Chattisgarh High Court
Arss - Sips (Jv) A Joint Venture vs Union Of India on 20 December, 2021
Arb. Appeal No.33/2020
Page 1 of 27
AFR
HIGH COURT OF CHHATTISGARH, BILASPUR
Arbitration Appeal No.33 of 2020
Order reserved on: 25-11-2021
Order delivered on: 20-12-2021
{Arising out of order dated 4-7-2020 passed in M.J.C.No.9/2020 by the
Judge, Commercial Court (District Level), Nava Raipur, Atal Nagar, Distt.
Raipur}
1. ARSS - SIPS (JV), a Joint Venture, having its registered office at 129,
Transport Center, Rohtak Road, Punjabi Baag, New Delhi
2. M/s ARSS Infrastructure Projects Ltd., having its registered office at
Plot No.38, Sector A, Zone D, Mancheswar Industrial Estate,
Bhubaneswar, Odisha
3. Shyam Indus Power Solutions Pvt. Ltd., having its registered office at
Building No.16A, Najafgarh Road, Moti Nagar, Shivaji Marg, New
Delhi - 110015
---- Appellants
Versus
1. Union of India, through the Secretary, Ministry of Railways, Rail
Bhawan, 1, Raisina Road, New Delhi
2. South East Central Railway, through its General Manager,
Headquarter, Bilaspur, Chhattisgarh
3. Chief Administrative Officer (Construction), South East Central
Railway, Bilaspur, Chhattisgarh
4. Chief Engineer (Construction - I), South East Central Railway,
Bilaspur, Chhattisgarh
---- Respondents
------------------------------------------------------------------------------------------------------
For Appellants: Mr. Vijay Dubey and Mr. Amrito Das, Advocates.
For Respondents: Mr. H.S. Ahluwalia, Advocate.
------------------------------------------------------------------------------------------------------
Hon'ble Shri Sanjay K. Agrawal and
Hon'ble Shri Arvind Singh Chandel, JJ.
C.A.V. Order
Sanjay K. Agrawal, J.
1. Invoking the appellate jurisdiction of this Court under Section 37 of the
Arb. Appeal No.33/2020
Arbitration and Conciliation Act, 1996 (for short, 'the AC Act'), the
appellants herein have called in question the impugned order dated 4-
7-2020 passed by the learned Judge, Commercial Court (District
Level), Nava Raipur, Atal Nagar, District Raipur, whereby the learned
Commercial Court has rejected the application filed by the appellants
herein seeking interim injunction under Section 9(1) of the AC Act
finding no merit and refused to restrain the respondents herein from
encashing the performance bank guarantee (PBG) to the extent of ₹
6,77,26,553/-.
2. Respondent No.2 South East Central Railway issued a notice inviting
tender for work in Lajkura-Raigarh Section for construction of 4 th line
between Jharsuguda and Bilaspur. The scope of the said work was
widening, including soil investigation, design of bridges, execution of
earthwork, minor bridges, major bridges, RUB, extension of FOB, staff
quarter and other service buildings, supply of ballast and other
miscellaneous works in which the appellants participated and were
declared successful bidders and consequently, letter of acceptance
(LOA) was issued in their favour on 21-9-2016. Accordingly,
agreement dated 13-6-2017 came to be executed between the parties
with a stipulation that the work will be completed within 24 months
from the date of issuance of LOA dated 21-9-2016 and accordingly,
the appellants submitted bank guarantee worth ₹ 6,77,26,553/- in
shape of performance bank guarantee (PBG) with the respondents as
per the terms and conditions of the NIT. However, thereafter, in the
course of execution of work, dispute arose between the parties
regarding laxity in performance and dissatisfaction with progress of
work, and when the work in question could not be completed within
Arb. Appeal No.33/2020
the stipulated time despite several extensions given to the appellants,
ultimately, respondent No.2 terminated the contract on 2-1-2020 which
was called in question by the appellants herein before this Court by
filing W.P.(C)No.31/2020 and which was dismissed by this Court
(Division Bench) on 24-2-2020 giving liberty to the appellants to
invoke the arbitration clause, if any.
3. It is the case of the appellants that since arbitrator was not appointed
despite making application, thereafter, they filed application under
Section 9(1) of the AC Act on 28-2-2020 before the District Judge,
Bilaspur for grant of interim injunction, which was returned to the
appellants to file before the Commercial Court (District Level) after
coming into force of the Commercial Courts Act, 2015. In the said
application, it was pleaded that the contract period for completion of
the said contract was extended by the respondents herein up to 31-3-
2020 invoking clause 17-A of the general conditions of contract
without any penalty and without any liquidated damages, but the
contract in question has been terminated on 2-1-2020 prior to last date
of completion of work i.e. 31-3-2020, which is ex facie illegal and bad
in law and by which the appellants have prima facie case and are
entitled to obtain interim injunction under Section 9(1) of the AC Act.
4. The respondents filed reply to the said application filed under Section
9(1) of the AC Act before the Commercial Court opposing the said
application stating inter alia that the appellants have neither prima
facie case in their favour nor balance of convenience lies in their
favour and there is no irreparable loss to the appellants if the
application for interim injunction is rejected and as such, the
application is liable to be rejected.
Arb. Appeal No.33/2020
5. The learned Commercial Court by its impugned order rejected the
application holding that invocation of bank guarantee and payment
thereunder can be restrained only on three grounds namely, fraud,
irretrievable injury and special equity, but the appellants have not
setup any such ground out of the aforesaid three grounds for obtaining
injunction against invocation of bank guarantee and accordingly,
rejected the application which has been sought to be questioned by
way of this arbitration appeal.
