M/S. Kse Electricals Pvt. Ltd vs The Project Director
2021 Latest Caselaw 1464 Cal/2

                     IN THE HIGH COURT AT CALCUTTA
                      Ordinary Original Civil Jurisdiction
                               ORIGINAL SIDE
                            (Commercial Division)

Present:-
THE HON'BLE JUSTICE MOUSHUMI BHATTACHARYA


                               A.P. 232 OF 2021

                     M/S. KSE ELECTRICALS PVT. LTD.
                                       vs
     THE PROJECT DIRECTOR, BANGLADESH RURAL ELECTRIFICATION
                               BOARD AND ANR.

For the Petitioner             :     Mr. Sabyasachi Chowdhury, Sr. Adv.
                                     Mr. Rajarshi Dutta, Adv.
                                     Mr. V. V. V. Sastry, Adv.
                                     Mr. Tridib Bose, Adv.
                                     Mr. Debjyoti Saha, Adv.


For the Respondent no. 2       :     Mr. K. Thaker, Adv.
                                     Mr. Varun Kedia, Adv.


Reserved for Judgment on       :     08.10.2021.


Delivered on                   :     23.11.2021


Moushumi Bhattacharya, J.

1. The issue which falls for consideration in the present case is the ground

on which invocation of a bank guarantee can be restrained.

2. By an order dated 10th May, 2021 a learned Single Judge restrained the

respondent No. 2 from making any payment under a bank guarantee invoked

by the respondent No. 1. The said order was modified on 21st May, 2021 by

another Learned Judge confirming the interim order of injunction and further

restraining the respondent No. 1 from encashing the bank guarantee. The letter

of invocation was stayed and the petitioner was given the liberty of producing a

copy of the order before the respondent No. 2 in their seats at Kolkata and

Dhaka. The petitioner and the respondent No. 2 have filed their respective

affidavits thereafter. The respondent No. 1 has however not contested in the

proceedings and has not challenged or responded to the orders of injunction by

way of affidavit or otherwise. These orders were passed in the present

application filed by the petitioner under Section 9 of The Arbitration and

Conciliation Act, 1996.

3. A brief background of the facts is necessary for a better understanding of

what brought the petitioner to this court by way of the present Arbitration

Petition.

4. The factual matrix in the present matter is almost identical to A.P No.

230 of 2021. The parties are the same and so is the underlying contract as well

as the terms of the bank guarantee. The small factual differences relate to the

transaction. Counsel appearing for the petitioner and the respondent No. 2

have also proceeded on the substantial similarities of the issues involved in

A.P. 230 of 2021, A.P. 231 of 2021 and A.P. 232 of 2021.

5. This judgment and those delivered in A.P. 230 of 2021 and A.P. 231 of

2021 should be read in the aforestated context.

A brief factual background:

6. The petitioner was awarded a contract for supply of conductor and

related accessories to the respondent No. 1 pursuant to a global tender floated

by the latter. The contract dated 26th October, 2016 was a Carriage and

Insurance Paid (CIP) contract for a price of USD 1,399,800. The petitioner was

required to furnish a performance security for an amount of USD 139,980 for a

period of 24 months under the relevant clause of the General Conditions of

Contract (GCC). The contract was governed by the GCC and the Special

Conditions of Contract (SCC) which also provided for the mode of payment to

be made by the respondent No. 1 to the petitioner. The petitioner submitted the

performance security in the form of a bank guarantee dated 20th October,

2016. The petitioner, being a constituent of Citibank NA, Kolkata applied for

the bank guarantee to be issued in favour of the respondent No. 1 whereupon

Citibank NA, Kolkata issued a stand-by letter of credit in favour of the Citibank

NA, Bangladesh at Dhaka. Citibank, NA Dhaka issued a performance security

in the form of a bank guarantee based on the stand-by letter of credit.

7. The petitioner supplied the entire material under the contract by 13th

March, 2019 which was received by the respondent on 21st May, 2019 and the

respondent No. 1 prepared Receiving Reports containing the details of the

goods dispatched upon receipt of the goods. The warranty in respect of the

goods shipped and supplied by the petitioner to the respondent No. 1 was to

remain valid for 12 months after delivery of the goods and acceptance of the

same at the final destination under Clause 28.3 of the GCC. The warranty

expired on 13th March, 2020.

