Man Industries India Limited vs Indian Oil Corporation Limited
2008 Latest Caselaw 1723 Del

*     IN THE HIGH COURT OF DELHI AT NEW DELHI

+     O.M.P. 339/2007 & IA No.7313/2007

                                            Reserved on :      September 8, 2008
                                            Date of Decision : September 24, 2008

      MAN INDUSTRIES INDIA LIMITED                 ..... Petitioner

                      Through : Mr. A.S. Chandhiok, Sr. Advocate with Ms. Geetika
                      Panwar, Ms. Mamta Tiwari and Ms. Arti, Advocates

             versus

      INDIAN OIL CORPORATION LIMITED                ..... Respondent

                      Through : Mr. V.N. Koura with and Ms. Paramjeet Benipal,
                      Advocates

CORAM:

Mr. Justice S. Ravindra Bhat


1.    Whether reporters of local papers may be
      allowed to see the judgment?                                     YES

2.    To be referred to the Reporter or not?                           YES

3.    Whether the judgment should be reported                          YES
      in the Digest?

%     24.09.2008
Mr. Justice S. Ravindra Bhat


1.    In these proceedings under Section 9 of the Arbitration and Conciliation Act,

1996 (hereafter called "the Act"), the petitioner seeks an order restraining invocation of

a bank guarantee, by the respondent, Indian Oil Corporation (hereafter "IOC").


OMP339/07                                                                           Page 1
 2.     The petitioner entered into an agreement with the IOC, for supply of 20,000

metres of 48" size API 5L X 65 Grade Line Pipes for which the IOC issued a Purchase

Order on 5-8-2004. In terms of that Order, the petitioner had to -and did - furnish a

bank guarantee, for Rs. 5,49,77,184/- to secure due performance of the agreement.

The guarantee was issued by the second respondent (hereafter called "the bank"). In

terms of Clause 4.19.2 of the Purchase Order, the guarantee had to be valid and in

force for 21 months from the completion of all deliveries under the contract. Clause

4.19.2 reads as follows:


              "4.19.0       PERFORMANCE GUARANTEE:
              ............

4.19.2 Said Performance Guarantee shall be and remain in force and shall be irrevocable upto and until 21 (twenty one) months from completion of all deliveries under the contract, and as long as defect liability period for all replacement pipes shall have not expired and all obligations relative thereto shall not have been discharged."

3. In terms of Clause 11 (of the Purchase Order) the warranty period was 12

months from the date of commissioning, or 18 months from the date of dispatch (of the

supplies) whichever was earlier. Clause 9 stipulated for third party inspection of the

equipment, at the stage of dispatch, by one Intertek. The petitioner claims to have

executed the contract in accordance with agreed terms, adhering to the delivery

schedule and dispatching the goods after their due inspection; it relies on inspection

certificates by Intertek, dated 28-12-2004, 11-1-2005 and 18-1-2005. The last

certificate is particularly relied on to say that it was a cumulative dispatch certificate,

OMP339/07 Page 2 also reflecting a deduction of Rs. 43, 27,706/ 48 made by the IOC on allegations of the

petitioners‟ delay in delivery of the pipes.

4. According to the petitioner, IOC lifted three (3) pipes more than six months after

inspection (18-1-2005) on 5-8-2005, despite having been intimated a number of times

about readiness of such equipment. The petitioner relies on letters and copies of e-

mails, dated 19-3-2005; 24-3-2005; 31-3-2005; 11-4-2005 and 30-6-2005 sent to IOC

asking the latter to lift the pipes. The petitioner contends that though the bank

guarantee was to be valid and in force till 4th October, 2006, yet IOC insisted that its

validity should be extended by another seven months. The petitioner had little choice,

but to yield to this demand; resultantly, the bank guarantee was extended till 4 th May,

2007.

5. The petitioner avers that when the pipes reached Paradip, Orissa, IOC, after

their inspection, alleged defects in two of them, and demanded Rs. 25, 31, 315/0 as

damages; the break-up for such damages was furnished on 12-2-2007. The petitioner

contends that though it had no contractual obligation towards coating on the pipes, or

their transportation, since it ceased to exercise control, after dispatch, yet, in order to

maintain business relations, it paid Rs. 25, 31, 315/- through a demand draft, for Rs.

