia, calling
upon the Petitioner to cure the said breaches within a period of 30 days from
the receipt of the said notice. However, the Petitioner has not even replied to
this letter despite having received the same from the Respondent No.1. The
Petitioner has in the petition alleged that after receipt of the letter, the
Petitioner had made certain representations to the Respondent No.1 which
allegations are denied by the Respondent No.1. The allegation of the
Petitioner that the clause pertaining to substitution of the bank guarantee and
a Promissory Note by cash deposit of Rs.300 crores is waived by the
Petitioner, also cannot be accepted in view of Clauses 31 and 33 of the
Agreement which expressly states that no modification to the said Agreement
shall be permitted unless they are in writing and are agreed and signed by
both the parties and any waiver of any provision of the Agreement by the
Respondent No.1 to be effective has to be in writing.
23. It is set out in the letter dated 24th June 2011 addressed by the
Respondent No.1 to the Petitioner and also submitted by Mr. Tulzapurkar that
the Petitioner has miserably failed to comply with the other provisions of the
said Agreement, more particularly the completion of Phase 1(i) by November
14, 2009, Phase 1(ii) by October 14, 2009 and Phase 1 (iii) by October 14,
2010 and commencement of Phase 2 by October 14, 2010, as agreed under
Clauses 7.1 (a) and 7.1 (b) of the said Agreement. The Petitioner has not
responded to the said letter dated 24th June 2011 and has refuted its contents
for the first time only in the present petition i.e. after more than a year, on
the ground that after receipt of the said letter dated 24th June 2011, the
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Petitioner had made representation and explained the correct position to the
Respondent No.1, which again is denied by Respondent No.1. The said issues
qua the compliance of the obligations under the said Agreement shall be
finally decided in the arbitration proceedings. Mr. Subramaniam has
submitted that the Petitioner has spent substantial amounts after executing
the said Agreement and the Respondent No.1 has not spent any amounts. He
has also submitted that after invocation of the present bank guarantee, the
Petitioner is required to give further securities to the Respondent No.1 which
again the Respondent No.1 is entitled to invoke. What is forgotten is that the
Petitioner has under the Agreement, agreed to substitute the bank guarantee
of Rs.25 crores and the Demand Promissory Note of Rs.275 crores by a cash
deposit of Rs.300 crores and the Petitioner has further agreed to maintain the
value of the performance security at the level agreed i.e. Rs.300 crores by
replenishing or issuing additional security. Needless to point out that it is well
settled law that Courts cannot rewrite contracts.
24. The Hon'ble Supreme Court has in its decision in the case of Himadri
Chemicals Industries Ltd. Versus Coal Tar Refining Co. (supra) observed that the
law relating to grant or refusal to grant injunction in the matter of invocation
of a bank guarantee or a letter of credit is now well settled by a plethora of
decisions and in the case of U. P. State Sugar Corpn. v. Sumac International
Ltd., the Hon'ble Supreme Court made two exceptions for granting an order of
injunction to restrain the enforcement of a bank guarantee or a letter of credit
i.e. (i) fraud committed in the notice of the bank which would vitiate the very
foundation of the guarantee; and (ii) injustice of the kind which would make
it impossible for the guarantor to reimburse himself. So far as the first
exception of fraud is concerned, the Hon'ble Supreme Court in paragraph nos.
11 and 12 of the its decision held as follows :
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"11. Except under these circumstances, the courts should not
readily issue injunction to restrain the realisation of a bank
guarantee or a letter of credit. So far as the first exception is
concerned i.e. of fraud, one has to satisfy the court that the fraud in
connection with the bank guarantee or letter of credit would vitiate
the very foundation of such a bank guarantee or letter of credit. So
far as the second exception is concerned, this Court has held in that
decision that it relates to cases where allowing encashment of an
unconditional bank guarantee would result in irretrievable harm or
injustice to one of the parties concerned. While dealing with the
case of fraud, this Court in U. P. Coop. Federation Ltd. v. Singh
Consultants and Engineers (P) Ltd. held as follows : (SCC p. 197,
para 53)
The fraud must be of an egregious nature such as to
vitiate the entire underlying transaction. (emphasis
supplied)
While coming to a conclusion as to what constitutes fraud, this
Court in the above case quoted (at SCC p. 197, para 54) with
approval the observations of Sir John Donaldson, M. R. in
Bollivinter Oil SA v. Chase Manhattan Bank, All ER at p. 352g-h
which is as follows :
"The wholly exceptional case where an injunction may be
granted is where it is proved that the bank knows that any demand
for payment already made or which may thereafter be made will
clearly be fraudulent. But the evidence must be clear, both as to the
fact of fraud and as to the bank's knowledge. It would certainly not
normally be sufficient that this rests on the uncorroborated
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statement of the customer, for irreparable damage can be done to a
bank's 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."
12. In Svenska Handelsbanken v. Indian Charge Chrome it has
also been held that a confirmed bank guarantee/irrevocable letter
of credit cannot be interfered with unless there is established fraud
or irretrievable injustice involved in the case. In fact, on the
question of fraud, this decision approved the observations made by
this Court in U. P. Coop. Federation Ltd. v. Singh Consultants and
Engineers (P) Ltd."
