Delhi High Court
Humboldt Wedag Gmbh vs Dalmia Cement Ventures Ltd. & Ors. on 4 March, 2010
Author: Valmiki J. Mehta
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ O.M.P. No.548/2009
4th March, 2010
HUMBOLDT WEDAG GMBH ...Petitioner
Through: Mr. Neeraj Kishan Kaul, Senior
Advocate with Ms. Anuradha Lal,
Advocate and Mr. Om Parkash,
Advocate for the petitioner.
VERSUS
DALMIA CEMENT VENTURES LTD. & ORS. ....Respondents.
Through: Mr. Jayant Bhushan, Senior Advocate
with Mr. Mihir Kumar, Advocate and
Mr. Gautam Talukdar, Advocate for
the respondent no.1.
Mr. Abhishek Kumar, Advocate for
respondent no.2.
CORAM:
HON'BLE MR. JUSTICE VALMIKI J.MEHTA
1. Whether the Reporters of local papers may be allowed to see
the judgment?
2. To be referred to the Reporter or not? Yes
3. Whether the judgment should be reported in the Digest? Yes
% JUDGMENT (ORAL)
VALMIKI J.MEHTA, J
1. This is the petition under Section 9 of the Arbitration and
Conciliation Act, 1996 whereby the petitioner seeks an injunction to restrain
OMP 548/09 Page 1
the respondent No.1 (hereinafter „the respondent‟) from invoking the Bank
Guarantee for Euro 2,835,000 and which Bank Guarantee was given to
secure the advance payment given by the respondent to the petitioner. The
petitioner as the contractor and the respondent as an owner entered into a
contract by virtue of the Letter of Intents dated 20.2.2008 whereby the
petitioner was to design, engineer, manufacture, supply and sell the cement
plants to the respondents for its sites at Belgaum; Karnataka, Gulbarga-I;
Karnataka, Gulbarga-II; Karnataka and Meghalaya. The subject contract is
dated 17.3.08.
2. In terms of the contract, the respondent gave an advance
payment and which advance payment was secured by the petitioner by
giving to the respondent the subject Bank Guarantee. The original contract
contained a Clause called as Section 26.2 which reads as under:
"26.2 Consequences
If the Contract is terminated as per Section 26-Termination for
Convenience, the Seller shall determine:
(i) the cost of material and goods ordered for the purposes of the
Contract or for use in connection with supply of the Equipment which
have been delivered to the Seller or for which the Seller is legally liable to
pay or accept delivery. Such materials and goods shall become the
property of and be at the risk of the Buyer when paid for by the Buyer and
the Seller shall place the same at the Buyer‟s disposal; and
(ii) the amount of any other reasonable expenditure incurred by the
Seller in the expectation of completing the whole of the supply of the
Equipment as well as cancellation charges as applicable on submission of
proofs; and
OMP 548/09 Page 2
(iii) the costs for removal of Equipment from the Site and the return of
these items to the Seller‟s and/or Subcontractors‟ workshops as well as the
costs of repatriation of the Seller‟s and/or Subcontractors personnel; and
(iv) a reasonable amount in respect of loss of profit not exceeding 10%
of the total amount due under the Contract to the extent that such profit has
not already been paid to the Seller in sums already invoiced;
And shall issue an accumulated invoice certified by the auditor of the
Seller payable by means of the Letter of Credit as specified in Annex
11(Forms of Securities).
3. Pursuant to the fresh discussion and negotiations between the
parties, the contract was novated on 5.9.2008 and these novations are as
under:
" Amendment No.3 to Contract between Dalmia Cement Ventures
Ltd. and Humboldt Wedag GmbH made on March 17,2008
Contract No.DV-MGH-DLH-PUO-002-00
-----------------------------------------------------------------------------------Following
amendments have been agreed between DCVL &HWG for Plant no.3 (Gulbarga
II) and Plant 4 (Meghalaya).
1) The contract value for plant No.3 and 4 remains EURO 10,253,500.00.
2) HW Germany confirms placing order of the following items.
a) 12 Nos. Roller Bearing Assemblies
b) 3Nos. Oil Lubrication Systems
C) 2 Nos. Rollers Complete welded
d) 4 Nos. Rollers with complete studs
e) 6 Nos. Gear boxes
The contract value of these items amounts to Euro 7,900,000.00 and it has been
agreed between DCVL & HWG as follows:
i) DCVL shall release an advance payment amounting to 10% of Euro
7,900,000.00 by September 15,2008 at the latest.
OMP 548/09 Page 3
ii) DCVL shall open a L/C of 90% of Euro 7,99,000.00 within 15 days
from the date of advance payment, latest by September 15, 2008 whereas the
confirmation of this L/C shall not be effective before Nov. 15, 2008.