15, 37, 048/- and adjustment, made by IOC, of Rs. 10,00,000/- lying with it. The

petitioner next contends that though there were no pending issues ( about performance

of contract) and despite expiration of 21 months from completion of all deliveries, the

IOC, on 27-4-2007, wrote to the bank, for extension of the guarantee for a further six

OMP339/07 Page 3 months. The petitioner, in its letter of 30-4-2007 said that the guarantee could be in

force only for 21 months, from completion of all deliveries which was last done on 18 th

January, 2005. It contends that the validity of the guarantee had expired, and could not

be extended unilaterally. Yet, to bring the matter to a close, the petitioner extended the

validity period of the guarantee by another month, to 4-6-2007.

6. The petitioner relies on a letter to IOC dated 16th May, 2007 that it had discussed

the issue with the Chief Construction Manager, Paradip, who had informed that there

was no further issue with regard to deliveries, except for the two pipes against which

necessary compensation had been received. It is contended that this clarified that the

IOC did not indeed have any pending or outstanding issues concerning the deliveries, or

the supply of contracted equipments. The petitioner adverts to other letters, in regard

to joint meeting with the IOC. The petitioner alleges that when an inquiry was made on

its behalf about the reasons for extension of bank guarantee, IOC officials mentioned

about a minutes of meeting, previously held on 20-3-2006, regarding ovality in the

pipes supplied. This, it is contended, was never mentioned in previous letters, or

brought up as a pending or outstanding issue, for more than one year; no complaint

about the standard of the pipes was ever made to it. The petitioner received a letter

dated 28-5-2007 for the first time discussing about the question of ovality of the pipes;

it alleges that such defect or deficiency falls within the domain of the transporter, and is

not its fault. The petitioner replied to the letter, refuting its role, on 31-5-2007; it also

took steps to extend the bank guarantee validity by another month. The petitioner also

OMP339/07 Page 4 wrote to IOC on 15th June, 2007 submitting its report, mentioning about having

checked all records and stating that the pipes were supplied according to specifications,

and that no ovality or other defects were found at that time, or during dispatches.

7. The petitioner alleges fraud by IOC in regard to transportation by the coating

contractor, which was not according to specifications. The goods were inspected and

found in order by the third party inspector; the IOC‟s contractor thereafter had to follow

instructions. The non-adherence to such specifications by that party could not lead to

the petitioner being prejudiced by invocation of the bank guarantee, as is sought to be

done. The petitioner also refers to the arbitration clause, i.e. 4.26.0 and contends that

the IOC cannot invoke the guarantee; it seeks a restraint order under Section 9, against

the letter of 23-6-2007 by IOC seeking further extension of the guarantee, failing which

it is sought to be invoked. It is contended that the dispatch of all the agreed and

contracted goods led to completion of the contract, and performance of the petitioner‟s

obligations. The IOC never raised any issue concerning ovality. Even after the minutes

of meeting of 20th March, 2006, IOC raised demands only in regard to delay in supply,

for which over Rs. 43 lakhs was deducted; more importantly, an amount exceeding Rs.

25 lakhs was given to it in April, 2007, after it raised the issue of two defective pipes.

Therefore, claiming that pipes were not according to specifications, on account of their

ovality, was not justified; the third party inspection too did not support this stand.

8. IOC, in its reply, relies on a letter dated 29-6-2007, issued to the bank, in

continuation of its letter of invocation dated 23rd June, 2007, stating that a demand for

OMP339/07 Page 5 Rs. 26.94 lakhs plus US $ 20,70,000 was payable by the petitioner , on account of

ovality supplied pipes. According to IOC, the petitioner neither extended the validity of

the bank guarantee beyond 4th July, 2007, nor responded to its claim; it therefore,

requested the bank to treat its letter as a demand and release Rs. 5,49,77,184/- to it.

On 3rd July, 2007, IOC wrote another letter to the bank, further to its previous letters,

stating that Rs. 26.94 lakhs plus US $ 20,70,000 was payable by the petitioner for

losses and damages suffered on account of excessive ovality of the pipes supplied by

the latter.