In paragraph no.14 of the said decision, the Hon'ble Supreme Court has set
out certain principles which are required to be noted by the Court in the
matter of granting injunction restraining the encashment of a bank guarantee.
In the said paragraph, the Hon'ble Supreme Court has held that in case an
injunction restraining the encashment of a bank guarantee or letter of credit is
granted on the ground of fraud, the same has to be of an egregious nature,
which would vitiate the very foundation of the bank guarantee or letter of
credit and in cases where the beneficiary seeks to take advantage of the
situation.
25. It is therefore trite law that the Court can restrain encashment of bank
guarantee in cases of established fraud in issuance of the bank guarantee. The
fraud has to be absolutely egregious vitiating the foundation of the bank
guarantee. In the present case, the Petitioner has failed to make out any case
of fraud. The allegations of fraud made by the Petitioner are merely bald
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assertions and do not establish a case of fraud much less fraud of an egregious
nature. As set out herein, the bank guarantee is an unconditional and
irrevocable guarantee. As held by the Hon'ble Supreme Court, encashment of
an unconditional and irrevocable bank guarantee ought not to be injuncted by
Courts unless the case falls within recognized exceptions laid down by the
Hon'ble Supreme Court. Again, an unconditional and irrevocable Bank
Guarantee is an independent contract and whether encashment of the same
ought to be permitted or not has to be considered without any reference to
the underlying or main contract or to the disputes/claims thereunder. The
allegations therefore made by the Petitioner that the invocation of the Bank
Guarantee is vitiated by fraud, cannot be accepted and the said contention is
rejected.
26. The Petitioner has also submitted that irretrievable injustice shall be
caused to it in case the Bank Guarantee is encashed. In the case of U. P. State
Sugar Corpn. v. Sumac International Ltd. (supra), irretrievable injustice is the
second exception made by the Hon'ble Supreme Court for grant of an
injunction restraining encashment of a Bank Guarantee which is referred to in
clause 13 of the decision in Himadri Chemicals Industries Ltd. Versus Coal Tar
Refining Co. (supra) and reads thus:
"13. So far as the second exception is concerned, this Court in U.
P. State Sugar Corpn. v. Sumac International Ltd. as considered
herein earlier, as SCC para 14 on pp.575-76 observed as follows :
"14. On the question of irretrievable injury which is
the second exception to the rule against granting of
injunctions when unconditional bank guarantees are sought
to be realised the Court said in the above case that the
irretrievable injury must be of the kind which was the subject-
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matter of the decision in Itek Corpn. case. In that case an
exporter in USA entered into an agreement with the Imperial
Government of Iran and sought an order terminating its
liability on stand by letter 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 licenses 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 United States and had
cancelled the export contract. The Court upheld the
contention of the exporter that any claim for damages against
the purchase if decreed by the American courts would not be
executable in Iran under thee circumstances and realisation of
the bank guarantee/letters of credit would cause irreparable
harm to the plaintiff. This contention was upheld. To avail of
this exception, therefore, exceptional circumstances which
make it impossible for the guarantor to reimburse himself if
he ultimately succeeds, will have to be decisively established.
Clearly, a mere apprehension that the other party w ill not be
able to pay, is not enough. In Itek case there was a certainty
on this issue. Secondly, 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 present case, if the Petitioner succeeds in the arbitration proceedings
and/or in any other proceedings, it can always seek refund/reimbursement of
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the said amount of Rs.25 crores from the Respondent No.1 and it is not the
case of the Petitioner that it will not be possible for the Petitioner to recover
the said amount of Rs.25 crores from the Respondent No.1. As correctly
submitted on behalf of the Respondent No.1, the Petitioner has done nothing
more than to merely plead fraud of irretrievable injustice and special equities
without establishing cogent grounds in respect of the same. In view thereof,
no case is made out by the Petitioner as to how irretrievable injustice will be
caused to the Petitioner in case the Bank Guarantee is encashed. Also no
special equities have been made out by the Petitioner for grant of injunction
against encashment of the Bank Guarantee. In the case of Dwarikesh Sugar
Industries Ltd. Versus Prem Heavy Engineering Works (P) Ltd. And Another
(supra), the Hon'ble Supreme Court held in paragraph 22 as under :
"22. The second exception to the rule of granting injunction, i.e.,
the resulting of irretrievable injury, has to be such a circumstance
which would make it impossible for the guarantor to reimburse
himself, if he ultimately succeeds. This will have to be decisively
established and it must be proved to the satisfaction of the court
that there would be no possibility whatsoever of the recovery of the
amount from the beneficiary, by way of restitution."
No such circumstance exists in the present case.
27. In the light of the above circumstances, in my opinion, the Petitioner
has not made out any case to restrain the Respondent No.1 from invoking the
said Bank Guarantee. The Arbitration Petition is therefore dismissed with
costs.
(S. J. KATHAWALLA, J.)
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