6. Mr. Vijay Dubey and Mr. Amrito Das, learned counsel appearing for
the appellants herein, would submit that the learned Commercial
Court is absolutely unjustified in rejecting the application under
Section 9(1) of the AC Act. They would further submit that invocation
of bank guarantee in the present case is per se unjust, illegal and bad
in law because the respondents themselves extended the contract
under clause 17-A and they have not invoked clause 17-B of the
general conditions of contract meaning thereby that extension was not
because of any fault on the part of the contractor. However, even
before that, the contract was terminated on 2-1-2020 without
specifying under which clause the contract was found to be violated
either in terms of progress of work or otherwise. Relying upon the
decisions of the Supreme Court in the matters of Hindustan
Construction Co. Ltd. v. State of Bihar and others 1, Standard
Chartered Bank v. Heavy Engineering Corporation Ltd. and another 2
and Hindustan Steelworks Construction Ltd. v. Tarapore & Co. and
another3, they would submit that in such circumstances, the
respondents be restrained from invocation of performance bank
1 (1999) 8 SCC 436
2 (2020) 13 SCC 574
3 (1996) 5 SCC 34
Arb. Appeal No.33/2020
guarantee furnished by the appellants. Mr. Das, learned counsel,
would also submit that extension of contract period for completion of
work by virtue of clause 17-A of the general conditions of contract
would amount to "special equity" and that would furnish a ground for
grant of interim injunction restraining encashment of performance
bank guarantee and as such, the appeal deserves to be allowed and
the order of the Commercial Court deserves to be set-aside.
7. Mr. H.S. Ahluwalia, learned counsel appearing for the respondents,
would take preliminary objection stating inter alia that since now, the
Arbitral Tribunal has been constituted by the respondents by order
dated 23-11-2021, therefore, by virtue of sub-section (3) of Section 9
of the AC Act, arbitration appeal would not be maintainable and
remedy of the appellants, if any, is to approach the Arbitral Tribunal so
constituted for seeking any interim injunction. He would further submit
that earlier, when the appellants had approached this Court by filing a
writ petition challenging the order of termination of contract and
invocation of bank guarantee, an order was passed by the Division
Bench on 24-2-2020 in W.P.(C)No.31/2020 wherein, though, liberty
was granted to the petitioners to take remedy of seeking adjudication
of dispute by way of arbitration, observations were made on prima
facie consideration that the progress of work was not satisfactory. He
would also submit that such observation shows that prima facie
progress of work by the appellants was not found satisfactory,
therefore, the contract was terminated. Relying upon the decisions of
the Supreme Court in the matters of Gujarat Maritime Board v. Larsen
and Toubro Infrastructure Development Project Limited and another 4
4 (2016) 10 SCC 46
Arb. Appeal No.33/2020
and Andhra Pradesh Pollution Control Board v. CCL Products (India)
Limited5, learned counsel would submit that in such circumstances,
this Court would not normally interfere with invocation of bank
guarantee and as such, the learned Commercial Court has rightly
rejected the application for interim injunction filed by the appellants
and the instant appeal deserves to be dismissed.
8. Replying to the submission of learned counsel for the respondents
relating to applicability of Section 9(3) of the AC Act, Mr. Das, learned
counsel for the appellants, would submit that it is a case where
jurisdiction under Section 9(1) of the AC Act has been invoked by the
appellants on 28-2-2020 and Arbitral Tribunal has been constituted
only on 23-11-2021, therefore, sub-section (3) of Section 9 would not
be applicable and he would rely upon the decision of the Supreme
Court in the matter of Arcelor Mittal Nippon Steel India Ltd. v. Essar
Bulk Terminal Ltd.6 to buttress his submission.
9. We have heard learned counsel for the parties and considered their
rival submissions made herein-above and also went through the
record with utmost circumspection.
10. Upon hearing learned counsel for the parties and after going through
the record, following two questions emerge for consideration: -
1. Whether upon constitution of Arbitral Tribunal by respondent
No.2 on 23-11-2021, the instant arbitration appeal arising out of
rejection of application under Section 9(1) of the AC Act would
not be maintainable by virtue of Section 9(3) of the AC Act?
2. Whether the learned Commercial Court (District Level) is
5 (2019) 20 SCC 669
6 2021 SCC OnLine SC 718
Arb. Appeal No.33/2020
justified in rejecting the application filed by the appellants under
Section 9(1) of the AC Act seeking interim injunction against
revocation of bank guarantee to the extent of ₹ 6,77,26,553/-?
Answer to Question No.1: -
11. It is vehemently submitted by Mr. Ahluwalia, learned counsel for the
respondents herein, that during the pendency of appeal, Arbitral
Tribunal has been constituted on 23-11-2021, therefore, arbitration
appeal would not be maintainable and is hit by sub-section (3) of
Section 9 of the AC Act, whereas in reply to this, it is submitted by Mr.
Vijay Dubey and Mr. Amrito Das, learned counsel for the appellants
herein, that since application under Section 9(1) of the AC Act has
already been entertained by the learned Commercial Court on 4-3-
2020 and it has finally been decided by that Court on its merit on 4-7-
2020 against which this appeal has already been entertained by this
Court on 30-7-2020 by granting interim order in favour of the
appellants, therefore, Section 9(3) of the AC Act would not be a bar
for finally adjudicating this arbitration appeal and it is not hit by Section
9(3) of the AC Act.