9. By ex-parte order dated 27th June, 2007, in the meanwhile, this court had

entertained this petition, and suspended operation/ stayed the letter dated 23 rd June,

2007 issued by the petitioner. That interim order has subsisted, and binds the parties,

till date.

10. Mr. A. S. Chandhiok, the petitioners‟ learned senior counsel argues that the IOC‟s

so called invocation of the guarantee is unlawful. It was argued that a cumulative

reading of the letters dated 23rd June, 2007, 29th June, 2007 and 3rd July, 2007, all

clarify that the IOC had no doubt in its mind that what was sought was merely

extension of the bank guarantee; the tenor of the first two letters was not aimed at

invoking the guarantee. Counsel relied on the phraseology in the guarantee, issued by

the bank, to submit that invocation had to be in terms with that document. Aware that

the first two letters did not conform to the terms of the guarantee, the IOC wrote on 3 rd

July, 2007, for the first time, mentioning about alleged damages. As this aspect was

OMP339/07 Page 6 conspicuously absent in the previous letters, there was no invocation in accordance with

the guarantee; the court, according to counsel should continue the interim order, till

completion of arbitration proceedings. Counsel relied on the decision reported as

Hindustan Construction Co. Ltd -vs- State of Bihar 1999 (8) SCC 436 in support of this

submission.

11. It was contended that the facts of this case disclose that special equities existed,

to prompt the court into granting a restraint order, in respect of the bank guarantee,

and irretrievable injustice would result if such order were not given. The record disclose

that the third party inspector was satisfied about the dispatch of the equipment,

quantities, and the delivery schedule; any doubts in that regard were concluded, with

the deduction in excess of Rs. 43 lakhs, in January, 2005. The petitioner was no doubt

aggrieved by allegations about three defective pipes, and the demand for Rs. 25 lakhs

odd; yet, it paid off the amounts in April, 2007. All this while, the IOC never made

reference to the question of ovality of the pipes; they had been supplied much earlier.

In these circumstances, when all pending issues were closed, and the contract had

been performed, the IOC could not have legally sought extension of the bank

guarantee, and its subsequent invocation, and that too in a conditional manner. As a

matter of fact, the IOC‟s demand was that the guarantee should be extended, failing

which it stood invoked. Since this court has ensured that such extension has

taken place, the IOC cannot now seek encashment of the amounts, as no reason

for doing so exists. Reliance was placed on UP Cooperative Federation Limited

OMP339/07 Page 7 vs. Singh Consultants and Engineers (Pvt.) Limited, (1988) 1 SCC 174 and Hindustan

Steel Works Construction Ltd. Vs. G.S. Atwal & Co. (Engineers) (P) Ltd. (1995) 6 SCC

76.

12. It was also urged that the invocation was unlawful, since the obligations spelt

out under the guarantee, covered only demands made up to and as on 4-10-2006.

Since, undeniably the question of ovality of pipes supplied was not raised as an issue as

on, or before that date, the bank guarantee could not cover such demand. Counsel

contended that the two extensions of bank guarantee, firstly till 4 th May, 2007, and

later, till 4th July, 2007, did not alter the situation, since they merely extended the

validity of the bank guarantee; however, the bank‟s liability to pay was limited to what

was demanded before 4th October, 2006, as there was no extension of that clause or

condition. Counsel placed reliance on the decision reported as State of Maharastra -vs-

M.N. Kaul AIR 1967 SC 1634, to say that a guarantor cannot be made liable beyond the

terms of his engagement.

13. Learned counsel submitted that the invocation in question here disclosed fraud

relating to the performance of the contract. No doubt, the Supreme Court had in many

judgments, ruled that fraud, to enable the court to injunct invocation, should be in

regard to the underlying contract, yet subsequent developments in relation to the

documents, concerning the contract, or its performance, could also be valid grounds for

granting stay of the bank guarantee. The manner in which documents were sought to

be used, established the fraud of the IOC; it did not also intend to invoke the bank

OMP339/07 Page 8 guarantee, as is clear from the letters dated 23-6-2007, 29-6-2007 and 3-7-2007.

