Bharat Heavy Electricals Ltd. vs Indian Overseas Bank & Anr.
1999 Latest Caselaw 1097 Del

ORDER

Manmohan Sarin, J.

1. The petitioner has filed the above petition under Section 9 of the Arbitration and Conciliation Act, 1996 with application, under Order XXXIX, Rules 1 and 2 CPC. Seeking a restraining against the threatened statement of performance bond/bank guarantee in the sum of Rs. 35,39,75,000/-, issued by respondent No.1 bank in favour of respondent No. 2, under the Contract dated 20.9.1995 between the petitioner and respondent No. 2.

2. The petitioner moved the Court on receipt of a notice dated 2.8.1999, issued by respondent No. 2, notifying the petitioner that it would invoke the bank guarantee for Rs. 35,39,75,000/-, if the payment of the liquidated damages was not made within 30 days. Respondent No. 2 had addressed the same letter to all the 4 major contractors for encashment of their respective performance bonds given under their respective contracts with the petitioner.

3. The case of the petitioner as set out in the petition and urged before the Court may be stated as follows :-

(i) The notice/threatened demand dated 2.8.1999, was not in accordance with the terms of the bank guarantee/performance bond.

The form of demand requires respondent No. 2 to state that the contractors failed to rectify the breach under the contract, "as defined in the performance bond". It is urged that the performance bond/bank guarantee was given for the performance of the contract, as defined in the performance bond. The submission is that the performance bond is for completion of, "the scope of supply as defined in the contract in Clause 1.1.46 at page 15 and as detailed in Schedule 3 at pages 110 to 112 of volume 2. In other words, the contention is that petitioner having supplied all the materials mentioned in Schedule 3 as duly verified by the engineer of respondent No. 2, the bank guarantee/performance bond could not be invoked. This, it is claimed is supported by 31 certificates, issued by respondent No. 2. Reference is also invited to a certificate dated 20.2.1998, certifying completion of despatch of all equipments under the scope of supply. It is urged that the last supply of equipment for unit 1 of the power plant was made in May, 1998 and supply of equipment for unit 2 was made in November, 1998. The titioner claims to have adhered to the scope and schedule of supply and it is urged that there is no breach or default in the equipment supply contract. Thus, there was no cause or justification for invoking the bank guarantee and the attempt at invocation was clearly fraudulent. All equipments, as per the scope of supply having been supplied by the petitioner and no notice of any breach or defect in the scope of supply was ever issued. Notice dated 2.8.1999 related to alleged delay in completion of plant, which does not relate to the scope of supply and hence if the respondent is permitted to encash the bank guarantee, it would purport to fraud and result in irretrievable justice.

(ii) It is urged that the construction and commissioning of the power plant is not part of scope of equipment supply contract. The same is covered by a separate contract awarded to M/s. Badger Energy INC. of U.S.A., who have submitted their own performance bond in favour of respondent No. 2 for construction and commissioning of the power plant. The delay in completion of power plant, it is urged, is not attributable to failure of the petitioner in performance of the scope of supply under the equipment supply contract, which stands executed fully. The performance bond cannot be legally encashed for the delay under the other contract, which is not covered by the equipment supply contract. The petitioner urges that the respondent's claim for liquidated damages from 20.6.1998 to 5.3.1999, does not relate to the delay for non-supply of equipments. The threatened invocation of the bank guarantee shall not be, therefore, in accordance with the terms of the bank guarantee/performance bond as per format in second schedule. It is also urged that the demand is not in prescribed second schedule, which requires a declaration from the respondent to state that no appropriate cure for breach and defect has commenced. Regarding the defect in the turbine for unit 1, which was noticed in the course of erection of the turbine in June, 1999, necessary rectification as required under the contract has been commenced. The claim of respondent No. 2 for liquidated damages is said to be unconscionable and in contravention of Clause 7 of the contract. The demand on the performance bond or bank guarantee towards the delay in construction of plant by other contractors under a separate contract would be nothing but perpetuating fraud and, therefore, the bank guarantee cannot be encashed as all the equipments mentioned in third schedule have been supplied to the satisfaction of the Engineer of respondent No. 2.

