Delhi High Court
Denel (Proprietary) Ltd vs Union Of India & Anr on 22 March, 2010
Author: Valmiki J. Mehta
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ O.M.P. Nos.703/2009, 710/2009 & 711/2009
Date of decision : March 22, 2010
1. OMP 703/2009
DENEL (PROPRIETARY) LTD ... Petitioner.
Through: Mr. N.K.Kaul, Sr. Advocate with
Mr. Ravinder Singhania, Mr. Tarun Dua
and Mr. Abhishek Kumar, Advocates.
VERSUS
UNION OF INDIA & ANR ....Respondents
Through: Mr. Mohan Parasaran, ASG& Mr. Rajeev
Mehra, Sr. Advocates with
Mr. B.V.Niren, Ms. Arti and Mr. Alok
Prasanna Kumar, Advocates.
2. OMP 710/2009
DENEL (PROPRIETARY) LTD ... Petitioner.
Through: Mr. V.P.Singh, Sr. Advocate with .
Mr. Ravinder Singhania, Mr. Tarun Dua
and Mr. Abhishek Kumar, Advocates.
VERSUS
UNION OF INDIA & ANR ....Respondents
Through: Mr. Mohan Parasaran, ASG & Mr.Rajeev
Mehra, Sr. Advocates with
Mr. B.V.Niren, Ms. Arti and Mr. Alok
Prasanna Kumar, Advocates.
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 1
3. OMP 711/2009
DENEL (PROPRIETARY) LTD ... Petitioner.
Through: Mr. V.P.Singh, Sr. Advocate with .
Mr. Ravinder Singhania, Mr. Tarun Dua
and Mr. Abhishek Kumar, Advocates.
VERSUS
UNION OF INDIA & ANR ....Respondents
Through: Mr. Mohan Parasaran & Mr. Rajeev
Mehra, Sr. Advocates with
Mr. B.V.Niren, Ms. Arti and Mr. Alok
Prasanna Kumar, Advocates.
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 The aforesaid three petitions are being disposed of by this common order
inasmuch as the facts of the three cases are more or less similar. Wherever the
need arises to refer to a difference in an issue or fact for any individual case,
then, the same would be adverted to. These petitions have been filed by the
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 2
petitioner under Section 9 of the Arbitration and Conciliation Act, 1996 seeking
restraint against the invocation of the Bank Guarantees totalling to an amount of
approx. USD 6,110,038 by the respondent no.1. The Bank Guarantees are given
by the banks which have been arrayed as other respondents.
2 The facts of the case are that the petitioner was awarded various contracts
by the respondent no.1/Union of India for supply of certain defence equipments
such as AMR Rifles and ammunition. In pursuance of the requirements of these
contracts, the petitioner gave two types of Bank Guarantees. The Bank
Guarantees are Warranty Bank Guarantees and Performance Bank Guarantees.
On the ground that the petitioner employed agents and gave commission for
securing the contracts in question, disputes arose between the parties, and the
respondents have sought to inter alia encash the Bank Guarantees. I may note
that so far as OMP Nos. 710/2009 and 711/2009 are concerned, the arbitration
proceedings were initiated between the parties way back in the year 2007. The
Arbitration Tribunal was constituted and certain orders were passed by the
Arbitration Tribunal. At the present stage, the Arbitration Tribunal is however
non-functional firstly on account of the demise of the presiding Arbitrator,
secondly on account of, the Arbitrator appointed by the petitioner having
recused himself and thirdly because the petitioner has filed proceedings for
removal of the Arbitrator appointed by the respondent no.1.
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 3
3 The cases on behalf of the petitioner were argued by Mr. N.K.Kaul and
Mr. V.P.Singh, Sr. Advocates. So far as OMP 703/2009 is concerned, Mr.
Kaul raised the following contentions:
(i) The Warranty Bank Guarantees were specific Bank Guarantees meant to
cover only specific situations pertaining to the equipment failing to meet the
contractual specifications or being defective and since presently the Bank
Guarantees in question are not being enforced for any breach of contractual
conditions pertaining either to technical specifications or because of the fact that
the equipments were in any manner defective, it was contented that the Bank
Guarantees cannot be encashed. It is argued by Mr. Kaul that this is so when the
language of the Bank Guarantees is read along with the relevant Clauses of the
contract.