Reliance was placed on the judgment reported as M/s Synthetic Foams Ltd. -vs-

Simplex Concrete Piles (India) Pvt. Ltd. AIR 1988 Del 207.

14. Mr. V. N. Kaura, IOC‟s counsel, contends that courts can injunct a bank from

paying under an unconditional bank guarantee, only if clear circumstances establishing

a fraud, in connection with the underlying contract, and not in manner of invocation of

the guarantee. The other circumstance would be if it is shown that allowing

encashment of a guarantee would result in irretrievable harm or injustice to one of the

parties concerned. Such fraud should be of an egregious nature. He relied on the ruling

of the Supreme Court, in Vinitec Electronic Systems Ltd -vs- HCL Infosystems Ltd 2008

(1) SCC 544.

15. IOC contends that the requirements of alleging fraud are compelling; one who

says so, should make clear and unambiguous averments. Here, in this case, the

petitioner has not made any specific averments about fraud, or special equities. There

is no dispute that arbitral proceedings are pending; in case the petitioner is aggrieved

by invocation of the guarantee, it can always seek relief in that regard too, provided a

case is made out. Counsel next relied on the judgment reported as Dwarikesh Sugar

Industries Ltd. -vs- Prem Heavy Engineering Works (Pt) Ltd 1997 (6) SCC 450 in

support of the submission that to seek injunction of bank guarantee, i.e. result

of irretrievable injury, should be of such magnitude that it would render

impossible for the guarantor to reimburse himself, if he ultimately succeeded. In this

OMP339/07 Page 9 connection, counsel placed reliance on the kind of circumstances that would fit the

description of irretrievable injustice, and illustrated the case of Itek Corpn. case, 566

Fed Supp 1210, quoted with approval in U.P. State Sugar Corporation v. M/s. Sumac

International Limited, (1997) 1 SCC 568.

16. Learned counsel submitted that evidence of fraud (or irretrievable injustice)

should be clear, both as to the fact of fraud and as to the bank‟s knowledge. He relied

on the judgment of the Supreme Court, reported as Himadri Chemicals Industries Ltd.

v. Coal Tar Refining Co.,(2007) 8 SCC 110, in that regard.

17. Before proceeding with a discussion on merits of this case, it would be relevant

to notice the law applicable to actions seeking restraint of obligations arising under

bank guarantees. A bank guarantee is an independent contract between the bank and

the beneficiary and its terms bind both the parties. The terms of the bank guarantee

are, thus, extremely material. The invocation must, be in accordance with the terms of

the bank guarantee. Except in the case of fraud, which could be as established fraud, or

where irretrievable injury likely to be caused to the guarantor, courts would be reluctant

to grant injunction against the invocation of bank guarantee. In UP Cooperative

Federation Limited vs. Singh Consultants and Engineers (Pvt.) Ltd. (1988) 1 SCC 174,

the Supreme Court held:

"...... an unconditional bank guarantee could be invoked in terms thereof by the person in whose favour the bank guarantee was given and the courts would not grant any injunction restraining invocation, except in the case of fraud or irretrievable injury."

OMP339/07 Page 10 The same principle has been noticed in Svenska Handelsbanken v. Indian Charge

Chrome, (1994) SCC 502) Larsen and Toubro Ltd. vs. Maharashtra State Electricity

Board (1995) 6 SCC 68; Hindustan Steel Works Construction Ltd. Vs. G.S. Atwal & Co.

(Engineers) (P) Ltd., (1995) 6 SCC 76 National Thermal Power Corporation Limited vs.

Flowmore (P) Ltd, (1995) 4 SCC 515; State of Maharashtra vs. National Construction

Co.", (1996) 1 SCC 735.

18. A bank guarantee should be in unequivocal terms, unconditional and recite that

the amount would be paid without demur or objection and irrespective of any dispute

that might have cropped up or might have been pending between the beneficiary under

the bank guarantee and the person on whose behalf the guarantee is furnished. The

bank has to verify whether the amount claimed is within the terms of the guarantee.

Unless fraud or special equity is, prima facie, made out as a triable issue by specific

pleading and strong evidence, to prevent irretrievable injustice to the party concerned,

the beneficiary cannot be restrained from encashing the bank guarantee till decision of

the arbitrator/court on amount due and payable to the beneficiary.

