Bharat Electricals vs Standing Conference Of Public ...
1997 Latest Caselaw 199 Del

JUDGMENT

J.B. Goel, J.

1. This is a petition under section 9 of the Arbitration and Conciliation Act, 1996 (for short "the Act"), filed by the petitioner/contractor to restrain the respondent from encashing the bank guarantees Nos. 317 of 1992 to 326 of 1992 and 451 of 1992, to 458 of 1992, issued by the Canara Bank, Janpath, New Delhi, on behalf of the petitioner which are sought to be invoked by the respondent-beneficiary in their letters dated December 20, 1996/December 23, 1996.

2. Briefly the facts are that the respondent is a society which was setting up an office complex for public sector undertakings at Laxmi Nagar District Centre, Delhi. The petitioner was awarded a contract for execution of the work of internal electrification and sub-station work at the said complex. The contract between the parties was executed on October 28, 1988. The total value of the work was Rs. 6,85,62,217.70. The work was to be completed within a period of 20 months, i.e., by the end of June, 1990. The work was delayed and could not be completed within the stipulated period. Only the work of the value of Rs. 7.30 lakhs could be executed. A supplementary agreement was also executed on March 20, 1991, between the parties.

3. It appears that the contract was not terminated and the petitioner continued with the work. During the pendency of the work the petitioner approached the respondent vide letter dated July 16, 1992 (annexure "R-2") for sanction of a special interest free advance of Rs. 1.25 crores for arranging material for the execution of the work on the plea that due to severe cash flow problem they were not having funds to finance the purchase of equipment required for the project and also due to escalation in the cost of material.

4. Without admitting their obligation/liability, the respondent vide their letter dated August 17, 1992 (annexure "R-3") agreed to give special advance of Rs. 60 lakhs on the conditions that (1) on providing an unconditional and irrevocable bank guarantee in the prescribed format to be kept alive till the amount was realised encashable on demand by SCOPE in the case of non-fulfilment of any of the relevant conditions of the guarantee or breach of any conditions of the agreement and supplementary agreement. (2) That the repayment/recovery/adjustment of this ad hoc advance shall be in stages as decided by SCOPE starting after nine months of the date of release of the ad hoc advance and the full repayment/recovery shall be completed by the settlement of the final bill, in the event of the full amount not being able to be recovered from the amount of the final bill by encashment of the bank guarantee. (3) That in the event of failing to execute a minimum work of two-thirds value of the amount of ad hoc advance within four months of the date of release of this advance, then the entire ad hoc advance or any part thereof shall be recovered from the admitted dues, if any, or by encashing the bank guarantee, and be liable to pay interest at the rate of 18 per cent. per annum for this period. (4) And a detailed programme for the completion of the balance work including physical execution of minimum quantified critical items of work as specified targets as worked out by the architects taking into consideration the discussion with petitioners, other contractors and programmes submitted by all contractors so as to complete the work without further delay and to implement this programme so as to complete total work within eleven and half months of issue of this letter and two months thereafter for testing and final commissioning.

5. It appears that these conditions were accepted and the petitioner had furnished various bank guarantees of Rs. 5 lakhs each of the total amount of Rs. 60 lakhs issued by the Canara Bank, Janpath branch, New Delhi, on September 24, 1992.

6. Apparently, on the request of the petitioner the respondent in their letter dated December 23, 1992 (annexure "R-4"), further agreed to advance another advance of Rs. 42 lakhs on the following conditions :

"(1) The work shall be executed in such a manner so that the minimum cumulative value of total executed work (as certified by the architects) on February 28, 1993, shall amount to Rs. 3.4 crores and, on May 15, 1993, shall amount to Rs. 4.1 crores.

(2) Against an irrevocable bank guarantee in an approved format.

(3) This second instalment of special advance would be a part of the total special advance, to be recovered simultaneously with recovery of the first instalment of advance so as to complete the recovery of the full advance of Rs. 102 lakhs progressively as stipulated in conditions on the basis of which first instalment of Rs. 60 lakhs was released to you. In the event of your failing to achieve the above said evaluation targets certified by the architects for executed works up to February 28, 1993, and May 15, 1993, then this second instalment of advance shall be recovered by encashing the bank guarantee. However, in case stipulated value for February 28, 1993, is achieved but fail to achieve minimum stipulated value as required to be achieved by May 15, 1993, then the encashment of the bank guarantee shall be limited to an amount of Rs. 27 lakhs out of the total bank guarantee of Rs. 42 lakhs.