12. The question is, what would be the effect of constitution of Arbitral
Tribunal by respondent No.2 on 23-11-2021 upon this arbitration
appeal in view of sub-section (3) of Section 9 of the AC Act?
13. This question is no longer res integra and it has authoritatively been
adjudicated by the Supreme Court in Arcelor Mittal Nippon Steel India
Ltd. (supra) in which in paragraph 2, the following questions were
framed for adjudication and determination:
"2. The short question of law raised in this appeal is,
whether the Court has the power to entertain an application
Arb. Appeal No.33/2020
under Section 9(1) of the Arbitration and Conciliation Act,
1996, hereinafter referred to as "the Arbitration Act", once
an Arbitral Tribunal has been constituted and if so, what is
the true meaning and purport of the expression "entertain"
in Section 9(3) of the Arbitration Act. The next question is,
whether the Court is obliged to examine the efficacy of the
remedy under Section 17, before passing an order under
Section 9(1) of the Arbitration Act, once an Arbitral Tribunal
is constituted."
14. Their Lordships of the Supreme Court considered the above-stated
questions and in paragraph 95 held that the bar of Section 9(3) would
not operate, once an application has been entertained and taken up
for consideration. It was further held that it has never been the
legislative intent that even after an application under Section 9 of the
AC Act is finally heard, relief would have to be declined and the
parties have to be relegated to their remedy under Section 17 of the
AC Act. Finally, in paragraphs 107 and 108, their Lordships have held
that the bar of Section 9(3) operates where the application under
Section 9(1) had not been entertained till the constitution of the
Arbitral Tribunal, and observed as under: -
"107. It is reiterated that Section 9(1) enables the parties to
an arbitration agreement to approach the appropriate Court
for interim measures before the commencement of arbitral
proceedings, during arbitral proceedings or at any time
after the making of an arbitral award but before it is
enforced and in accordance with Section 36 of the
Arbitration Act. The bar of Section 9(3) operates where the
application under Section 9(1) had not been entertained till
the constitution of the Arbitral Tribunal. Ofcourse it hardly
need be mentioned that even if an application under
Section 9 had been entertained before the constitution of
the Tribunal, the Court always has the discretion to direct
the parties to approach the Arbitral Tribunal, if necessary
by passing a limited order of interim protection, particularly
when there has been a long time gap between hearings
and the application has for all practical purposes, to be
heard afresh, or the hearing has just commenced and is
likely to consume a lot of time. In this case, the High Court
Arb. Appeal No.33/2020
has rightly directed the Commercial Court to proceed to
complete the adjudication.
108. For the reasons discussed above, the appeal is
allowed only to the extent of clarifying that it shall not be
necessary for the Commercial Court to consider the
efficacy of relief under Section 17, since the application
under Section 9 has already been entertained and
considered by the Commercial Court. The judgment and
order under appeal does not, otherwise, call for
interference."
15. Reverting to the facts of the case in the light of the principles of law
laid down by their Lordships of the Supreme Court in Arcelor Mittal
Nippon Steel India Ltd. (supra), it is quite vivid that in the instant case,
application under Section 9(1) of the AC Act has been filed and
entertained by the Commercial Court and finally dismissed on merits
by order dated 4-7-2020 against which arbitration appeal has been
preferred on 10-7-2020 and entertained by granting interim order in
favour of the appellants herein on 30-7-2020 and therefore
constitution of Arbitral Tribunal by respondent No.2 on 23-11-2021
would not prevent this Court to decide this arbitration appeal filed
under Section 37 of the AC Act, calling in question the order rejecting
application under Section 9(1) of the AC Act finally on merits, which is
a continuation of proceeding under Section 9(1) of the AC Act. As
such, the preliminary objection raised on behalf of the respondents
that this arbitration appeal is not maintainable in view of constitution of
Arbitral Tribunal in terms of Section 9(3) of the AC Act, is hereby
overruled.
Answer to Question No.2: -
16. The question is, whether the learned Commercial Court (District Level)
is justified in rejecting the application under Section 9(1) of the AC Act
Arb. Appeal No.33/2020
filed by the appellants restraining revocation of bank guarantee by the
Bank in favour of the respondents?
17. The appellants have furnished bank guarantee on 10-10-2016 in
favour of the respondent SECR to the extent of ₹ 6,77,26,553/-. It is
the performance bank guarantee by which the Bank has unequivocally
undertaken to pay the said amount to the respondents
notwithstanding any dispute or disputes raised by the contractor in
any suit or proceeding pending before any court or Tribunal relating
thereto to discharge their liability and the said amount is payable. As
such, the bank guarantee is an unconditional bank guarantee. Clause
1.35 of the Special Conditions of Contract relates to performance
guarantee payable wherever the contract is rescinded.
18. At this stage, before entering into the merits of the matter, it would be
appropriate to refer to the provisions contained in Section 126 of the
Indian Contract Act, 1872 which provides and which defines "Contract
of guarantee" as under: -
"126. "Contract of guarantee", "surety", "principal debtor"
and "creditor".--A "contract of guarantee" is a contract to
perform the promise, or discharge the liability, of a third
person in case of his default. The person who gives the
guarantee is called the "surety"; the person in respect of
whose default the guarantee is given is called the "principal
debtor", and the person to whom the guarantee is given is
called the "creditor". A guarantee may be either oral or
written."