8. On 9th March, 2021, the respondent No. 1 alleged short-supply of goods.

Thereafter, the respondent No. 1 issued a letter of invocation dated 5th May,

2021 and requested the Citibank NA, Dhaka to encash the bank guarantee.

The petitioner had renewed the bank guarantee and kept it alive on account of

10% of the contract price having been retained by the respondent No. 1 under

the relevant clause of the GCC.

Contentions of the Respondent No. 2 Citibank NA:

9. The primary contention of Mr. K. Thakker, learned counsel appearing for

Citibank NA, is that this court lacks territorial jurisdiction to entertain the

present application.

10. According to counsel, the contract was executed at and is governed by

the laws of Bangladesh; the contract was to be performed at Bangladesh and

the bank guarantee issued by Citibank NA, Dhaka is governed by the laws of

Bangladesh. It is also contended that there is an absence of substantive

jurisdiction since the Citibank NA, Kolkata and Citibank NA, Dhaka are

separate entities governed by different banking regulations. Counsel submit

that neither of the two parties are parties to the arbitration agreement between

the petitioner and the respondent No. 1 which forms the basis of the

application and hence no relief can be sought against them. The other

contention is that the bank guarantee is an independent contract between the

bank and the beneficiary, invocation whereof is to be tested on the terms of the

bank guarantee. It is also submitted that the petitioner has not been able to

make out an established case of fraud or irrevocable injury or special equities

which would vitiate the entire underlying transaction.

Response of the petitioner to the above contentions:

11. According to Mr. Sabyasachi Chowdhury, and Mr. Rajarshi Dutta,

learned Counsel, Citibank NA, Kolkata and Citibank NA Bangladesh are one

and the same entity in respect of the bank guarantee and the respondent No. 2

has been impleaded as a bank carrying on business from Kolkata, India with

an overseas branch at Bangladesh, Dhaka. Counsel relies on Clause 10.2 of

the GCC which contains the arbitration agreement under which the arbitration

proceeding is to be conducted in accordance with the UNCITRAL Arbitration

Rules, 2010. Counsel relies on Section 2 and the relevant clauses thereunder

of the 1996 Act which would bestow the jurisdiction on this court to entertain

the application. On the merits of the dispute, it is contended that the petitioner

has already received 90% of the contract price and the respondent No. 1 is

withholding 10% as retention money and that the respondent No. 1 has no

other claims against the petitioner. Counsel points to the conduct of Citibank

NA, Kolkata espousing the cause of respondent no. 1 as well as Citibank NA,

Bangladesh.

12. Counsel submits that there are special equities in the present matter to

warrant an invocation of the bank guarantee.

13. The arguments advanced by learned counsel appearing for the petitioner

and the respondent No. 2 (the respondent No. 1 is not represented in this

proceeding) would make it clear that the challenge to the orders of injunction

passed by the court is mounted on the premise of the lack of territorial and

substantive jurisdiction. The decision accordingly proceeds on the aforesaid

basis.

Lack of territorial jurisdiction:

14. The objection to this court entertaining the present application on the

lack of territorial jurisdiction may be answered on the basis of the clauses

contained in the General Conditions of Contract (GCC) which governs the

contract entered into between the petitioner and the respondent No. 1 on 26th

October, 2016. Under Clause 9.1 of the GCC- "Governing Law" - the contract

shall be governed by and interpreted in accordance with the laws of the

Purchaser's Country, unless otherwise specified in the Special Conditions of

Contract (SCC). Clause 10.2- "Settlement of Disputes" -provides for arbitration

where the parties have failed to resolve their disputes by mutual consultation

and provides that the arbitration proceedings shall be conducted in accordance

with the rules and procedure specified in the SCC. The SCC provides that the

rules of procedure for arbitration proceedings pursuant to Clause 10.2 of the

GCC shall be settled by arbitration in accordance with the UNCITRAL

Arbitration Rules, 2010. Clause 9.1 of the GCC which provides that the

contract shall be governed by the laws of the Purchaser's Country, which is

Bangladesh in this case, would not stand in the way of this court assuming

jurisdiction of the matter since the governing law of the contract only decides

the substantive provisions of law which would govern the arbitration between

the parties; Reference : Bharat Aluminium Co. vs Kaiser Aluminium Technical

Services Inc.: (2012) 9 SCC 552 , where the Supreme Court made a distinction

between the place/seat of the arbitration and the location of the subject matter

of the suit.