(4) The recovery of this second instalment of the special advance shall be simultaneous with the recovery of the first instalment of special advance and shall be governed by the stipulations on the basis of which the first instalment of the special advance was released, unless otherwise stipulated in this letter.

(5) All conditions including payment/recovery/adjustment of this second instalment of advance shall be covered by the stipulation as governing the release of the first instalment of Rs. 60 lakhs. A detailed programme for completion of the balance work will be signed."

7. It appears that this was also accepted by the petitioner and this amount was also released by the respondent on the petitioner's furnishing various bank guarantees of this amount issued by the same bank on December 24, 1992.

8. In all outstanding 18 such bank guarantees are annexures "P-4 to P21", the first ten dated September 24, 1992, and the latter eight dated December 24, 1992, seventeen being in the sum of Rs. 5 lakhs each and one in the sum of Rs. 7 lakhs bearing Nos. 317 of 1992 to 326 of 1992 and 451 of 1992 to 458 of 1992, given by the Canara Bank, Janpath, New Delhi. These bank guarantees are in identical terms.

9. The work was not executed as agreed and the respondent had given a show-cause notice dated August 18, 1993 (annexure "R-5"), for invoking the bank guarantees. However, these were not actually invoked at that time.

10. Earlier disputes had arisen between the parties which were referred to two arbitrators one each nominated by the parties who gave an award in the sum of Rs. 4,17,30,000 on March 30, 1994, in favour of the petitioner. After this award was given a second supplementary agreement dated August 23, 1994, was executed between the parties, inter alia, agreeing to the mode of payment of the amounts due under the award and it was also agreed that the petitioner will complete the work up to July 15, 1995, and testing and commissioning shall be completed by September 15, 1995.

11. According to the respondent after August, 1994, till date work of the value of Rs. 21 lakhs only has been executed and only an amount of Rs. 10.14 lakhs has been adjusted and recovered from the bills and the balance amount about Rs. 91.86 lakhs out of the advance of Rs. 102 lakhs still remains due from the petitioner to the respondent. It is for the recovery of this balance amount that the respondents have invoked the bank guarantees and demanded payment of Rs. 91,86,473 under their letters dated December 20, 1996, (annexure "P-29") and repeat letter dated December 23, 1996 (annexure "R-11").

12. The petitioner has alleged that the work could not be completed within the stipulated period, i.e., by September 15, 1995, on account of consistent failures on the part of the respondent in not making available the required work fronts, decisions and the payments due in terms of contract against bills Nos. 36 and 37, for the work done of over Rs. 61,80,309 and of escalation bill No. 17, dated September 17, 1996, of Rs. 1,12,09,675 have not been released.

13. Disputes between the parties have again been referred to two arbitrators, Mr. Justice M. L. Bhatt, nominated by the petitioner, and Shri H.D. Dandage, appointed by the respondent.

14. The case of the petitioner is that the amount due could be recovered in stages from the running bills up to the final bill and that stage has not reached. Even otherwise after adjusting various payments due as per aforesaid bills a sum of over Rs. 87 lakhs is outstanding due from the respondent and so invoking of the bank guarantee is unjustified, arbitrary, illegal, in violation of the terms of the bank guarantees and the terms of contract between the parties, an attempt to unduly enrich themselves and is fraudulent.

15. The respondent in reply has alleged that the two loans of Rs. 102 lakhs were given in the interest of the work being completed without delay. This amount was to be realised by adjustment out of the bills submitted for the work done within the stipulated period and as the work target was not achieved, the amount remained unadjusted; that even according to the second supplementary agreement, dated August 23, 1994, the time for completing of work was September 15, 1995, whereas uptill now the petitioner had executed work of the value of Rs. 21 lakhs only as per bills Nos. 35 and 36 and out of these bills only Rs. 10.14 lakhs could be adjusted leaving a balance of about Rs. 91.86 lakhs; as regards the bill No. 37, dated September 26, 1996, and escalation bill these were not correctly drawn and were returned by their architect who was authorised to verify and certify for payment. As such nothing is payable nor anything was recovered or adjusted against these two bills. The balance payment has not been paid in spite of several demands, reminders and in spite of the fact that it was agreed in the meeting on July 31, 1996 (annexure "R-8") that the total special advance shall be adjusted by November 30, 1996, by deducting 40 per cent. of the amount payable or a minimum of Rs. 10 lakhs per bill. The petitioner has practically done no work thereafter and the balance amount of advance remained unadjusted. In the circumstances, there was no alternative and the respondent had acted within their right in invoking the bank guarantees. This is apart from the fact that the petitioner is liable to pay liquidated damages for the delay and defaults on their part.

