International Engineers & ... vs M/S. Asea Brown Boveri Ltd.
1998 Latest Caselaw 1015 Del

ORDER

M.S.A. Siddiqui, J.

1. By this order I propose to dispose the IA No. 3270/98 filed by the plaintiff under Order 39 rules 1 and 2 and Section 151 CPC for restraining the defendant No. 1 from invoking and encashing the bank guarantee No. 207/97 dated 14.7.1997.

2. The plaintiff has filed the present suit for declaration and permanent injunction restraining the defendant No. 2 from invoking and encashing the bank guarantee on the allegations that in 1994, defendant No.1 had entered into a contract with defendant No. 3 for execution of the work under tender No. PL-PJ-STIC-VCPPL-01 for Veerangam-Chaksu-Panipat Project (Annexure C). The defendant No.1 entered into a contract with the plaintiff to execute the work in accordance with the agreement (Annexure D). The plaintiff was required to furnish a bank guarantee to secure the mobilisation advance of 10% of the contract. Despite submission of the bank guarantee, the defendant No.1 did not release the mobilisation advance in time. The defendant No.1 also delayed performance of the contract as a result whereof the plaintiff suffered financial losses. However, despite heavy odds, the plaintiff performed his part of the contract and a sum of Rs. 39 lacs became due from the defendant No.1 under the sub contract. By the fax messages dated 11.1.1997 and 27.2.1997, the defendant No.1 wrongfully demanded a performance bank guarantee from the plaintiff for releasing the said amount. Thus the defendant No.1 coerced the plaintiff to furnish the performance bank guarantee in question. According to the plaintiff, after completion of the sub-contract, end to end testing of the optical link was duly carried out to the satisfaction of the defendants 1 and 3. (Vide testing reports dated 4.6.97 and 6.6.97 Annexure N). Thereafter, on 29.8.97, the defendant No. 1 also certified execution of the sub-contract by the plaintiff to its satisfaction (Annexure P). On 5.1.98, the plaintiff sent a communication to the defendant No.1 for releasing the bank guarantee on completion of the said contract. Instead of releasing the bank guarantee, the defendant No.1 raised a fraudulent demand of Rs.19.7 lacs against the plaintiff.

3. The defendant No. 2 has filed written statement in support of the plaintiff's case. The defendant No.1 resisted the suit contending that the suit is barred under Section 5 of the Arbitration and Conciliation Act, 1996 inasmuch as the disputes between the parties are covered by the arbitration agreement. It is averred in the written statement that the plaintiff has delayed performance of the contract in question. It is further averred that the plaintiff has failed to make out any case of irretrievable injustice by proof of special equities or fraud so as to invoke the jurisdiction of this Court by way of injunction to restrain the defendant No.1 from encashing the bank guarantee.

4. In order to entitle ad interim injunction, it is incumbent upon the plaintiff to establish a prima facie case, meaning thereby that there is bona-fide contention between the parties or serious question to be tried, that if it is not granted, it is likely to suffer a greater mischief and that the interference of this Court is necessary to protect it from an irreparable injury. At the outset, I must make it clear that the law as to the contractual obligations under the bank guarantee or irrevocable letter of credit has been well settled in a catena of cases decided by the Apex Court. Reference may, in this connection, be made to the decisions in U.P. Cooperative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd. General Electric Technical Services Company Inc. Vs. Punj Sons (P) Ltd. and Another Svenska Handelsbanken Vs. M/s. Indian Charge Chrome & Ors. (1994) 1 SCC 502; National Thermal Power Corporation Ltd. Vs. Flowmore Pvt. Ltd. and Another Hindustan Steel Workers Construction Ltd. Vs. G.S. Alwal & Co. (Engineers) Pvt. Ltd. Larsen & Toubro Ltd. Vs. Maharashtra State Electricity Board & Ors. Ansal Engineering Projects Ltd. Vs. Tehri Hydro Development Corporation Ltd. and Anr. . Hindustan Steelworks Construction Ltd. Vs. Tarapore & Co. & Anr. U.P. State Sugar Corporation Vs. Sumac International Ltd. Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engineering Works (P) Ltd. and Another ITC Ltd. Vs. Debt Recovery Appellate Tribunal & Ors. . The sum and substance of principles laid down in all the said cases is that in order to restrain the operation of either irrevocable bank guarantee or letter of credit, the plaintiff must establish a strong prima facie case of fraud of an egregious nature or special equities in the form of preventing irretrievable injustice between the parties. The question, therefore, is whether the plaintiff has made out any case for irreparable injury by proof of special equity or fraud so as to invoke the jurisdiction of this Court by way of injunction to restrain the defendant No.1 from encashing the bank guarantee.