19. In Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co.,(2007) 8 SCC 110,

the Supreme Court held that:

"14. From the discussions made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement of a bank guarantee or a letter of credit, we find that the following principles should be noted in the matter of injunction to restrain the 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

OMP339/07 Page 11 bank guarantee or letter of credit is given or accepted, the beneficiary is entitled to realise 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 realisation 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 guarantees or letters of credit.

(v) 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."

20. The first question which arises is whether the bank guarantee was invoked in its

terms and if the petitioner is right in contending that the Bank could not have allowed

its encashment. Considerable reliance is placed upon the letters of 23rd June, 2007 and

29th June, 2007 for this purpose. No doubt, ex facie, they do not anywhere disclose

reference to loss or damage suffered or incurred by the IOC in express terms. The

tenor of these letters is that in the event of refusal to extend the bank guarantees

further, the same should be encashed. However, one cannot be unmindful of the fact

that the bank guarantee was in force and valid till 4th July, 2007. The last in the series of these

OMP339/07 Page 12 correspondences between IOC and the Bank is a letter dated 3rd July, 2007. This letter

reads as follows:-

"Indian Oil Corporation Limited Paradip-Haldia Crude Oil Pipeline Project 1205, Forest Park, Bhubaneswar -751009 (Orissa) Tel.:91-674-2595401, 2595318, 2595373 Fax: 91- 674-2595234 PHCPL/PDP/665 11 Date: 03.07.2007 The Manager, Bank of Baroda, Mumbai Main Office, Post Box No.347, 10/12, Mumbai Samachar Marg, Fort.Mumbai-400 001 Fax No.: 022 22040494 Sub: Bank Guarantee No.BMO:FGN:GTEE:P/86/94 dated 31.08.2004 and as extended upto 04.07.2007 for Rs.5,49,77,184.00. Dear Sir, This refers to your letter No.MMO:FGN:Prop:89/1157 dated 02.07.2007 and further to our letter no. PHCPL/PDP/665/11 dated 29th June, 2007 which was addressed to you in suppression of our letter dated 23 rd June, 2007, in view of omission in the said letter to specify the claim of Indian Oil Corporation Limited against Man Industries (India) Ltd.

In terms of our letter no. PHCPL/PDP/665/11 dated 29th June, 2007 we had informed you that the Indian Oil Corporation Limited has a claim of Rs.26.94 Lakhs plus US $ 2,070,000/- for losses and damages suffered on account of the excessive ovality of the pipes supplied by M/s. Man Industries (India) Ltd. pursuant to Letter of Intent No.PLM/PHCPL/04/04 dated 28.07.2004 and P.O. No. PLM/PHCPL/04/17128226. To put the matter beyond doubt and ensure that our demand conforms in all respects to the requirements of the above Bank Guarantee we hereby re-iterate our demand of Rs.5,49,77,184.00 (Rupees Five crore forty nine lakhs seventy seven thousand one hundred eighty four only) in terms of the above Bank Guarantee towards our claim inter-alia of Rs.26.94 lakhs and

OMP339/07 Page 13 US$2,070,000/- against Man Industries (India) Ltd. for the loss and damage suffered by the Corporation.

We should remind you that in terms of the guarantee the bank undertook to pay the Corporation forthwith, on demand in writing and without protest or demur or proof or conditions, any and all monies claimed by the Corporation from the Contractor under or in respect of the contract referred to in the Bank Guarantee as specified in any notice of demand made by the Corporation on the Bank with reference to the said guarantee/undertaking.

We are advised that the demand in terms of our letter 29th June, 2007 and this letter are not covered by the order of injunction passed by the Hon‟ble Delhi High Court on 27th June, 2007.

Kindly acknowledge receipt.