(iii) Reliance is placed by the petitioner in support of its contentions on Larsen & Toubro Limited Vs. Maharashtra State Electricity Board & Ors. - 1995 (7) S.C. 18, where the Apex Court granted stay against the invocation of bank guarantee, as the performance of the contract was completed. The bank guarantee was to ensure only till successful completion of the trial operations of the plant till it was taken over. The event having ensued, the invocation of the bank guarantee was held to be not encashable on its terms and to prevent irretrievable justice injunction was issued. Further, reliance is placed on , which enjoins that the encashment of the bank guarantee has to be in accordance with its terms. Learned counsel further relied on and State of Maharashtra Vs. Dr. M.N. Kaul -

to urge that the invocation is to be in accordance with the terms of the bank guarantee.

4. Respondent No. 2 has filed a detailed and comprehensive reply, refuting the contentions raised by the petitioner as well as the interpretation sought to placed on the scope of performance bond/bank guarantee.

Respondent No. 2 has averred and explained in the reply that it is setting up a 2 x 130 Mega Watt thermal plant. For this purpose, it entered into an equipment supply contract on 29.9.1995, with the petitioner. On the same date, respondent No. 2 entered into contract with three other contractors, namely, M/s. Raytheon Fbasco Overseas Limited, Badger Energy Inc., and Entery Overseas International Inc. The aforesaid four contracts entered into between respondent No. 2 on the one side, petitioner and the other three contractors are for the purposes of engineering, procurement and construction of the said 2 x 130 Mega Watt thermal plant in Karnataka. All the four contractors including the petitioner are jointly and severally responsible for the timely and successful completion of the power plant and more specifically for the scope of supply, as defined in Schedule 3 of their respective contracts. In addition, each of the contractors are also jointly and severally responsible for engineering, construction, erection, procurement and successful completion and handing over of the power plant.

5. The case of respondent No. 2 is that the liability of the petitioner under the contract does not come to an end on a mere physical or mechanical dumping of the equipment enumerated in Schedule 3 of the contract. The case of respondent No. 2 is that on a conjoint reading of clauses, namely: 1.1.4, 1.1.34, 1.1.37 to 39, 1.1.45. 1.1.46, 1.1.47, 1.1.60 as well as clauses 8.1, 8.1 (A) 8.1 (B), the following position emerges :-

(a) The petitioner is responsible for completion of the scope of supply as per Schedule Three of the Contract subject to and in accordance with all the terms and conditions of the Contract.

(b) The general obligations of the petitioner under Clause 8.1, 81-A and 8.18 relate to the entire Section (defined in Clause 1.1.47) and not merely to the list of equipment set out in Schedule Three of the Contract.

(c) In terms of the contract, the equipment supplied by the petitioner has to be commissioned, erected and should pass a series of tests. After the successful completion of such tests and certification to that effect from the Engineers, the power plant is liable to be taken over by respondent No.2. The liabili ty of the petitioner continue not just till the point of time of takeover of each unit, but also beyond that period, till the completion of the defects liability period for each unit. In other words, the liability of the petitioner does not come, to an end by a mere mechanical dumping of equipment enumerated in Schedule Three of the contract. The liability of the petitioner extends till after the actual take over of each section of the power plant by respondent No. 2 in terms of Clause 29.1, after all requisite tests on completion for each section have been conducted in accordance with Clause 28.1.

(d) As per Clause 27.1 read with Clauses 1.1.47, 1.1.55, 1.1.56, 25.1 and 28.1, the obligation of the petitioner is to perform the scope of supply in such a manner that each of the Sections is completed in accordance with the terms and conditions of the Contract within the time for completion. Clearly, the petitioner is required to complete the scope of supply in such a manner and within such a time as would enable completion of the Section subject to all terms in the contract pertaining to testing, takeover and curing of defects, if any. Failure on part of the petitioner to perform its obligations gives the right to respondent No.2 to claim liquidated and ascertained damages under Clause 27.1 as per the rates and caps prescribed therein.

(e) That the liability of the petitioner continues right till the date of take over of each unit is also evident from Clause 38.2 read with Clause 1.1.45 which stipulates that the risk of loss or damage to the scope of supply passes from the petitioner to respondent No. 2 only at the time of effective date of takeover of each unit.

(f) Each of the contracts is jointly and severally liable for the timely and successful completion of each section. This is borne out from a reading of Clauses 1.1.47, 1.1.49, 1.1.60, 26.1(f), 27.1, 28.1 and 29.1."