19. Section 126 of the Indian Contract Act, 1872 defines a contract of
guarantee as "a contract to perform the promise, or discharge the
liability, of a third person in case of his default". A guarantee is an
undertaking to be collaterally responsible for the debt, default, or
miscarriage of another. The essentials of a contract of guarantee are:
Arb. Appeal No.33/2020
• The contract of guarantee must have all the essentials of a
contract.
• There must be an existing debt, which should be recoverable.
• Existence of three parties in a contract of guarantee, ie,
principal debtor, creditor, and surety.
• There must be a distinct promise by the surety to pay the debt
in case of default by the principal debtor.
• The principal debtor must be primarily liable.
• The liability must be legally enforceable.
20. A bank guarantee is an independent and distinct contract between the
bank and the beneficiary and is not qualified by the terms of the
underlying transaction, or the primary contract between the person at
whose instance the bank guarantee is given and the beneficiary. The
nature of obligation of the bank is absolute, and not dependent upon
the inter se disputes or proceedings (see Hindustan Steel Works
Construction Ltd. v. Tarapore & Co.7). The bank is liable to pay as
soon as the demand is made by the creditor (see National Thermal
Power Corpn. Ltd. v. Flowmore Pvt. Ltd.8).
21. In the matter of Himadri Chemicals Industries Ltd. v. Coal Tar Refining
Co.9, the Supreme Court has held that in the matter of invocation of a
bank guarantee or letter of credit, a bank guarantee is an independent
and a separate contract and is absolute in nature. The existence of
disputes between the parties to the contract is not a ground for issuing
an order of injunction to restrain enforcement of a bank guarantee, or
letter of credit. In the matter of invocation, it is not open to a bank to
rely upon the terms of the underlying contract between the parties.
7 (1996) 5 SCC 34
8 (1995) 4 SCC 515
9 (2007) 8 SCC 110
Arb. Appeal No.33/2020
Their Lordships of the Supreme Court have enunciated the following
principles in the matter of injunction for restraining encashment of a
bank guarantee or a letter of credit: -
(i) While dealing with an application for injunction in the course of
commercial dealings, and when an unconditional bank guarantee or
letter of credit is given or accepted, the beneficiary is entitled to
realize such a bank guarantee or a letter of credit 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 realization of a bank guarantee or a letter of credit.
(iv) Since a bank guarantee or a letter of credit is an independent
and a separate contract and is absolute in nature, the 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
guarantee or letter of credit.
(v) Injunction against encashment may be granted if there is fraud
of an egregious nature which would vitiate the very foundation of
such a bank guarantee or letter of credit, and the beneficiary seeks
to take advantage of the situation.
(vi) Allowing encashment of an unconditional bank guarantee or a
letter of credit would result in irretrievable harm or injustice to one of
the parties concerned.
22. The principle laid down in Himadri Chemicals Industries Ltd. (supra)
Arb. Appeal No.33/2020
was followed by the Supreme Court in the matter of Vinitec
Electronics Pvt. Ltd. v. HCL Info Systems Ltd. 10 and it has been held
that in the case of an unconditional bank guarantee, the same are
payable by the guarantor on demand. When in the course of
commercial dealings, unconditional guarantees have been given or
accepted, the beneficiary is entitled to realise such a bank guarantee
in terms thereof, irrespective of any pending disputes. The bank
guarantee is an independent contract between the bank and the
beneficiary thereof. For a party to claim that the case falls under the
exception of fraud or special equities, proper pleadings must be made
out which lay down the factual foundation of the allegation of fraud or
special equities.
23. In the matter of NHAI v. Ganga Enterprise11, the Supreme Court has
held that a bank guarantee has to be strictly construed as per the
terms of the guarantee. The invocation must be in accordance with
the terms of the bank guarantee, and any deviation therefrom, would
render the invocation bad in law. If the enforcement is in terms of the
guarantee, the courts would normally refrain from interfering with the
enforcement of the bank guarantee. Interference would be justified if
the invocation is contrary to the terms of the guarantee, or in the case
of fraud.
24. In the matter of State of Maharashtra v. National Construction Co.
Bombay12, the Supreme Court analysed the law relating to bank
guarantees, and laid down the general rule in the following term:
"The rule is well established that a bank issuing a
guarantee is not concerned with the underlying contract
10 (2008) 1 SCC 544
11 AIR 2003 SC 3823
12 (1996) 1 SCC 735
Arb. Appeal No.33/2020
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 there is an allegation of fraud or the like,
the courts will not interfere, directly or indirectly, to withhold
payment, otherwise trust in commerce, national and
international, would be irreparably damaged. But that does
not mean that the parties to the underlying contract cannot
settle their 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."
Exceptions to Grant of Injunction of a Bank Guarantee: -
25. A bank guarantee must be honoured strictly in accordance with the
terms of the guarantee, subject to two exceptions. The first is in a
clear case of fraud, which the bank has notice of, and the beneficiary
seeks to take advantage of.
26. The Supreme Court in the matter of General Electric Technical
Services Company Inc. v. M/s. Punj Sons (P) Ltd. and another 13 held
that by interim injunction under Order 39 Rule 1 of the CPC, bank
guarantee cannot be interdicted by Court in the absence of fraud or
special equities in the form of preventing irretrievable injustice
between the parties. It was further held that it is the fraud of
beneficiary, not the fraud of somebody else.