Thanking you, Yours faithfully, (A.Bandyopadhyay) Senior Construction Manager"

21. The authorities are all clear right from the United Commercial Bank, UP

Cooperative Federation Limited, Hindustan Steel Works Construction Ltd. down to the

latest rulings in Vinitec Electronic Systems Ltd and Himadri Chemicals Industries Ltd.,

that the nature and character of the guarantee is an unconditional representation by

the Bank to honour the demand as and when made. The Courts have to, necessarily

adopt a circumspect approach when an application for injunction is made. The two

exceptions universally recognized are fraud of egregious nature and special equities

pointing to irretrievable injustice. In the circumstances of this case, even a facial

inconsistency between the demand and the terms of the guarantee, disclosed in the

previous two letters, cannot prevent its performance; the Court would be unjustified in

OMP339/07 Page 14 interdicting the Bank on this score, having regard to the clear terms of the demand,

made in the letter of 3rd July, 2007.

22. The second aspect which requires consideration is the contention that the

guarantee covered only demands made up to and as on 4th October, 2006. Here the

argument is that the demands regarding ovality having been made on the petitioner

after April, 2007, i.e. later than 4th October, 2006, the bank guarantee could not have

been invoked. The relevant part of the original bank guarantee reads as follows:-

"We Bank of Baroda, Mumbai Main Branch (hereinafter called „the Bank‟ which expression shall include its successors and assigns hereby undertake to pay the corporation in rupees forthwith on first demand in writing and without protest or demur or proof or conditions any and all monies anywise claimed by the Corporation from the Contractor under in respect of or in connection with the said contract as specified in any notice of demand made by the Corporation on the Bank with reference to this undertaking upto and aggregate limit of Rs.5,49,77,184/- (Rupees Five Crore Forty Nine Lakhs Seventy Seven Thousand One Hundred Eighty Four Only).

And the Bank hereby agrees with the Corporation that : i. This Undertaking shall be a continuing undertaking and shall remain valid and irrevocable for all claims of the Corporation and liabilities of the Contractor arising upto and until midnight of 04.10.2006.

ii. This undertaking shall be in addition to any other undertaking or guarantee or security whatsoever that the Corporation may now or at any time have in relation to its claims or the Contractor‟s obligation/liabilities under and/or in connection with the said Contract and the Corporation shall have full authority to take recourse to or enforce this undertaking in preference to the other undertaking or

OMP339/07 Page 15 security(ies) at its sole discretion, and no failure on the part of the Corporation in enforcing or requiring enforcement of any other undertaking or security shall have the effect of releasing the Bank from its full liability hereunder.

------

vi. The amount stated in any notice of demand addressed by the Corporation to the Bank as claimed by the Corporation from the contractor or as liable to be paid to the Corporation by the Contractor or as suffered or incurred by the Corporation on account of any losses or damages or costs, charges and/or expenses shall be between the bank and the Corporation be conclusive of the amount so claimed or liable to be paid to the Corporation or suffered or incurred by corporation, as the case may be, and payable by the Bank to Corporation in terms hereof.

-------

viii) Notwithstanding anything to the contrary contained hereinabove our liability under this Bank Guarantee shall not exceed Rs.5,49,77.184.00 (Rs.Five Crores Forty Nine Lacs Seventy Seven Thousand One Hundred Eighty Four Only). This Bank Guarantee shall be valid upto 4.10.2006. We are liable to pay the guaranteed amount or any part thereof under this Bank Guarantee only and only if you serve upon us a written claim or demand on or before 4.10.2006."

23. The bank guarantee was later extended on 29.9.2006 in the following terms:

"To Indian Oil Corporation Limited,(Pipelines Division) 4th Floor, A-1, Udyog Marg, Sector-1, NOIDA - 201 301 (U.P) Dear Sirs, Re: Our Bank Guarantee No.BMO-FGN:GTEE:P/86/94 Dtd.31.08.2004 for Rs.5,49,77,184/- fvg. Yourselves A/c.M/s.Man Industries (I) Limited.

OMP339/07 Page 16 At the request of M/s.Man Industries (India) Limited We, Bank of Baroda, Mumbain Main Office, Mumbai amend the captioned guarantee as follows: "THE VALIDITY OF THE BANK GUARANTEE IS EXTENDED FROM 04.10.2006 TO 04.05.2007."

This amendment is an integral part of our original guarantee no.BMO:FGN:GTEE:86/94 dtd.31.08.2004 for Rs.5,49,77,184.00 and must be annexed thereto.