6. The case of respondent No. 2 is that the petitioner has miserably failed in discharge of its obligations and to adhere to the time for completion. After taking into account the extension agreed, the time for completion of Section 1 of the contract was scheduled to come into an end in June, 1998 and time for completion of Section 2 in December, 1998. The petitioner having failed to fulfilll the scope of supply, as given in Section 1, respondent No. 2 vide its letter dated 29.6.1998, notified the petitioner of its intention to claim liquidated and ascertained damages as per clause 27.1. On 30.6.1998, another letter was addressed to all the four contractors, wherein respondent No.2's claim for liquidated and ascertained damages against all the four contracts was issued. Respondent No. 2 sought to raise certain frivolous defenses, which were denied by respondent No. 2 vide its letter dated 1.8.1998. As there is failure to complete Section 2 also, respondent No. 2 addressed a letter to all the four contractors informing that the time for Section 2 also had come to an end. This was followed by a letter of 4.6.1998, calling upon the contractors to make immediate payment of the liquidated and ascertained sums. Notice of default was also issued by the engineers on 30.6.1999.

7. In the light of the foregoing, learned counsel for respondent No. 2 submitted that petitioner had been in breach of the contract due to failure to perform the scope of supply. There have been serious delays in delivering and even where deliveries have been made, the equipment supplied has been defective and had to be given back for repairs. Respondent No. 2's project has been severely crippled and delayed causing immense loss to respondent No. 2 on account of omissions and commissions of the petitioner. Respondent No. 2 has filed Annexure 6 (colly) giving the summary of the letters/notices issued regarding the breaches of the petitioner. I find merit in this submission. The correspondence and documents placed on record prima facie support the submission sought to be made by respondent No. 2.

8. Learned counsel for respondent has also drawn the Court's attention to the decision of a Division Bench of this Court in CM. No. 2652/99 in FAO (OS) 218/90, filed by respondent No. 2. A learned Single Judge of this Court in OMP. 196/99, filed by petitioner herein, seeking a restraint on encashment of bank guarantee had granted a restraint on encashment of bank guarantee in respect of this very contract. At that time, the encashment of bank guarantee was sought by respondent No. 2 as the petitioner had not passed on to respondent No. 2, the deemed export benefit received by it. The learned Single Judge had held that the claim of deemed export benefit does not fall within the scope of the performance bond holding, that the performance bond was confined to scope of supply, which does not cover the deemed export benefit. The Division Bench in the appeal filed by respondent No.2/Jindal Tractebel Power held as under :-

"Even otherwise, in our prima facie view, it cannot be categorically said that the performance guarantee is only to cover instances of breaches in supply of equipment or defects in the equipment. The "Contract", which is for supply of equipment, contains numerous terms and conditions. One of the terms and conditions, under CI.48.1 is that deemed export benefits received by the respondents were to be passed on to the appellants. Admit tedly, respondents have received approximately Rs. 28 lacs by way of deemed export benefits. Respondents have not passed on this entire benefit to the appellants. Prima facie it is difficult to accept reasoning of learned Single Judge that the concerned guarantee would not cover such a contingency and that it would only cover cases where there was a breach in supply or a defect in the goods supplied.

Thus "the Contract" is the contract for procurement and construc tion. The respondents are to complete the `Scope of Supply' upon and subject to terms and conditions contained in the contract. Prima facie it would appears that this would mean not just supply of material but also fulfillling other terms and conditions of the Contract. Prima facie, it appears that the first schedule to the guarantee merely enumerates that the power plant contract is for completion of Scope of supply. That would not mean that the guarantee does not cover other terms and conditions of the Contract. For supplies made by respondents, they would have to recover monies from the appellant. Prima facie it appears that in a case where respondents had to only receive monies there would be no need to give a guarantee. However, if under other terms and conditions of the Contract there were obligations, which the respondents had to perform then a performance guarantee would be required. A reading of C1.1.39 shows that the security was to be provided by the respondents under C1.10.1 for due performance of the "Contract". Performance of the "Contract" would also include performance of C1.48.1.

In our prima facie view restraining invocation of such an on demand guarantee was not justified. The Supreme Court has time and again deprecated the practice of Courts interfering in such cases. Accordingly, operation of the impugned order dated 21.7.1999 is stayed.