27. In the matter of Svenska Handelsnbanken v. Indian Charge Chrome14,
their Lordships of the Supreme Court have held that fraud in
connection with the bank guarantee would vitiate the very foundation
of the bank guarantee. The fraud must be of an egregious nature
such as to vitiate the entire underlying transaction.
13 AIR 1991 SC 1994
14 (1994) 1 SCC 502
Arb. Appeal No.33/2020
28. The second exception to the general rule of non-intervention is if there
are 'special equities' in favour of injunction, such as when 'irretrievable
injury' or 'irretrievable injustice' would occur if such an injunction was
not granted {see B.S.E.S. Ltd. (Now Reliance Energy Ltd.) v. Fenner
India Ltd.15}.
29. In the matter of Dwarikesh Sugar Industries Ltd. v. Prem Heavy
Engineering Works (P) Ltd.16 the Supreme Court has held that in
respect of the second exception to the rule of granting injunction in
case of a bank guarantee, the resulting irretrievable injury has to be
such that it would make it impossible for the guarantor to reimburse
himself, if he ultimately succeeds, and the same shall have to be
decisively established. The Supreme Court has further held that 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.
30. The Supreme Court in the recent past in Andhra Pradesh Pollution
Control Board (supra) while taking note of its earlier decisions in the
matters of Ansal Engg. Projects Ltd. v. Tehri Hydro Development
Corpn. Ltd.17, SBI v. Mula Sahakari Sakhar Karkhana Ltd. 18 and
Hindustan Construction Co. Ltd. v. State of Bihar19 and relying upon
the same, held that absent a case of fraud, irretrievable injustice and
special equities, the Court should not interfere with the invocation or
encashment of a bank guarantee so long as the invocation was in
terms of the bank guarantee.
15 (2006) 2 SCC 728
16 (1997) 6 SCC 450
17 (1996) 5 SCC 450
18 (2006) 6 SCC 293
19 (1999) 8 SCC 436
Arb. Appeal No.33/2020
31. Thereafter, in Standard Chartered Bank (supra), the Supreme Court
again noticed its earlier decision in Himadri Chemicals Industries Ltd.
(supra) and held that bank guarantee is an independent contract
between bank and the beneficiary and the bank is always obliged to
honour its guarantee as long as it is unconditional and irrevocable
one. It has been further held that the dispute between the beneficiary
and the party at whose instance the bank has given the guarantee is
immaterial and is of no consequence, however, exceptions to this rule
are when there is a clear case of fraud, irretrievable injustice or
special equities. It was also held that the Court ordinarily should not
interfere with the invocation or encashment of the bank guarantee so
long as the invocation is in terms of the bank guarantee. Their
Lordships finally held that once the demand was made in due
compliance with bank guarantees, it was not open for the bank to
determine as to whether the invocation of the bank guarantee was
justified so long as the invocation was in terms of the bank guarantee.
32. In the matter of U.P. State Sugar Corporation v. Sumac International
Ltd.20 the Supreme Court has held that the exception of irretrievable/
irreparable injury, exceptional circumstances which make it impossible
for the guarantor to reimburse himself if he ultimately succeeds, will
have to be decisively established. A mere apprehension that the
other party will not be able to pay is not a sufficient ground to establish
irretrievable injury.
33. The Delhi High Court also in the matter of Intertoll ICS Cecons O&M
Company P. Ltd. v. National Highways Authority of India21, speaking
through A.K. Sikri, J. (as His Lordship then was) after analysing the
20 (1997) 1 SCC 568
21 ILR (2006) I Delhi 196
Arb. Appeal No.33/2020
judgments of the Supreme Court on the point, has laid down the
principles in paragraph 10 of the report as under: -
"10. The principles which may be distilled from the
aforesaid judgments and the observations made therein,
would be the following:
(a) The bank guarantee is an independent contract
between the bank and the beneficiary.
(b) When there is an unconditional bank guarantee and the
bank has agreed to make payment without demur or
protest, on beneficiary invoking the said bank guarantee,
the bank is under obligation to honour the said demand. It
is based on the rationale that otherwise trust in commerce,
national and international, would be irreparably damaged.
(c) The bank, or for that matter, the person at whose
instance the bank guarantee is given [and as a sequitter
even the court] will not go into the pending disputes or
nature thereof between the contractor and the
employer/beneficiary. The duty of the bank under a
performance guarantee is created by the document itself.
Once the documents are found to be in order, the bank has
to honour the same.
(d) The courts, at this stage, cannot even go into the
question as to whether the beneficiary has suffered any
damages or not. Therefore, the ground that in India only a
reasonable amount can be awarded by way of damages
even when the parties to the contract have provided for
liquidated damages, is not available in such proceedings.
(e) The court is also precluded from embarking on the
enquiry in encashment of bank guarantee the beneficiary is
trying to take undue enrichment.
(f) In so far as dispute between the parties to the underlying
contract is concerned, that has to be settled by resorting to
litigation or arbitration, as the case may be.
(g) The courts should, therefore, be slow in granting the
injunction to restrain the realization of such a bank
guarantee.
(h) However, there are two well recognized exceptions to
this rule which are:
Arb. Appeal No.33/2020
(1) A fraud of egregious nature.
(2) The invocation/encashment of bank guarantee
would result in irretrievable harm or injustice to one of
the parties.
(i) In some cases third exception is also carved out viz.
when there are special equities in favour of the person
seeking injunction.
(j) In case the bank guarantee is not invoked in terms
thereof, the bank can refused to honour the bank
guarantee as in that case it would not be in accordance
with the agreed stipulation and invocation would be
improper. This can be treated as the fourth exception as in
such a case injunction can be granted."