(ii) The second argument put forth by Mr. Kaul was that the Bank Guarantees
have been given for specific contracts and the same are being enforced for
breaches in other contracts, and for which Bank Guarantees have not been
given.
(iii) The third and final argument raised by Mr. Kaul was that the Bank
Guarantees were given for a specific period covering the guarantee period of the
equipments and since the specific period has come to an end without the
equipment being defective or the eventuality of requiring rectification of the
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 4
defects in any of the equipments, the Bank Guarantees in question have
exhausted their purposes and hence cannot be encashed. Mr. Kaul relied upon
the contractual Clauses 10.1 to 10.6 in support of his arguments.
4 Mr. V.P.Singh, Sr. Advocate in OMP 710/2009 and OMP 711/2009 has
argued on the lines of point Nos.2 and 3 above as urged by Mr. Kaul and he has
additionally relied upon Clause 12.2 of the contract to contend that the
Performance Bank Guarantee exhausts itself after delivery is complete or when
delivery cannot be effected because operation of one contract was suspended in
this case.
5 In order to appreciate and deal with the arguments of the counsel for the
petitioner, it is necessary to refer to the relevant Clauses of the Contract and
which are Clauses 10.1 to 10.6 & 12.2 and the same read as under:-
"10. WARRANTY BOND
10.1 For every consignment of the Products to be delivered to the
Buyer in accordance with the delivery schedule as set out in Annex D, a
warranty bond in the form of a Bank Guarantee from a first class bank duly
confirmed by the Bank of Baroda, New Delhi Branch, equal to 5% (five
percent) of the value of the relevant consignment, shall be furnished by the
Seller, by not later than 30 (thirty) days before the FOB (Incoterms 2000)
delivery of the relevant consignment. The warranty bond shall become
effective on FOB delivery of the relevant consignment. The Buyer will be
entitled to call on a warranty bond in the event that the Seller has failed to
replace (delivered FOD) or rectify defective Products within a period of 150
days after receipt of the Buyer's notice in terms of clause 9.3.
10.2 Should the Buyer intend to call up a Warranty Bond, the Buyer
shall give the Seller 30 days prior written notice of its intention to do so,
setting out valid reasons as to why the bond is to be called up. Should the
Seller fail to remedy the default within 30 (thirty) days after receipt of notice
of Buyer's intention to call up the Warranty Bond, the Buyer may proceed to
call up the Warranty Bond.
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 5
10.3 The Warranty Bond shall be valid for a period of 60 (sixty)
months after lot acceptance of the relevant Products in accordance with
Annex A, chapter 5.
10.4 The Seller shall have the option to, instead of establishing a
warranty bond in respect of each consignment, establish a single warranty
bond for all Products supplied under this Contract and to amend the value of
such single bond to 5% (five percent) of the value of Products delivered
FOB in respect of which the warranty has not yet expired. The Seller will
upon expiry of the warranty of Products be entitled to proportionately
decrease the value of such single warranty bond.
10.5 In the event that the Seller exercise its option in terms of clause
10.4 to establish a single warranty bond, the relevant lot numbers of the
Products covered by the warranty bond will be recorded in the warranty
bond and the Buyer will only be entitled to claim against the portion of the
warranty bond covering the relevant lot (s) of defective Products.
10.6 The Warranty Bond shall be in the format as set out in Annex G
hereto."
"12.2 The Performance Bond will automatically and in full terminate
90 days after FOB delivery of the last production lot. In case of delay in
deliveries the Seller will extend the validity of the Performance Bond at his
expense by an adequate period to cover 90 days from actual last FOB
delivery as stated in Annex D (Delivery 14)."