16. Learned counsel for the petitioner has contended that the amount advanced was to be adjusted in stages from the running bills and final payment due was to be adjusted on the settlement of the final bill and it was only in case the amount could not be so recovered that the bank guarantee could be encashed, that as the execution of the work is still in progress, the stage of final bill and adjustment has not reached; that the work could not be executed in time because of defaults on the part of the respondent; the invocation of the bank guarantees, in the circumstances, is contrary to the terms of the agreement, is fraudulent, illegal and unjust resulting in irretrievable injury and there are special equities warranting restraining from invoking the bank guarantees. It is also contended that the respondent has withheld over Rs. 17 lakhs due from the petitioner out of the bills and this fact has been suppressed at the time of invoking the bank guarantees and for that reason also, the invocation is fraudulent which fact disentitles their invocation.

17. He has placed reliance on State Trading Corporation of India Ltd. v. Jainsons Clothing Corporation , Hindustan Steelworks Construction Ltd. v. Tarapore and Co. , Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corporation Ltd. , Banerjee and Banerjee v. Hindustan Steel Works Construction Ltd., and Synthetic Foams Ltd. v. Simplex Concrete Piles (P.) Ltd., .

18. Whereas learned counsel for the respondent has contended that bank guarantees are independent contracts and the main contract is not relevant. The bank guarantees have been invoked as per the terms of the bank guarantee and no case is made out to disentitle the respondent to do so; the action of the respondent is neither fraudulent nor will irretrievable injustice be caused to the petitioner nor are there special equities in their favour and as such the petitioner is not entitled to seek restraint against invocation of the bank guarantees.

19. Reliance has been placed on United Commercial Bank v. Bank of India, , National Thermal Power Corporation Ltd. v. Hind Galvanizing and Engineering Co. Ltd., , General Electric Technical Services Co. Inc. v. Punj Sons Pvt. Ltd. ; State Trading Corporation of India Ltd. v. Jainsons Clothing Corporation , National Thermal Power Corporation Ltd. v. Flow More Pvt. Ltd. [1995] 84 Comp Cas 97 (SC), Coronation Construction Pvt. Ltd. v. Gujarat Heavy Chemicals Ltd. [1996] 1 AD Del 346 and Hindustan Steelworks Construction Ltd. v. Tarapore and Co. .

20. As already noticed the respondent had agreed to give the said advance on the terms and conditions mentioned in their letters dated August 17, 1992, (annexure "R-3") and December 23, 1992 (annexure "R-4"). And the amount was released on furnishing of various bank guarantees by the petitioner wherein the conditions for invoking the bank guarantees are mentioned. Outstanding bank guarantees are annexures "P-4" to "P-21", these are in identical terms. The material terms of the bank guarantee read as under :

"Now this bank guarantee witnesseth that, in consideration of the beneficiary having agreed to grant a special advance of Rs. 5 lakhs to the contractor, we, Canara Bank, do hereby guarantee unto to the beneficiary due repayment of the said special advance amount of Rs. 5 lakhs and every part thereof and undertake that we, the bank, hereby unconditionally and irrevocably undertake to pay to the beneficiary immediately on its first demand and without any delay, demur, reservations, recourse, contest or protest and/or without any reference to the contractor an amount not exceeding Rs. 5 lakhs or any part thereof as may be stated in any notice(s) of demand addressed to the bank by or on behalf of the beneficiary and notice(s) of demand from or on behalf of the beneficiary stating that the contractor has committed default in repayment of the advanced amount or any part thereof shall be final, conclusive and binding on us.

Notwithstanding anything stated elsewhere in this guarantee we, the bank, further agree that :

(1) the beneficiary shall be the sole judge to decide as to whether the contractor has or has not, repaid or adjusted the said advance amount or any part thereof and the decision of the beneficiary in this behalf shall be final, conclusive and binding on us. Any demand(s) from or on behalf of the beneficiary, on the basis that the contractor defaulted in repayment of the advanced amount or any part thereof, as the case may be, shall be conclusive, final and binding on us and we shall immediately make payment to the beneficiary on his giving us the said notice(s) of demand notwithstanding any dispute(s) or difference(s) between the beneficiary and the contractor(s) or any dispute pending before any court(s) Tribunal(s), arbitrator(s) or any other authority and without reference to the contractor . . . .