NOTWITHSTANDING ANYTHING CONTAINED HEREIN:-

a) Our liability under this Bank Guarantee shall not exceed Rs.5,49,77,184/- (Rupees Five Crores Forty Nine Lakhs Seventy Seven Thousand One Hundred Eighty Four Only).

b) This Bank Guarantee shall be valid up to 04.05.2007; and

c) We are liable to pay the guaranteed amount or any part thereof under this Bank Guarantee only if you serve upon us a written claim or demand and received by us on or before 04.05.2007."

24. It was again extended in identical terms and kept alive till 4th July, 2007. The

argument here, about the bank guarantee not covering any demand not lodged before

4th October, 2006 would perhaps have been powerful enough to persuade a court in

respect of claims for injunction in other transactions. However, the Court cannot lose

sight of the fact that the object of the bank guarantee was to secure due performance

of the contract by the petitioner. Such being the case and the extension documents

expressly spelling out that the validity of the guarantee stood extended from 4 th

October, 2006 till the dates expressed and all other terms and conditions remaining

unchanged, the Court, having regard to the present state of law (whereby in the

existing state of law, egregious fraud and special equities alone can entitle a

third party to injunction), cannot agree with the petitioner‟s argument. The bank

guarantee in this case - as indeed in all other cases - constitutes an independent

OMP339/07 Page 17 autonomous arrangement whereby upon demand being raised by the concerned

beneficiary, an unequivocal representation to pay it ("encash"), is made.

25. The interpretation advanced by the petitioner would lead to startling result in

that if no claim is lodged before the last date expressed in the original bank guarantee-

which might stand extended- the entire purpose of the guarantee itself would be

defeated. There is one more reason why such construction is unacceptable; the

undertaking in the guarantee is expressed to be a continuing one; the original

guarantee refers to the date 4.10.2006 at two places. These necessarily had to be so,

the reference being to last date of validity. The validity stood extended by successive

letters. If during the period of validity, the beneficiary, i.e. IOC, lodges a claim, there is

nothing precluding the Bank from encashing the guarantee and honouring its

unconditional commitment. To hold otherwise would be to inject uncertainty to the

contract of guarantee, which is plainly not permissible.

26. The petitioners‟ last contention is that the demand amounts to a fraud, in regard

to invocation of the guarantee. The IOC, despite several chances, insisted that there

was defective performance and firstly deducted above Rs. 43 lakhs, and later,

demanded Rs. 25 lakhs, which was given in April, 2007. Later, it brought out the issue

of ovality of the pipes, for the first time in May - June, 2007. This, it is contended,

amounts to a fraud. The petitioners argue that the IOC could not have relied on the

minutes of meeting dated 20-3-2006, which was never mentioned earlier, or brought up

in any correspondence.

OMP339/07 Page 18

27. It would be useful, at this stage to once again notice the relevant summation of

law in Himadri (supra) which is as follows:

(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 guarantees or letters of credit.

(v) 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.

The mere fact that IOC, a contracting party, and buyer, did not make any reference to

the ovality of the pipes supplied, or demand any amounts prior to April, 2007, cannot

preclude it from doing so. It is not as if such claims were time barred in law, or

contractually inhibited. Delay in such cases would be a relevant factor in adjudicating on

the merits of the claim, not concluding that it amounts to a fraud of an "egregious"

nature. As far as special equities are concerned, the standard indicated by judgments of

our Supreme Court is extremely high; the reference to Itek, found in several Supreme

Court decisions, clearly shows that irretrievable injustice should be of such kind that the

aggrieved party in all likelihood would be unable to recover the money, if the bank

guarantee were to be encashed. Surely, such a conclusion cannot be reached here; IOC

is rooted in India, it is not only solvent, but a profit making public sector undertaking.

In the event of the bank guarantee being encashed, the petitioner would not be put to

any greater hardship, if its claims were to eventually succeed.

28. For the above reasons, the court is of opinion that this petition has to fail; it is

OMP339/07 Page 19 accordingly dismissed, along with the interlocutory application. The interim orders

subsisting till date are vacated. No costs.

                                                   S. RAVINDRA BHAT,J

SEPTEMBER 24, 2008




OMP339/07                                                                   Page 20