5. Admittedly the bank guarantee given by the bank (defendant No. 2) on behalf of the plaintiff is as under:

This DEED OF GUARANTEE made on this 14th day of July, 1997 One thousand Nine Hundred and Ninety Seven by State Bank of India Bank Okhla branch, Address, (herinafter called "the bank") to and in favour of the ASEA BROWN BOVERI LIMITED a company incorporated in under the Company's Act, 1956 having its Office at 22A Shah Industrial Estate, Veera Desai Road, Andheri (West), Mumbai - 58 (hereinafter referred to as the Purchaser, which expression shall unless repugnant to the context or meaning thereof includes its successor/administrators and assigns).

WHEREAS M/s. IEPC Ltd., IEPCL HOUSE, 43-44, Okhla Ind. Area, Ph-II, Scheme-III, New Delhi -20, have by virtue of the contract entered into with the Purchaser as per Agreement No.______NIL_______dated 21st March, 1996 agreed with the purchaser to supply, install and commission an Optical Fibre Cable communication Link between Kukas and Chaksu Station of Viramgam Chaksu Panipat Pipeline of Indian Oil Corp. Ltd. in accordance with the terms and conditions of the contract.

AND WHEREAS in accordance with the terms of the Agreement No.___NIL___dated 21.03.96 the contractor has to pay a sum of Rs.19,79,500/-(Rupees Nineteen lacs Seventy nine thousand five hundred only) as performance guarantee from a Nationalized Bank.

AND WHEREAS the contractor has requested the purchaser to accept bank guarantee in lieu of Performance Guarantee for a sum equivalent to 10% (Ten Percent) of the value of the contract for the satisfactory performance of the contract.

AND WHEREAS the Bank has at the request of the Contractor agreed to guarantee the payment of the said sum in case the contract is not performed in accordance with specifications indicated in the terms and conditions in Agreement No. ___NIL___dated 21.03.96.

NOW THIS WITNESSES AS FOLLOWS

1. In consideration of the Purchase having agreed to accept the Bank Guarantee from a Nationalized Bank towards Performance Guarantee for a sum equivalent to Rs.19,79,500/- (Rupees Nineteen lacs seventy nine thousand five hundred only) the Bank do hereby guarantee that if the contractor fails to perform the contract in accordance with the specifications and conditions of the contract as subsequently amended the Bank shall pay forthwith merely on demand without any demur to the purchaser such amount or amounts, as the Bank may be called upon to pay by the purchaser.

PROVIDED that the liability of the Bank under this deed shall not at any time exceed the said amount of Rs.19,79,500/- (Rupees Nineteen lacs seventy nine thousand five hundred only).

PROVIDED further that the guarantee hereunder furnished shall be released as soon as the Contractor has performed his part of the contract in accordance with the terms of the contract and the period of performance guarantee is over and a certificate to that effect is issued by the Purchaser subject however our guarantee shall not hold good after 30.4.98.

2. The Bank, further undertakes to indemnify the Purchaser against any loss or damage that may be caused or suffered by the Purchaser by reason of any breach of the terms and conditions in the said agreement No.___NIL___dated 21.03.96.

3. The guarantee herein contained shall remain in force till the term and conditions of agreement No.______NIL_____ dated 21.03.96 have been fully and properly carried out by the said Contractor and in any case, the guarantee shall not hold good after 30.04.98 with a claim period of One Month.

4. The Bank further agrees with the Purchaser that the Purchaser shall have the fullest liberty (without the consent of the Bank and without affecting in any manner the obligations of the Bank hereunder) to vary any of the terms and conditions of the contract or to extend the time of performance of the contract by the said Contractor from time to time or to postpone from time to time any of the powers exercisable by the Purchaser against the said contractor and to forebear or to enforce any of the terms and conditions relating to the said contract and the Bank shall not be relieved of its liability by reason of any such variation, or extension being granted to the said Contractor or by reasons of any forbearance, act or omission on the part of the Purchaser or any indulgence by the Purchaser to the said Contractor or by any such matter or things whatsoever which under the law relating to sureties would but for these provisions have effect of so relieving the Bank.

5. Any account settled between the Purchaser & the Contractor shall be the conclusive evidence against the Bank for the amount due and shall not be questioned by the Bank.

6. The expression 'Bank' 'Purchaser' and 'Contractor' herein before used shall include their respective successors and assigns.

IN WITNESS WHEREOF Shri & Shri acting for and on behalf of the Bank have signed this Deed on day, month and year first above written.

Notwithstanding any thing contained hereinbefore our liability under this guarantee is restricted to Rs. 19,79,500/- (Rs. Nineteen Lacs Seventy Nine thousand five hundred only). This guarantee will expire on 30.04.98 with a claim period of One Month. Any claim under this guarantee must be received on or before 31st May, 1998 if no such claim has been received by us by that date all your rights under this guarantee will cease.