(3) The beneficiary shall have fullest liberty without affecting in any way the liability of the bank under this guarantee from time to time, to vary any of the terms and conditions of the contract to extend the time for performance of the contract by the contractor, to postpone for any time, or from time to time, the exercise of any powers vested in him or of any right which the beneficiary might have against the contractor, and to exercise the same at any time in any manner and either to enforce or to forbear to enforce any covenants, contained or implied, in the contract or any other course of remedy or security available to the beneficiary . . . . .

This guarantee shall be in addition to and not in substitution or derogation of any other guarantee or security available to the beneficiary in respect of the said contract."

21. The outstanding bank guarantees are of the total amount of Rs. 92 lakhs and are invoked by the respondent vide their letters dated December 20, 1996 (annexure P-29) followed by another letter of December 23, 1996 (annexure R-11) in the sum of Rs. 91,86,473 in the following terms :

"Now we hereby demand from you the sum of Rs. 91,86,473 (rupees ninety one lakhs eighty six thousand four hundred seventy three) and we state that the said contractor has committed default in repayment of the said advance amount to the extent of Rs. 91,86,473 (rupees ninety one lakhs eighty six thousand four hundred and seventy three only)."

22. The principles governing the invocation of the bank guarantees are well settled. These have been reaffirmed in a recent judgment of the Supreme Court in Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corporation Ltd. where it has been laid down as under (at page 152) :

"It is settled law that the bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the beneficiary. Unless fraud or special equity exists, is pleaded and prima facie established by strong evidence as a triable issue, this beneficiary cannot be restrained from encashing the bank guarantee even if dispute between the beneficiary and the person at whose instance the bank guarantee was given by the bank, had arisen in performance of the contract or execution of the works undertaken in furtherance thereof. . . .

The object behind this is to inculcate respect for free flow of commerce and trade and faith in the commercial banking transactions unhedged by pending disputes between the beneficiary and the contractor.

It is equally settled that in terms of the bank guarantee the beneficiary is entitled to invoke the bank guarantee and seek encashment of the amount specified in the bank guarantee. It does not depend upon the result of the decision in the dispute between the parties, in case of the breach. The underlying object is that an irrevocable commitment either in the form of bank guarantee or a letter of credit solemnly given by the bank must be honoured. The court exercising its power cannot interfere with enforcement of bank guarantees/letters of credit except only in cases where fraud or special equity is prima facie made out in the case as a triable issue by strong evidence so as to prevent irretrievable injustice to the parties. The trading operation would not be jettisoned and faith of the people in the efficacy of banking transactions would not be eroded or brought to disbelief."

23. In this case two contentions were raised that it was a fraud because after the promise to extend the time for completing the work, and the terms of the bank guarantee were extended, that contract was terminated. It was held that it was not a case of fraud but one of acting in terms of contract.

24. The second contention was that unless the amount due and payable is determined by a competent court or tribunal by mere invocation of the bank guarantee or letter of credit pleading that the amount is due and payable by the petitioner which was disputed it cannot be held to be due and payable in a case. This contention was rejected. It was held that the bank guarantee/letter of credit is an independent contract between the bank and final adjudication of the disputes between the parties is not a pre-condition to invoke the bank guarantee.

25. In Hindustan Steelworks Construction Ltd. v. Tarapore and Co. , injunction was sought against invocation of the bank guarantee on the ground that there was a counterclaim which was referred to the arbitrator. It was held that the circumstance that there was serious dispute on the question as to who has committed the breach of the contract and whether the amount is due and payable by the contractor to the appellant till the arbitrator declares the award, was not sufficient to make the case an exceptional one or of special equity justifying interference restraining the appellant from enforcing the bank guarantee. It was further laid down in this case that whether the bank guarantee is towards security deposit or mobilization advance or working funds or for due performance of the contract, if the same is unconditional and if there is a stipulation in the bank guarantee that the bank should pay on demand without demur and that the beneficiary shall be the sole judge not only on the question of breach of contract but also with respect to the amount of loss or damages, the obligation of the bank would remain the same and that obligation has to be discharged in the manner provided in the bank guarantee.

26. In the case of State Trading Corporation of India Ltd. v. Jainsons Clothing Corporation , the appellant had entered into a contract with a foreign buyer for the supply of 7,000 mt. of rice. It in turn had entered into an agreement with the respondent for the supply of 3,000 mt. and in case of necessity another 1,500 mt. of rice. In furtherance thereof the respondent had furnished a performance bank guarantee which was payable on demand that the supplier had defaulted in the fulfillment of its obligations and in terms of the guarantee, on certificate that the respondent had committed default in the performance of the contract, the bank guarantee was invoked. On behalf of the respondent, inter alia, it was contended that the contract between the appellant and the foreign buyer was cancelled and in the circumstances invocation of the bank guarantee was fraudulent. Negativing this contention it was held that there was no fraud in the formation or execution of the bank guarantee. The cancellation of the contract between the appellant and the foreign buyer does not have the effect of frustrating or cancelling the contract with the respondent and invoking of the bank guarantee is not a fraud or fraudulent act of the appellant.