15. The question with regard to territorial jurisdiction may also be answered

with reference to Section 2(1)(e)(ii) of The Arbitration and Conciliation Act,

1996, which defines "Court" to mean in the case of International Commercial

Arbitration, the High Court in exercise of its Ordinary Original Civil

Jurisdiction, having jurisdiction to decide the questions affirming the subject-

matter of the arbitration if the same had been the subject-matter of a suit.

Second, it is also undisputed that the transaction is an International

Commercial Arbitration as defined under Section 2(f) of the Act since the

dispute arises out of a commercial contractual relationship involving a

corporation incorporated in Bangladesh. Third, the fact that this court would

have jurisdiction to receive, try and entertain the dispute had it been filed by

way of a suit would be evident from the averments in the petition. The

pleadings in the petition indicate that sufficient cause of action has arisen

within the jurisdiction of this court including the commencement of the

transaction entered into between the parties, the working out of the

commercial relations between the parties, the dispute and differences between

them as evident from the correspondence exchanged and the culmination

thereof in the form of the letter of demand issued by the respondent no.1 to the

petitioner and the letter of invocation dated 5th May, 2021 to the respondent

no.2 and copied to the petitioner. Although speculative, had the petitioner

instituted a suit for the same relief against the respondents, there would have

been sufficient ground to grant leave to the petitioner under Clause 12 of the

Letters Patent, 1865 to proceed with the same.

16. Section 2(4) of the Act is an interesting follow-up to Section 2(1)(e)(ii) in

the matter of a court assuming jurisdiction in entertaining matters under Part I

of the Act. Under Section 2(4), Part I of the 1996 Act shall apply to every

arbitration under any other enactment for the time being in force unless the

provisions of Part I are inconsistent with the other enactment or the rules

framed thereunder. This provision therefore lends weight to the submissions

made on behalf of the petitioner with regard to eclipsing the Arbitration Rules

mentioned in the SCC and also in the matter of territorial jurisdiction.

17. Section 2(2) of the Act provides that subject to an agreement to the

contrary, the provisions of Sections 9, 27, 37(3)(1)(b) shall also apply to

International Commercial Arbitrations despite the place of arbitration being

outside India and an arbitral award made or to be made in such place is

enforceable and recognised under Part II of the Act. In the present case, the

Contract between the parties does not provide for a seat or a place outside

India. Hence Part I of the Act would be applicable in the given facts. Since the

Contract or the GCC does not exclude the applicability of Part I or Section 9 of

the Act, this court would have jurisdiction to try and decide the present

application filed under Section 9 of the Act. The wide and unfettered powers of

a court under Section 9 has been reiterated in countless decisions of the

Supreme Court and the High Courts. Section 2(2) as amended by the

amendment of 2016, closes the loops for a party to object to interim measures

under Section 9 unless the parties have specifically and unequivocally agreed

to exclude the operation of Part-I of the Act. The issue of maintainability of the

arbitration petition was also considered by the learned Single Judge on 10th

May, 2021 and the order of injunction was confirmed and extended to the

respondent no.1 despite such objection.

Whether the respondent no.2 Citibank NA should be treated as consisting of

two different entities?

18. It would be evident from the transaction that the petitioner, the

respondent no.1 and Citibank NA, Kolkata (respondent no.2) treated Citibank

NA, Bangladesh at Dhaka as an overseas office of Citibank NA, Kolkata.

Citibank NA carries on business from different offices in India including the

one at Kolkata. Since the petitioner was required to submit a Performance

Security in the form of a bank guarantee for a sum of USD 139,980 the

petitioner applied before the respondent no.2 at its office at Kolkata for a bank

guarantee to comply with the aforesaid stipulation. The application for bank

guarantee was made by the petitioner at Citibank NA in Kolkata whereupon

Citibank from its office at Kolkata issued a Standby Letter of Credit in favour of

Citibank at Dhaka. On the basis of such Standby Letter of Credit, Citibank NA,

Dhaka issued a Performance Security in the form of a bank guarantee, as the

overseas office of Citibank NA, Kolkata.