It must be mentioned that under similar circumstances and under an identical contract and an identical guarantee the Bombay High Court had refused stay of invocation. This has been upheld all the way to the Supreme Court."

The Division Bench also declined to grant stay of its order. The view taken by the Division Bench in respect of this very performance bond/bank guarantee is that it is not confined to in the supply of equipment but rather covers compliance with other terms and conditions of the contract.

9. The legal position with regard to the grant of injunction against the enforcement of bank guarantee and irrevocable letter of credit is now fairly well-settled with a series of pronouncements by the Apex Court. The Supreme Court in Syenska Handelsbanken Vs. M/s. Indian Charge Chrome and others [1994 (1) SCC 502], after noticing the earlier decisions of the Court summed up the position as under :

"...in case of confirmed bank guarantees/irrevocable letters of credit, it cannot be interfered with unless there is fraud and irretrievable injustice involved in the case and fraud has to be an established fraud..."

"...irretrievable injustice which was made the basis for grant of injunction really was on the ground that the guarantee was not encashable on its terms..."

"...there should be prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Mere irretrievable injustice without prima facie case of established fraud is of no consequence in restraining the encashment of bank guarantee."

10. The Supreme Court in Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engg. Works (P) Ltd. (AIR 1977 SC 2477) deprecated the tendency of not applying settled principles with regard to the legal position on encashment of bank guarantees. The Court in the said case had rejected the held allegation of fraud made against the beneficiary in the injunction application with a view to obtain an order of injunction. The Court held that in the absence of established fraud the court would not grant an injunction relating to the bank guarantee.

11. In the instant case, the petitioner has failed to prima facie show or establish any fraud or irretrievable justice. The fact that the encashment of the bank guarantee would entail financial hardship or would be onerous cannot be a ground to seek a restraint on its encashment. As regards appellant's claim of having fulfillled its obligations under the Contract and the respondent No. 2 not being entitled to damages, the same are to be gone into by the Arbitrator and are not to be considered while disposing of the injunction application against the encashment of the performance bond. The fraud or irretrievable justice, which is contemplated when the Court steps into interfere in one which should be of an egregious nature.

12. I find considerable merit in the submission of Mr. Rohtagi that the breach which the petitioner was required to rectify was in relation to the terms of the contract, whereby, the petitioner is required to pay liquidated and ascertained damages for delay in terms of clause 27. It is also this breach, which the petitioner has failed to rectify and cure. The submission of Mr. J.C. Seth that the encashment of the performance bond/bank guarantee sought was not as per the specified form is again without merit. Notice of 2.8.1998 given is the notice as contemplated under the contract for calling upon the petitioner to cure the breach by making the payment. The invocation of the bank guarantee is to be separately done as per the prescribed format.

13. In the passing I may also notice that during the course of proceedings both the parties had sought adjournment to attempt an amicable resolution of their differences. Petitioner had also filed an application IA. 9204/99 wherein stay of encashment of the bank guarantee was sought on the basis of the said agreement. In terms of the agreement, as annexed to the application, the respondent No.2 had agreed not to encash the performance bond until or after 31.9.1999 or such extended date as mutually be agreed on the condition".

(i) The appellant would not take any action by way of legal proceedings to prevent such encashment by respondent No.2 after 31.9.1999 or any extended date.

(ii) The appellant would make payment to the respondent No.2 of Rs.60 million in respect of deemed export benefit on or before 9.9.1999.

Learned counsel for the petitioner, Mr. Seth, urged that the payment of the deemed export benefit has been made and the appellant has paid a sum of Rs. 6,12,85,043.42 to respondent No. 2. The agreement was, however, subject to approval of condition No. (i) above by the Board of the appellant. This approval has not been forthcoming. Counsel for the respondent No. 2 informed that the talks for settlement have broken down. He submitted that he is not pressing his case on the basis that appellants are estopped from seeking to oppose encashment of the performance bond. In this view of the matter, this controversy does not affect the present decision. Accordingly, IA. 0294/99 is dismissed.

14. In view of the foregoing discussion, it is held that the petitioner has failed to make out a prima facie case, showing fraud or irretrievable justice. The petition has no merit and is dismissed.