34. In the matter of State Trading Corporation of India Ltd. v. Jainsons
Clothing Corporation and another22, their Lordships of the Supreme
Court have clearly held that it is settled law that the court, before
issuing the injunction under Order 39, Rules 1 and 2, CPC should
prima facie be satisfied that there is triable issue strong prima facie
case of fraud or irretrievable injury and balance of convenience is in
favour of issuing injunction to prevent irremedial injury. It was further
held that the court should normally insist upon enforcement of the
bank guarantee and the court should not interfere with the
enforcement of the contract of guarantee unless there is a specific
plea of fraud or special equities in favour of the plaintiff. He must
necessarily plead and produce all the necessary evidence in proof of
the fraud in execution of the contract of the guarantee, but not the
contract either of the original contract or any of the subsequent events
that may happen as a ground for fraud.
35. Coming to the facts of the present case in the light of the aforesaid
principles laid down for issuance of injunction against encashment or
22 (1994) 6 SCC 597
Arb. Appeal No.33/2020
invocation of bank guarantee that are in case of fraud of an egregious
nature as to vitiate the entire underlying transaction or special equity
in favour of person seeking interim injunction for preventing
irretrievable harm or injustice to one of the parties, it is appropriate to
mention here that the learned Commercial Court has noticed the
parameters for invocation of bank guarantee and thereafter in
paragraph 33 of the order has rightly held that invocation of bank
guarantee can be interdicted on three grounds i.e. "fraud",
"irretrievable injury" and "special equity", and also held that the
appellants herein have not setup any such ground out of the said
three grounds to seek restraint order against the invocation of bank
guarantee and proceeded to reject the application. The present
appellants have filed copy of the application filed by them under
Section 9 of the AC Act before the Commercial Court along with this
appeal memo. A careful perusal of the application filed under Section
9 seeking injunction against encashment or invocation of bank
guarantee would show that it is the case of the appellants herein that
though the respondents have extended the period of completion of
contract under clause 17-A of the general conditions of contract till 31-
3-2020, but terminated the contract in question on 2-1-2020, which is
arbitrary and illegal and therefore the appellants have prima facie
case for grant of injunction in their favour and balance of convenience
is also in their favour. As such, no specific ground of fraud or special
equity in favour of the appellants has been pleaded while seeking
interim injunction against encashment of bank guarantee. However,
learned counsel for the appellants have emphasized that the pleading
made in paragraph 19 of the application under Section 9 of the AC Act
Arb. Appeal No.33/2020
extending their contract under clause 17-A of the general conditions of
contract, would amount to the plea of "special equity" which is an
exception for granting interim injunction in favour of the appellants
restraining encashment of bank guarantee.
36. Now, the question is, whether the ground of special equity which is
one of the established grounds for injunction against invocation of
bank guarantee has been pleaded by and on behalf of the appellants?
37. Learned counsel for the appellants have emphasized that in
paragraphs 17, 18, 19 and 20 of the application under Section 9 of the
AC Act, the appellants herein have pleaded the ground of special
equities in their favour. Paragraphs 17, 18, 19 and 20 of the said
application are reproduced herein-below for the sake of convenience:
17/ यह कक अनावेदकगण दावा 2/1/2020 को संकवदा कनवस् कवने के इस
आदेश को अनावेदकगण की मनमानेपन से की गई कायर वाही होने के कावण रवि
याचचिका क्रमांक (सी) नं. 31/2020 माननीय छतीसगढ उच चयायालय मे पस्स्
ककया औव कदनांक 2/1/2020 के इस आदेश को चिसनौ्ी कदया था । माननीय
छतीसगढ चयायालय ने इस वीि याचचिका पव कदनांक 24/2/2020 को आदेश
पारव् कव्े हसए आदेश की कंचडका 11 एवं 12 मे यह पच्पाकद् ककया है कक
"अनावेदकगण के कथनानससाव संकवदा मे काल 1.38 सपेशल कंडीशन लो कक
काल 63 लनवल कंडीशन ऑफ काचि्ैकि के साथ पढा लायेगा । समे पककावा
के बीचि आरबि्ेशन से कववाद के कनवाकवण का पबंध है । इसललये वीि याचचिका
मे इसका कनवाकवण नही हो सक्ा , कयाकक कववाद के कनवाकवण कवने के ललए
भय पक के साकय देने हागे । इसललये पककाव अने अचधकावा के संबंध मे अचय
पचिाव कवचध अनससाव पाप कवने के ललए कायर वाही कव सक्े है । इसकी ससकवधा
दी गई ।"
18/ यह कक माननीय उच चयायालय के कदनांक 24/2/2020 के आदेश के
्सव्
ं बाद अनावेदकगण ने आवेदकगण दावा संकवदा के अं्र्र की गई "पवफामरश
गावंिी की वाशश" का नगदीकवण कवने के ललए ्तकाल ही संबंचध् बैक को संपकर
ककया, जलसकी लानकावी होने आवेदकगण ने कदनांक 26/2/2020 को बैक को
औव अनावेदकगण को पत देकव यह सूचचि् कव कदया कक माननीय उच चयायालय
की अनसमच् अनससाव आवेदकगण संकवदा मे पबंचध् वीच् से कवववाद को मधयसथ