19. The above facts would therefore indicate that Citibank NA, from its

overseas office at Dhaka issued the Performance Security in the form of a bank

guarantee on 20th October, 2016 for USD 139,980. No fact has therefore been

pleaded or proved to show that Citibank NA should be seen as two separate

and disparate entities namely the Kolkata and the Dhaka branches.

Conduct of respondent no.2 Citibank NA:-

20. By a letter dated 7th June, 2021 from the petitioner was informed that

Citibank N.A. Bangladesh had enquired from the respondent no. 1 about its

stand regarding the orders of injunction. The petitioner was also informed that

the respondent no. 1 had reiterated its demand for payment and intends to

flout the orders passed by the court. Subsequent correspondence from

Citibank NA, Kolkata to the petitioner shows that the petitioner is being

pressurized in respect of the invocation of the performance guarantee. The

conduct of the respondent no.2 makes it evident that the respondent no.2 has

made elaborate submissions in defence of the first respondent even though the

first respondent has neither appeared in nor contested the present application.

21. The cases shown on the subject of bank guarantees should be seen in

this context. In Hindustan Construction Co. Ltd. vs State of Bihar; (1999) 8 SCC

436, the Supreme Court stressed on the invocation being in terms of the bank

guarantee and the requirement of special equities. The Supreme Court was of

the opinion that special equities existed in favour of the appellants since the

defendants did not have sufficient funds to complete the work. The other set of

decisions namely Girish Mulchand Mehta vs Mahesh S. Mehta; 2010 (1) Bom CR

31 (Division Bench of the Bombay High Court), Bluecoast Infrastructure

Development Pvt.Ltd. vs Blue Coast Hotels Ltd (Single Bench of the Delhi High

Court), Geodesic Techniques vs L&T (Single Bench of the Madras High Court)

and Valentine Maritime Ltd vs Kreuz Subsea Pte. Limited (Division Bench of the

Bombay High Court) are for the proposition that while the jurisdiction of the

Court under section 9 of the Act can only be invoked by a party to the

arbitration agreement, Section 9 does not limit such jurisdiction to pass

interim measures only against a party to an arbitration agreement. In Valentine

Maritime, the Bombay High Court specifically pointed out that orders are

regularly passed restraining banks from releasing payment under bank

guarantees though the bank may not be a party to the arbitration agreement.

22. In Arch Hi-Rise (P) Ltd. vs. Yatin Bhimani: (2006) 4 CHN 204, a Division

Bench of this court was concerned with the issue of whether an interim order

can be passed against a third party who is not a party to the arbitration

agreement. The decision can be factually distinguished from the present case

since there is no indication from the facts that the appellant third party was

inextricably connected to the dispute or was required to be impleaded as a

necessary and proper party thereby. The Supreme Court in U.P. Co-operative

Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd.: (1988) 1 SCC 174,

was of the clear view that there was no fraud or irretrievable injustice involved

in the facts of that case. The court reiterated that for restraining the operation

of a bank guarantee, there should be good prima facie case of fraud and special

equities in the form of preventing irretrievable injustice between the parties. In

Hindusthan Paper Corporation Ltd. vs. Keneilhouse Angami: (1990) 1 Cal LT

200, a Division Bench of this Court, relying on an earlier decision of this court

in Centax (India) Ltd. Vs Vinmar Impex Inc. Ltd; AIR 1986 Cal 356 reiterated the

importance of the terms and conditions of a bank guarantee or a Letter of

Credit for its enforceability. The unreported decision of a Division Bench of this