6. From the perusal of the various Clauses of the said bank guarantee it is made out prima facie that the bank has undertaken to pay to the defendant without any demur on the demand made by the defendant No.1, and the defendant No.1 has also been made the sole judge whether the plaintiff has fulfillled the performance guarantee as provided in the contract. The aforesaid bank guarantee has to be regarded as independent of the main contract between the parties and the same can be enforced without reference of any claim or counter claim arising out the main contract between the parties.

It is also to be regarded as independent of the adjudication of disputes raised and proposed to be referred to arbitration in terms of the arbitration agreement between the parties.

7. It is worth mentioning that it is not the case of the plaintiff that the defendant No.1 fraudulently pursuaded the plaintiff to furnish the bank guarantee. On the contrary the plaintiff's main grievance is that the defendant No. 1 had coerced the plaintiff to furnish the bank guarantee for releasing the amount of Rs. 39 lacs. According to the plaintiff the said amount became due from the defendant under the sub contract and the defendant No. 1 demanded a bank guarantee for releasing the said amount. It is averred in the written statement of the defendant No. 1 that as per the contract, the mobilisation advance was to be released on submission of the bank guarantee. It is stated in para No. 11 of the plaint that the plaintiff was required to furnish a bank guarantee to secure the mobilisation advance of 10% of the contract value. Thus, it is not a case of coercion but one of acting in terms of contract. In this view of the matter, it cannot be held at this stage that the defendant No. 1 had coerced the plaintiff to furnish the bank guarantee.

8. It is an admitted position that the contract was not performed within the stipulated period and the disputes have arisen between the parties which are to be resolved by arbitration in terms of arbitration agreement. The parties are blaming each other for the delayed performance of the contract. According to the plaintiff, the defendant No. 1 has raised an illegal demand of Rs. 19.7 lacs. Thus an attempt has been made on behalf of the plaintiff to show that the said demand is fraudulent. In case of Hindustan Steel Construction Limited (supra), it was held that a demand by the eneficiary under the bank guarantee may become fraudulent not because of any fraud committed by the beneficiary while executing the underlying contract but it may become so because of subsequent events or circumstances. According to the plaintiff. after completion of the sub contract, optical link end to end testing was duly carried out to the satisfaction of defendants 1 and 3 (vide report dated 14.5.1997 -N at page 67 of the paper book) and on 29.8.1997, the defendant No.1 had also certified completion of the contract vide certificate dated 29.8.1997 (Annexure -Q at page 71 of the paper book). According to the defendant No.1, as per the terms of the contract, the end to end testing of cables does not amount to completion of the contract and further the overall final integration testing was the main test which was not carried out before issuing the certificate and the certificate (Annexure Q) clearly specifies that the said test was still underway; and that the certificate (Annexure Q) was issued on the request of the plaintiff for its submission to the Railway Administration. It is significant to mention that admittedly the certificate (Annexure Q) was issued on the basis of the testing report dated 14.5.1997 (Annexure N). The bank guarantee was issued on 17.7.1997. Viewing the aforesaid circumstances, it is not possible to come to the conclusion that the certificate (Annexure Q) was issued to discharge the plaintiff from its contractual obligations. That apart, the defendant No.1 had not sent any communication to the bank (defendant No.2) intimating about completion of the contract in terms of the bank guarantee. Therefore I find and hold that plaintiff has failed to make out a prima facie case to show that the demand raised by the defendant No.1 is fraudulent.

9. As regards the question of irretrievable injury, there is nothing on record to show that there would be no possibility whatsoever of the recovery of the amount from defendant No.1 by way of restitution. As noticed earlier, the bank guarantee is an independent contract between the bank (defendant No. 2) and the beneficiary (defendant No.1). It does not depend on the result of the disputes between the plaintiff and the defendant No.1. The alleged special circumstances and/or special equities in this case are that there is a serious dispute on the question as to who has delayed performance of the contract, that the defendant No.1 had a counter claim of Rs.19.7 lakhs against the plaintiff, that the disputes between the parties are to be resolved by arbitration, that the plaintiff has performed its part of the contract and that no amount can be said to be due and payable by the plaintiff to defendant No.1 till the arbitrators declare their award. In my opinion, these factors are not sufficient to make this case an exceptional case justifying interference by restraining defendant No.1 from enforcing the bank guarantee. Notwithstanding the disputes between the plaintiff and defendant No.1, the bank (defendant No. 2) was under obligation to discharge its liability as per terms of the bank guarantee.

10. For the foregoing reasons, the application filed by the plaintiff under Order 39 Rules 1 &2 and Section 151 CPC is dismissed. Before I part with this order, I would like to make it clear that nothing stated herein shall affect the rights of the parties that are agitated in the suit.