After the advance payment is made and the L/C is opened in accordance
with the contract stipulations, DCVL shall confirm one of the following
options 1-3:
Option 1: DCVL TO CONTINUE THE CONTRACT ENTIRELY
In case DCVL confirm continuation of contract by 15 th Nov‟08, the pending
portion of Euro 10,253,000.00 minus Euro 7,900,000.00= Net Euro
2,353,000.00 will be paid as follows:
1.1) the advance payment of 10% of Euro 2,353,000.00 shall be transferred
th
on 15 Nov‟08 and,
1.2) the L/C of 90% of Euro 2,353,000.00 shall be opened by 15th Nov‟08
In case that the above mentioned payment conditions have not been fully
fulfilled until Nov. 15, 2008 the contract portion value Euro 2,353,000.00 has be
to renegotiated.
In case that the before mentioned payment terms under (i), (ii), Option 1.1) and
Option 1.2) are fulfilled, HWG has accepted the following delivery periods:
Amendment No.3 to Contract between Dalmia Cement
Ventures Ltd. and Humboldt Wedag GmbH
made on March 17,2008
CONTRACT No. DV-MGH-DLH-PUO-002-00
Items for Commencement Amendment to Contractual Agreed Last
Plants No.3& Date Commencement Delivery Time Date of
4 Date Shipment
2 RP 16- Febr. 20,2008 +3.5 months 18 months Dec. 05, 2009
1RP7-170/90 Febr. 20,2008 +3.5 months 19 months Jan. 05, 2010
1RP 16-
Pyro Febr. 20, 2008 +3.5 months 12 months Jun. 05, 2009
Processing
Plant 4
OMP 548/09 Page 4
Option 2: DCVL TO BUY SPARE PARTS AND TO TERMINATE THE
SMALLER CONTRACT PORTION
DCVL has the option to take
- 12 Nos. Roller Bearing Assemblies
- 3 Nos. Oil Lubrication Systems
- 2 Nos. Rollers Complete welded
- 4 Nos. Rollers with complete studs
- 6Nos. Gear boxes
At Euro 7,900,000.00 Price. In such case, DCVL will terminate the contract
portion of Plant Nos. 3 and 4 in the outstanding amount of EUR 2,353.000.00
by convenience before 15th Nov‟ 08.
Option 3: DCVL TO TERMINATE THE CONTRACT FOR PLANT
In case the DCVL terminates the contract portion of Plant Nos.3 and 4 entirely
by convenience before 15th Nov‟08, then HWG will estimate the loss due to
termination of the contract and will inform DCVL accordingly. The loss
finally settled for the termination will not be more than 15% and not less than
10% of Euro 7,900,000.00. This amount shall be covered by advance payment
to HW Germany as mentioned under (i) and through payment of the L/C
mentioned under (ii). Advance Payment Bank Guarantee will be amended to
cover the eventuality of release without refund of advance payment in the event
of termination of contract. Likewise L/C terms will have to provide for
claiming the loss in excess of 10% of the Euro 7,900,000.00."
4. We are concerned with Option No. 3 which was the novation
and amendment to the contract.
5. It is not disputed that by virtue of Section 26 of the Contract,
the respondents could have terminated the contract for its convenience i.e.
without any fault on the part of either of the parties. Such termination for
convenience had the consequences as specified in Section 26.2 of the
contract.
6. By virtue of the amendment dated 5.9.2008 made to the
contract, Section 26.2 was amended whereby the loss which was quantified
OMP 548/09 Page 5
at 10% of the total amount due under the contract was amended to not less
than 10% but not more than 15% of Euro 7,900,000. In this Option 3, it is
clear that the amount of this loss shall be covered by the advance payment
made to the petitioner and the advance payment Bank Guarantee will be
amended to cover the eventuality of release without refund of advance
payment in the event of termination of the contract.
7. The law with regard to interdicting of encashment of a Bank
Guarantee is now well-settled. Payment under an unconditional, on demand
without demur Bank Guarantee can be injuncted by the Court only in the
circumstances of there existing a clear cut case of an egregious fraud or in
circumstances called special equities or when the demand may not be in
accordance with the Bank Guarantee. I must, at this very stage, state that
disputes as to merits under the contract, do not become egregious fraud, and
which fraud alleged has to be so apparent and stark on the face of the record
that thereby the petitioner can seek restraint of encashment of the Bank
Guarantee. Keeping in view the aforesaid parameters of law, let us examine
the facts of the present case as to whether the injunction as prayed for by the
petitioner can or cannot be granted.
8. The facts narrated above show as under:
(i) Under the contract, which was entered into between the parties,
the petitioner did receive the advance payment.
OMP 548/09 Page 6
(ii) This advance payment was secured by the subject Bank
Guarantee.
(iii) The original contract was amended by the amendment dated
5.9.2008 whereby the loss in terms of Section 26.2 of the contract was
amended to not less than 10% but not exceeding 15%, of Euro 7,900,000
and which would therefore be the figure of liquidated damages in case of no
fault termination of the contract.
(iv) The Option No.3 does not envisage the situation in Option No.2
whereby the respondent was to take spare parts and materials from the
petitioner.
9. Mr. Neeraj Kishan Kaul, Senior Advocate for the petitioner, has
vehemently contended that the injunction against the encashment of the
Bank Guarantee ought to be granted because the petitioner has huge claims
against the respondent and which have been duly notified to the respondent
by virtue of the letters at pages 38 to 42 of the rejoinder and which claims
the petitioner is entitled to by virtue of Section 26.2 of the contract. Mr.