27. Following U.P. Go-operative Federation Ltd. v. Singh Consultants and Engineers (P.) Ltd. and General Electric Technical Services Co. Inc. v. Punj Sons (P.) Ltd. , it was laid down that the fraud must be in the nature of an egregious nature as to vitiate the entire underlying transaction of the bank guarantee. It was emphasised that it is settled that the court, before issuing the injunction under Order 39, rules 1 and 2 of the Civil Procedure Code, should, prima facie, be satisfied that there is a triable issue, a strong prima facie case of fraud or irretrievable injury and the balance of convenience is in favour of issuing injunction to prevent irremediable injury. 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 guarantee, but not of the contract either of the original contract or any of the subsequent events that may happen as a ground for fraud.

28. The bank guarantee in the present case, in absolute terms gives discretion to the respondent beneficiary to invoke the same, by making a demand stating that the contractor has committed default in repayment of the advanced amount or any part thereof and such demand is final, conclusive and binding. And the beneficiary has been made the sole judge to decide as to whether the contractor has or has not committed default in payment of the advanced amount or any part thereof and the decision of the beneficiary is final and conclusive and binding. In the letter invoking the bank guarantee (annexure P-29/R-11) it has been specifically mentioned that the said contractor has committed default in payment of Rs. 91,86,473. Prima facie, there is no illegality or infirmity on the face of this invocation letter in invoking the bank guarantee.

29. Learned counsel for the petitioner however has contended that the recovery could be effected in stages and up to the stage of final bill and as that stage has not arrived the bank guarantee could not be invoked. There is no condition mentioned or apparent in the bank guarantee that the beneficiary was to wait for that final stage and that final stage may never reach if the contractor fails to execute the work. In condition No. 3 for grant of first advance it was stipulated that in the event of the petitioner failing to execute a minimum work of two-thirds value within four months of the date of the release of the ad hoc advance, the advance or any part thereof shall be recovered from the admitted dues or by encashing the bank guarantee. For the second instalment of advance also, a time for achieving a particular target was stipulated. These admittedly remain unfulfilled. Time for execution was extended and at the meeting held on July 31, 1996, time was given up to November 30, 1996. But to no effect.

30. The petitioner also can have no grievance of his two bills, i.e., Bill No. 37, dated September 10, 1996, and escalation Bill No. 17, dated September 17, 1996, having not been approved by the architect appointed for the purpose. Reasons have been given for rejecting and the architect was competent to reject such bills. This court cannot go into the validity of his decision. This also thus is not a valid ground to interfere by this court.

31. As regards the allegations of concealment of facts about withholding of various amounts of over Rs. 17 lakhs at the time of invoking the bank guarantee, annexure "P-25" relied on is a report "Summary of Abstract of Cost" prepared by the architect whereunder the sub-head "Special Advance", a sum of Rs. 91,86,473 as outstanding from the petitioner is shown. This was accepted by the petitioner "under protest regarding withheld amounts". Any dispute regarding amount withheld or if such withheld amount could be adjustable towards the liability in dispute or not is not within the power of this court to determine in these proceedings. The law as laid down in Synthetic Foams Ltd. v. Simplex Concrete Piles (India Pvt. Ltd., and Banerjee and Banerjee v. Hindustan Steel Works Construction Ltd., ), to the effect that misrepresentation or suppression of material facts or violation of the terms of the guarantee will be a ground to restrain invocation of the bank guarantee has no application in the present case.

32. In the circumstances, and for the reasons given above, this petition has no merit and the same is hereby dismissed with costs. Costs assessed at Rs. 10,000.

33. Interim injunction granted on December 27, 1996, is vacated. The petitioner was granted ex-parte injunction on December 27, 1996. In view of the facts noticed above, the interim injunction was obtained on misconceived facts and was wholly unjustified as a result of which the respondent has been deprived of the benefit of the encashment of the bank guarantees. In my view the respondent should not suffer for the act of the court. It is accordingly further ordered that the respondent shall also be entitled to interest at the rate of 18 per cent. per annum on the amount of Rs. 91,86,473 from December 23, 1996, till actual payment of this amount by the bank to the respondent against the aforesaid bank guarantees invoked by the latter.