को सौपने की कायर वाही पावंभ कव वहे है । इसललए बैक गावंिी का नकदीकवण
अनावेदकगण न कवाये । आवेदकगण काे आबंकि् कायर को ककसी अचय को पूणर
कवने के ललए अगव अनावेदक 2 से 4 पदान कव दे्े है ्ो अनावेदकगण को
अपूवणीय कच् होगी । इसललए अं्रवम पाय के ललए यह आवेदन माननीय
Arb. Appeal No.33/2020
चयायालय मे पस्स् कव्े है ।
19/ यह कक अनावेदकगण दावा आवेदकगण को कायर पूणर कवने के ललए कदनांक
31/3/2020 ्क की अवचध कवस्ारव् ककया गया है, (कबना ककसी ललकवीडेिेि
डैमेल कवथ पी.वही.सी. अण्डव काल -17 (ए) आफॅ ली.सी.सी., कबना ककसी
पेनालिी के कायर अवचध कवस्ारव् ककया है । ऐसी दशा मे कवस्ारव् अवचध के
समाप होने के पूवर 2/1/2020 को संकवदा कनवस् कवने का आदेश अवैध ्था
मनमाना है । इसललए पथम दकष मे यह मामला आवेदक के पक मे है । आवेदक
के पक मे ससकवधा का सं्सलन भी है ।
20/ यह कक आवेदन पत पस्स् कवना अलरचि है कयाकक अनावेदक बैक गावंिी
को इनकेश कवाने औव आवेदक के ठे का कायर को अचय को देने ्था आवेदक
कंचडका को अचय बीड मे भाग लेने से भी अयोरय होना आदेशश् ककया है । अ्ः
आरबि्ेशन मे अगसव होने के पूवर माननीय चयायालय मे "अं्रवम पाय" पाप
कवने लायक वाद कावण कदनांक 2/1/2020 को औव माननीय उच चयायालय के
आदेश कदनांक 24/2/2020 को आवेदक कंचडका को पाप हसआ है ।
38. Clause 17-A of the general conditions of contract deals with extension
of time in contracts, sub-clauses of which deal with extension due to
modification, extension for delay not due to Railway or contractor, and
extension for delay due to Railways.
39. True it is that the appellants' contract period has been extended by the
respondents by invoking clause 17-A of the Standard General
Conditions of Contract and the appellants' contract in question was
extended relying upon clause 17-A, which relates to extension of time
in contracts in terms of extension due to modification, extension for
delay not due to Railway or contractor and extension for delay due to
Railways, and the contract in question has not been extended under
clause 17-B, which provides for extension of time for delay due to
contractor.
40. At this stage, it would be appropriate to notice the bank guarantee
furnished by the appellants on 10-10-2016 to the extent of ₹
6,77,26,553/-. It states as under: -
"In consideration of the President of India (hereinafter
called "the Government") having agreed to exempt M/s
Arb. Appeal No.33/2020
ARSS - SIPS (JV) at 129, Transport Centre, Rohtak Road,
Punjabi Bagh, New Delhi - 110035 (hereinafter called "the
said Contractor"(s)/Supplier(s)") from the demand, under
the terms and conditions of this Agreement No. CEC/BSP/
ER/T/15-16/127 Lajkura-Raigarh/4th line JSG-BSP/538
dated 21.09.2016 made between The President of India,
Acting through the Chief Engineer(C) or his successor,
South East Central Railway, Bilaspur, of the Ministry of
Railways, Railway Board and M/s ARSS - SIPS (JV) at
129, Transport Centre, Rohtak Road, Punjabi Bagh, New
Delhi - 110035 for Soil Investigation, design of bridges,
execution of earth work, minor bridges, major bridges,
RUBs, extension of FOB, Staff Quarters and other service
buildings, supply of ballast and other miscellaneous works
in Lajkura-Raigarh section in connection with the
construction of 4th line between Jharsuguda - Bilaspur
(hereinafter called "the said Agreement"), of performance
guarantee for the due fulfillment by the said Contractor(s)
of the terms and conditions contained in the said
Agreement, on production of a Bank Guarantee for
Rs.6,77,26,553/- (Rupees Six Crore Seventy Seven Lacs
Twenty Six Thousand Five Hundred Fifty Three Only) we,
ICICI Bank Limited, having its Registered Office at Near
Chakli Circle, Old Padra Road, Vadodara, Gujarat, Pin -
390 007, India and amongst other places, a branch at 9A,
Connaught Place, New Delhi - 110001, India (hereinafter
referred to as "the Bank") at the request of M/s ARSS -
SIPS (JV) at 129, Transport Centre, Rohtak Road, Punjabi
Bagh, New Delhi - 110035 (contractors) do hereby
undertake to pay to the Government an amount not
exceeding Rs. 6,77,26,553/- (Rupees Six Crore Seventy
Seven Lacs Twenty Six Thousand Five Hundred Fifty
Three Only) against any loss or damage caused to or
suffered or would be caused to or suffered by the
Government by reason of any breach by the said
Contractor(s) of any of the terms or conditions contained in
the said Agreement.
2. We, ICICI Bank Limited at 9A, Connaught Place,
New Delhi - 110001, India do hereby undertake to pay the
amounts due and payable under this guarantee without any
demur, merely on a demand from the Government
(Railways) stating that the amount claimed is due by way of
loss or damage caused to or would be caused to or
suffered by the Government (Railway) by reason of breach
by the said contractor(s) of any of the terms or conditions
contained in the said Agreement or by reason of the
Arb. Appeal No.33/2020
contractor(s) failure to perform the said agreement. Any
such demand made on the Bank shall be conclusive as
regards the amount due and payable by the Bank under
this Guarantee. However, our liability under this Guarantee
shall be restricted to an amount not exceeding Rs.