court in Bridge & Roof Co. (I) Ltd. vs. SKP Buildcon Pvt. Ltd. in APO No. 495 of

2017 was only concerned with the hesitation of a court to stand in the way of

an unconditional bank guarantee being invoked and the apparent lack of

reasons in the order of the first court. The unreported decision in Deific Abode

LLP vs Union of India in WPA 11123 of 2020 is on the principle of binding

precedents and has presumably been cited to lessen the impact of the effect of

the decisions of the Bombay and Madras High Courts. South East Asia

Shipping Co. Ltd. vs Nav Bharat Enterprises Pvt. Ltd; (1996) 3 SCC 443 was

concerned with the question whether any part of the cause of action had a

reason for the Delhi High Court to entertain the suit and the Supreme Court

was of the view that cause of action must include some act done by the

defendant. The decision was not concerned with an arbitration agreement or

the considerations which would normally arise in respect of an application for

interim measures under Section 9 of the Act. Although several decisions have

been cited on behalf of the parties, none of the decisions persuade the court to

disagree with the contentions made on behalf of the petitioner on the merits of

the dispute.

23. With regard to the objection taken on behalf of the respondent no. 2 that

a non-party to an arbitration agreement cannot be impleaded in the present

proceeding, this court is of the view that Section 9 read with Section 2(1)(a) of

the 1996 Act provides for a right to apply for interim measures only to a "party"

to an arbitration agreement. There is no embargo however in the provision

against implementing a non-party to an arbitration proceeding where the

presence of such non-party is necessary to give effect to the order that may be

passed in the application against a party to the arbitration agreement. The

petition contains an averment that the respondent no. 2 has been impleaded

for proper and effective adjudication of the issues involved in the present

proceeding. This pleading finds factual support from the petitioner applying for

a bank guarantee to be issued in favour of the respondent no. 1 which was

impleaded by Citibank NA, Kolkata issuing a stand-by letter of credit in favour

of Citibank NA, Bangladesh at Dhaka who in turn issued a performance

security in the form of a bank guarantee. Hence in order to seek an order of

injunction, and in the event such injunction is granted, to be effective,

respondent no. 2 has been made a party to the proceedings and relief sought

against it. The issue of maintainability is therefore answered in favour of the

petitioner.

Substantive jurisdiction and merits of the dispute:

24. The admitted fact in the present case is that the petitioner completed

supply of the goods to the respondent no. 1 on 13th March, 2019 (shipment

received by the respondent no. 1 on 21st May, 2019) and there was no

contemporaneous demand or objection from the respondent no. 1 in relation to

the supplies made within the period of warranty which was till 13th March,

2020, from the date of delivery to the date of acceptance at the final destination

indicated by the respondent no. 1. Under Clause 28.3 of the GCC, the warranty

was to remain valid for 12 months after the goods or any portion thereof have

been delivered to and accepted at the final destination indicated in the SCC or

for 18 months after the date of shipment from the port or place of loading in

the country or origin, whichever period concludes earlier. The respondent No. 1

invoked the bank guarantee in terms of the letter dated 5th May, 2021 two

years after the completion of the supply of goods and more than one year after

the expiry of the warranty. Notably the demand on account of short-supply of

goods was made by the respondent No. 1 for the first time on 9th March, 2021.

The petitioner has already received 90% of the payment for supply of the entire

materials under the contract to the respondent no. 1 in accordance with clause

16.1 of the GCC which provides for the terms of payment under the contract.

The respondent no. 1 has however retained 10% of the contract price and

withheld the same.

25. The letter of invocation dated 5th May, 2021 relates to the 10% retention

money under the contract as stated in the said letter. The letter of invocation

further makes it clear that the 10% retention money is still unsettled. The

invocation was not concerned with the performance obligations of the petitioner

and was only confined to the 10% retention money. The performance security

issued by the Citibank NA, Dhaka in the form of bank guarantee and the

stand-by letter of credit issued by Citibank NA, Kolkata relate to the obligation

of the petitioner to supply the materials to the respondent no. 1. This would

appear from the application made by the petitioner to Citibank NA, Kolkata

with the respondent no. 1 indicated as the beneficiary.

26. The performance security also makes it clear that the undertaking on the

part of the respondent no. 2 to pay the beneficiary (respondent no. 1) was

confined to the beneficiary's demand and statement in relation to breach of the

obligations of the petitioner under the contract. Since the petitioner performed

its obligations under the contract by executing the entire supplies by March,

2019 and received 90% of the contract price for the same, there can be no

further basis for any outstanding claim by the respondent no. 1 against the

petitioner under the contract. No claim on account of liquidated damages has

been made by the respondent. The facts hence must be construed in favour of

the petitioner in confirming the order restraining the invocation of the bank

guarantee.

