Engineering Development Corp. vs Municipal Corporation Of Delhi
2006 Latest Caselaw 814 Del

JUDGMENT

Manju Goel, J.

1. This is a petition under Section 9 of the Arbitration & Conciliation Act, 1996 seeking an order of restraint against the respondent, namely, Municipal Corporation of Delhi, from invoking the bank guarantee No. 40630 dated 22.7.2005. The facts briefly stated in the petition are as under:

The petitioner, M/s. Engineering Development Corporation, is a class-I contractor who obtained a work order for construction of Outfall drain for disposal of storm water/waste water of Devli village in south zone to be constructed at an estimated cost of Rs. 3,44,60,000/-. The work was to start on 9.10.2005 and was to be completed within six months thereof, i.e., by 8.4.2006. The petitioner was required to give a performance guarantee for a sum of Rs. 7,80,000/- and accordingly the petitioner submitted the unconditional and irrevocable bank guarantee No. BG-40630 dated 22.7.2005 valid for a year. The petitioner made its preparation to start the work but was physically prevented by the residents of Sainik Farms, who are residents of the area in which the construction work had to be undertaken. The petitioner wrote several letters to the respondent for handing over the site which the respondent failed to do and, therefore, the respondent is in breach of the contract. In the meantime, the stipulated date for completion of the contract has expired. The petitioner received a letter dated 29.3.2006 offering suo moto extension of time up to 31.7.2006 without prejudice to its right to recover liquidated damages in accordance with Clause 2 of the agreement. The petitioner in response offered to perform the contract subject to increase in the rates by 25% in view of the rise in the market rates in the meanwhile. The respondent did not agree to this proposal. The petitioner exercised its option to close down the contract in view of the fundamental breach of the contract by the respondent. The respondent has threatened to invoke the bank guarantee submitted by the petitioner. There is an arbitration clause in the agreement between the parties. One of the terms of the bank guarantee is that the bank would indemnify the respondent to the extent of Rs. 7,80,000/- against any loss or damages, costs, charges and expenses caused or suffered by the respondent on account of the breach by the petitioner and to unconditionally pay the amount claimed by the respondent on demand without demur. It is stated that since there is no breach of contact on the part of the petitioner, the respondent cannot invoke the bank guarantee and the petitioner would suffer irreparable loss and injury in case the bank guarantee is invoked. Hence the prayer for an order of restraint.

2. The Supreme Court laid down the law in respect of granting of injunction against the invocation of bank guarantees in the case of U.P. State Sugar Corporation v. Sumac International Ltd. reported as . The principles of law laid down for dealing with such situations is given in para 12 as under:

12. The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize 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. The very purpose of giving such a bank guarantee would otherwise be defeated. The Courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The Courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may co-exist in some cases....

3. Learned Counsel for the petitioner, however, says that the present case is an exception and is covered by another judgment of the Supreme Court, namely, Hindustan Construction Company Ltd. v. State of Bihar reported as (1998) 8 SCC 436. In that case, one of the conditions of the bank guarantee was that the guarantee would be invoked ... in the event that the obligations expressed in the said clause of the above-mentioned contract have not been fulfillled by the contractor giving the right of claim to the employer for recovery of the whole or part of the advance mobilisation loan from the contractor under the contract.

4. It was thus a guarantee which could be invoked only in case of breach by the contractor. In the facts of the case, the Supreme Court observed it was the respondent who were in breach and not the appellant and upheld the order of the High Court against invocation of the bank guarantee. The simple question, therefore, is whether the term of the bank guarantee in the present case is comparable to the terms of the bank guarantee in the case of Hindustan Construction (Supra). The condition of the bank guarantee herein is as under:

... We, the Union Bank of India (hereinafter referred to as `the said bank') and having our registered office at Punjabi Bagh, New Delhi do hereby undertake and agree to indemnify and keep indemnified the corporation from time to time to the extent of Rs. 7,80,000/- against any loss or damages, costs, charges and expenses caused to or suffered by or that may be caused to or suffered by the corporation by reason of any breach or breaches by the said contractor of any of the terms and conditions contained in the said contract and to unconditionally pay the amount claimed by the corporation on demand and without demur to the extent aforesaid.

5. Apparently this document seems very close to the bank guarantee in the case of Hindustan Construction (Supra) but the clause following the above quoted clause shows a different picture. Clause 2 of the bank guarantee is as under:

2. We, Union Bank of India, further agree that the corporation shall be the sole judge of and as to whether the said contractor has committed any breach of (or) breaches of any of the terms and conditions of the said contract and the extent of loss, damages, costs, charges and expenses caused to or suffered by or that may be caused to or suffered by the corporation on account thereof and the decision of the corporation that the said contractor has committed such breach or breaches and as to the amount or amounts or loss, damages, may be caused to or suffered by the corporation from time to time shall be final and binding on us.

6. Clause 2 immediately makes it clear that there is no scope for the petitioner to raise a dispute as to who is the party in breach. For the purpose of invocation of the bank guarantee it is the opinion of the corporation which alone is sufficient and binding. The petitioner, therefore, cannot invite this Court to examine as to whether it is the respondent or the petitioner who is in default and whether the respondent can or cannot invoke the bank guarantee. Accordingly the principles enunciated in the Hindustan Construction (Supra) case cannot be applied to the present case.

7. Further the question of an interim order under Section 9 of the nature sought has to be granted on the same principles on which an injunction is generally granted. The risk of damage, if any, to be borne by the petitioner in the present case is only for a sum of Rs. 7,80,000/-. The respondent admittedly is a solvent party and there can be no difficulty in recovering this amount from the respondent in execution of an award in the event the intended arbitration is decided in favor of the petitioner. Hence there cannot be any risk or irreparable loss or injury to the petitioner in case the bank guarantee is allowed to be invoked before or during the arbitration proceedings.

8. Accordingly I find no merit in the petition and the same is accordingly dismissed.