6,77,26,553/- (Rupees Six Crore Seventy Seven Lacs
Twenty Six Thousand Five Hundred Fifty Three Only).
3. We undertake to pay to the Government any money
so demanded notwithstanding any dispute or disputes
raised by the contractor(s)/supplier(s) in any suit or
proceeding pending before any court or Tribunal relating
thereto our liability under this present being absolute and
unequivocal.
The payment so made by us under this bond shall be a
valid discharge of our liability for payment there under and
the contractor(s)/supplier(s) shall have no claim against us
for making such payment."
41. A careful perusal of the aforesaid terms of the bank guarantee would
show that the performance guarantee is an autonomous and
independent contract and that is independent in character. The
obligation arising under the bank guarantee is independent of the
obligation arising out of the main contract between the parties. The
performance guarantee imposes an absolute obligation on the banks
to pay irrespective of any dispute which may have arisen between the
parties and pending before any such court or tribunal, the liability
being absolute and unequivocal. It is independent of the primary
contract between the appellants and the respondents. The bank is
not concerned with the rights regardless of the underlying disputes,
but only with the performance of the obligation. The letter of
guarantee was addressed to the SECR in unqualified terms. The
liability of the bank is absolute and unequivocal.
42. Now, at this stage, it would be appropriate to notice clause 1.35 of the
subject contract which states as under: -
Arb. Appeal No.33/2020
"1.35 Performance Guarantee:
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx
(f) Wherever the contract is rescinded, the Security Deposit
shall be forfeited and the Performance Guarantee shall be
encashed. The balance work shall be got done
independently without risk and cost of the failed contractor.
The failed contractor shall be debarred from participating in
the tender for executing the balance work. If the failed
contractor is a JV or a partnership firm, then every
member/partner of such a firm shall be debarred from
participating in the tender for the balance work either in his/
her individual capacity or as a partner of any other JV/
partnership firm.
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx"
43. A careful perusal of clause 1.35 of the subject contract would show
that whenever the contract is rescinded, the security deposit shall be
forfeited and the performance guarantee shall be encashed. As such,
the unequivocal and absolute term of performance bank guarantee is
invokable as per clause 1.35 of the subject contract. Their Lordships
of the Supreme Court in their decisions as noticed herein-above
including U.P. State Sugar Corporation (supra) have held that "when
in the course of commercial dealings 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. The
bank giving such a guarantee is bound to honour it as per its terms
irrespective of any dispute raised by its customer". As such, it was
further held that "the very purpose of giving such a bank guarantee
Arb. Appeal No.33/2020
would otherwise be defeated. The courts should, therefore, be slow in
granting an injunction to restrain the realization of such a bank
guarantee".
44. In view of the discussion made herein-above, we are of the
considered opinion that Courts' interference under Order 39 Rules 1 &
2 of the CPC while granting interim injunction in enforcing bank
guarantees must be minimal. In case of fraud or special equities to
prevent irretrievable injustice to the parties seeking injunction, Courts
interfere to prevent enforcement of bank guarantees. If the terms of
the bank guarantee are unconditional and absolute, the bank has to
pay the amount of bank guarantee without demur. The payment of
bank guarantee cannot be made subject to the claims and counter-
claims arising out of the main contract between the parties. In the
instant case, the terms of the performance bank guarantee are
absolute and unconditional, and none of the grounds of fraud or
irretrievable injustice or special equity have been specifically pleaded,
except the pleading that the period of contract in favour of the
appellants has been extended by the respondents invoking clause 17-
A of the general conditions of contract which is not relatable to the
default of the appellants / contractor and the contract has been
rescinded on 2-1-2020 prior to the date of completion of contract i.e.
31-3-2020, that would not per se constitute the ground of special
equity for seeking interim injunction, as the exception carved out for
invocation of bank guarantee and same would remain in the realm of
the contractual dispute between the parties, which would fall outside
the ground of special equity and as such, the appellants have failed to
plead and establish any of the ground(s) noticed herein-above for
Arb. Appeal No.33/2020
seeking interim injunction against the invocation of bank guarantee.
Accordingly, we hold that the learned Commercial Court (District
Level) has rightly held that the appellants have failed to plead and
establish the grounds of "fraud", "special equity" and "irretrievable
injustice" to the appellants for seeking interim injunction against the
enforcement of bank guarantee.
45. We accordingly hereby dismiss the arbitration appeal and
consequently the interim order dated 30-7-2020 is hereby vacated.
No order as to cost(s).
Sd/- Sd/-
(Sanjay K. Agrawal) (Arvind Singh Chandel)
Judge Judge
Soma
Arb. Appeal No.33/2020
HIGH COURT OF CHHATTISGARH, BILASPUR
Arbitration Appeal No.33 of 2020
ARSS - SIPS (JV) and others
Versus
Union of India and others
Head Note
The Bank can be restrained from enforcement of unconditional and absolute
performance bank guarantee by interim injunction only in case of fraud and
special equities to prevent irretrievable injustice.
cSad dks dsoy /kks[kk/kMh ,oa fo'ks"k bZfDoVh ds ekeys esa] vifjorZuh; vU;k; dks jksdus
gsrq varfje O;kns'k }kjk fcuk 'krZ ,oa iw.kZ izn'kZu cSad xkjaVh dks ykxw djus ls jksdk
tk ldrk gSA