The Law:

27. In contemporary business, trade and commercial transactions, both

domestic and international, significant complexities are involved; for instance

spatial distance between counterparties who engage in such commercial

transactions. As such, it is often very difficult and challenging to approximately

assess the creditworthiness of the counterparty or the business partner.

Hence, over a period of time, commercial instruments have emerged for

securing contractual payments. A Bank Guarantee is such an instrument that

has evolved for securing payments with respect to commercial transactions.

Under Section 126 of The Indian Contract Act, 1872, a 'Contract of guarantee'

is a contract to perform the promise, or discharge the liability, of a third person

in case of his default. In the case of a Bank Guarantee, a bank, who is the

guarantor, undertakes or guarantees to pay the beneficiary an amount of

money as specified in the guarantee if the original contract's debtor fails to

adhere to his contractual obligations.

28. Courts are generally slow to interfere with the transaction between a

bank and the beneficiary which is seen as being independent of the underlying

contract between the lender and the supplier unless conditions call for such

interference. The three conditions, as accepted in several decisions, are fraud of

an egregious nature; special equities or the invocation not being in terms of the

bank guarantee. It is sufficient if a party seeking a restraint on the invocation

is able to establish any one of the three requirements. The test of special equity

or irrevocable injustice is a matter of an assessment by a court on the

particular facts presented to it for stay on a notice of invocation. The injury or

injustice must be irrevocable, irremediable and irreversible: Refer: State Bank

of India vs Sun Pharmaceuticals Industries Ltd: AIR 2019 CAL 385. The party

seeking an order for restraint must show that the invocation and consequent

payment by the bank to the intended beneficiary would set the party back-

irreversibly- in monetary terms which may not be recovered in the foreseeable

future.

29. In the present case, the petitioner has satisfied two of the three

ingredients, namely special equity and the invocation not being in terms of the

guarantee. The clauses in the contract and more particularly the GCC clearly

demonstrate that the bank guarantee was furnished towards performance

security. There can be no issue with regard to performance since the petitioner

has already received 90% of the contract price as discussed above. The

invocation letter also demonstrates that there cannot be any performance issue

with regard to the supplies effected by the petitioner. The invocation letter does

not contain any allegation of a breach of performance obligations by the

petitioner. The special equity also stands satisfied by reason of the petitioner

facing an immediate and irreversible financial loss if the payment is made by

Citibank NA, Dhaka to the respondent No. 1 in terms of the Letter of

Invocation. The submission made on behalf of the respondent no. 2 that

Citibank NA, Dhaka may already have made payment to the respondent no. 1

thereby rendering the present application infructuous, is not a factor which

would deter this court to permit the order of injunction to be subverted by

errant parties. If Citibank NA, Dhaka has the temerity to frustrate the orders of

injunction passed against the respondents, it must also bear the risk and

consequence of such action.

30. The interim orders passed by learned judges of this court on 10th May,

2021 and modified on 21st May, 2021 were on a particular set of facts before

filing of affidavits. This court may have considered altering or further modifying

the orders of injunction at the instance of the respondent No. 2 had compelling

facts subsequently been disclosed on affidavits. Apart from territorial

jurisdiction, no other grounds have been pleaded or shown which would

warrant varying the orders when all relevant facts were taken into

consideration by the learned Judges. It is also significant that the respondent

no. 1 has not appeared or contested these proceedings and respondent no. 2

has taken to "shadow boxing" on behalf of the absentee wrongdoer.

31. In view of the above reasons and finding that the contentions made on

behalf of the petitioner are of substance, the order dated 10th May, 2021 as

modified by the order dated 21st May, 2021 is confirmed and made absolute.

A.P. No. 232 of 2021 is disposed of in accordance with the above.

Urgent Photostat certified copy of this Judgment, if applied for, be

supplied to the parties upon compliance of all requisite formalities.

(MOUSHUMI BHATTACHARYA, J.)