Kaul further argued that in any case by virtue of the amendment, the Bank
Guarantee should necessarily be reduced by 15% of Euro 7,900,000 because
admittedly by the novation, the advance payment refund was to be adjusted
by the loss which would be incurred by the petitioner on account of no fault
termination by the respondents and which is upto 15% of Euro 7,900,000.
OMP 548/09 Page 7
10. In my opinion, the contentions as put forth by the petitioner
merit a limited acceptance. The limited entitlement for injunction with
respect to encashment of the subject Bank Guarantee, is with respect to the
second argument as advanced by Mr. Kaul. This argument is borne out and
substantiated from the amendment dated 5.9.08 which makes it clear that
advance payment refund shall be reduced by the figure of loss not less than
10% and not exceeding 15% of Euro 7,900,000 in case of no fault
termination of the contract. Admittedly, in this case, there is a no fault
termination of the contract, and therefore, by the admitted amendment
between the parties, the subject Bank Guarantee of Euro 2,835,000 shall
stand reduced by 15% of Euro 7,900,000. Meaning thereby the respondent
can encash the Bank Guarantee, however, encashment of this Bank
Guarantee will be for the amount of the Bank Guarantee less a sum of Euro
11,85,000 i.e. 15% of Euro 7,900,000.
11. That a Bank Guarantee need not to be encahsed for the entire
amount but it can be encashed for a limited amount has been held by the
Supreme Court in the judgment reported as Fenner (India) Ltd. Vs. Punjab
& Sind Bank 1997 (7) SCC 89.
12. So far as the other contention of Mr. Kaul is concerned that the
petitioner is entitled to restrain the respondent with respect to its claims of
losses by virtue of other parts of Section 26.2, in my opinion, this contention
is not worthy of acceptance. The position today, is that this is only a claim
OMP 548/09 Page 8
of the petitioner and not an adjudicated claim. It is not necessary that the
petitioner is bound to succeed in its claim, it may, but today it cannot be
said so. Disputes under the contract, cannot interdict the payment under the
Bank Guarantee. Therefore, simply because the petitioner has made claims
against the respondent, however well merited they may be, cannot entitle the
petitioner to seek restraint against encashment of an unconditional, on
demand and without demur Bank Guarantee as it has been repeatedly held
that the contract of Bank Guarantee is an independent contract and has to be
read as per its terms.
13. The last contention which was raised by Mr. Kaul in terms of
the language of the Bank Guarantee was that the Bank Guarantee was given
towards fulfilment of contractual obligations and in this case there does not
arise the issue of fulfilment of contractual obligations because the contract
has been terminated on account of no fault termination. Again I find that
this argument is of no help to the petitioner because surely the expression
"contractual obligations" would necessarily include the obligations of the
petitioner for refunding by it to the respondent, of amounts which the
petitioner is not entitled to retain. Refund of the advance payment and
which is secured by the Bank Guarantee will surely fall within the
expression "contractual obligations" of the petitioner. Mr. Jayant Bhushan,
Learned Senior Counsel for the respondent, has rightly argued that today,
there is no letter of invocation and when the letter of invocation would be
OMP 548/09 Page 9
made it would be made in terms of the Bank Guarantee and in which
invocation letter it will be necessarily stated that the contractual obligations
have not been performed by the petitioner entitling the respondents to
invoke and encash the Bank Guarantee. I may only note that the Court or
the bank does not go into the merits of the breach of the contractual
obligations and in case of an unconditional Bank Guarantee a demand made
by the beneficiary is treated as final with respect to existence of the
circumstances entitling the beneficiary to invoke and encash the Bank
Guarantee. The argument of Mr. Kaul, is therefore rejected, that the Bank
Guarantee in question does not envisage encashment in case of a no fault
termination.
14. In my opinion, therefore, the petitioner, neither has a prima
facie case nor has the balance of convenience in its favour or that it will be
caused any irreparable injury as required under the law with respect to
injunction against encashment of Bank Guarantee. The catena of judgments
of the Supreme Court and of this Court with respect to encashment of Bank
Guarantee, therefore, have to be followed by this Court and injunction as
prayed for by the petitioner cannot be granted.
15. The present petition is therefore only partly allowed whereby
the respondent is permitted to encash the Bank Guarantee of Euro 2,835,000
minus therefrom a sum of Euro 11,85,000.
OMP 548/09 Page 10
16. Since the petition is partly allowed and partly dismissed, I
would not impose the complete costs upon the petitioner. Ordinarily, I
would have imposed 100% of the costs of these proceedings upon the
petitioner by virtue of para 37 of the judgment of Supreme Court in the case
of Salem Advocate Bar Association Vs. Union of India (2005) 6 SCC 344,
because the petitioner has illegally sought injunction against encashment of
the entire amount of the Bank Guarantee, however, in the peculiar facts of
the case, I order that this petition stands disposed of in terms of the
directions given above subject to payment of costs of Rs.50,000/- by the
petitioner to the respondent.
17. With the aforesaid observations, the petition stands disposed of.
VALMIKI J.MEHTA, J
March 04, 2010
Ne
OMP 548/09 Page 11