6. (i) It is also necessary to refer to two sample Bank Guarantees and the
same reads as under :-
FIRST TYPE
" SWIFT-MT :760 NORMAL DM-2
SWIFT-DEST: SBINZAJJ
SENT TO :
State Bank of India
3rd Floor, Cnr Baker / Cradock Ave
Rosebank
South Africa
:27: SEQUENCE OF TOTAL
1/1
:20: TRANSACTION REFERENCE NUMBER
821-02-0009989-G
:23: FURTHER IDENTIFICATION:
REQUEST
:30: DATE
031121
:77C: DETAILS OF GUARANTEE:
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 6
UNDER OUR FULL AND IRREVOCABLE RESPONSIBILITY AND
OUR COUNTER GUARANTEE NO: 821-02-0009989-G PLEASE
ISSUE A WARRANTY BOND IN FAVOUR OF THE PRESIDENT
OF INDIA THROUGH THE JOINT SECRETARY (ORDNANCE),
MINISTRY OF DEFENCE, AS PER THE TEXT PROVIDED
HEREUNDER,
QUOTE:
TO :THE PRESIDENT OF INDIA
THROUGH THE JOINT SECRETARY (ORDNANCE)
MINISTRY OF DEFENCE, GOVERNMENT OF INDIA,
NEW DELHI, INDIA.
WARRANTY BOND NUMBER : . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
....
LOT:M91(1)A1 LOT 002 AND M92(1) A1 LOT 004
WHEREAS YOU HAVE ENTERED INTO A CONTRACT
REFERENCE NUMBER 18(6)/99/D(GS-IV)/D(01) DATED 23 APRIL
2002 WITH M/S DENEL (PTY) LTD ACTING THROUGH ITS
DIVISION SOMCHEM (HEREINAFTER REFERRED TO AS THE
"THE SELLER") HAVING ITS PRINCIPLE OFFICE IN SOUTH
AFRICA FOR THE TOTAL CONTRACT VALUE OF USD
50.900.000,00 (FIFTY MILLION NINE HUNDRED THOUSAND
UNITED STATES DOLLARS) (HEREINAFTER REFERRED TO AS
THE "SAID CONTRACT") AND:
WHEREAS THE SELLER HAS UNDERTAKEN TO PRODUCE A
BANK GUARANTEE FOR 5 PCT (FIVE PERCENT) OF THE
VALUE OF EACH CONSIGNMENT TO SECURE ITS
OBLIGATIONS TO THE PRESIDENT OF INDIA.
WE, STATE BANK OF INDIA, HEREBY EXPRESSLY,
IRREVOCABLY AND UNRESERVEDLY UNDERTAKE AND
GUARANTEE AS PRINCIPLE OBLIGERS ON BEHALF OF THE
SELLER THAT IN THE EVENT THAT THE PRESIDENT OF INDIA
SUBMITS A WRITTEN DEMAND TO US THAT THE SELLER
HAS NOT PERFORMED ACCORDING TO THE WARRANTY
OBLIGATIONS UNDER AFOREMENTIONED CONTRACT, WE
WILL PAY YOU, ON DEMAND AND WITHOUT DEMUR, ANY
SUM UP TO A MAXIMUM OF USD 186.750.00 (ONE HUNDRED
AND EIGHTY SIX THOUSAND SEVEN HUNDRED AND FIFTY
UNITED STATES DOLLARS).
YOUR WRITTEN DEMAND SHALL BE CONCLUSIVE
EVIDENCE TO US THAT SUCH REPAYMENT IS DUE UNDER
THE TERMS OF THE SAID CONTRACT. WE UNDERTAKE TO
EFFECT PAYMENT UPON RECEIPT OF SUCH WRITTEN
DEMAND.
WE SHALL NOT BE DISCHARGED OR RELEASED FROM THIS
UNDERTAKING AND GUARANTEE BY ANY ARRANGEMENTS,
VARIATIONS MADE BETWEEN YOU AND THE SELLER,
INDULGENCE TO THE SELLER BY YOU, OR ANY
ALTERATIONS IN THE OBLIGATIONS OF THE SELLER OR BY
ANY FORBEARANCE WHETHER. AS TO PAYMENT, TIME
PERFORMANCE OR OTHERWISE.
THIS GUARANTEE SHALL REMAIN VALID UNTIL 22
DECEMBER, 2008, UNLESS A DEMAND OR CLAIM UNDER
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 7
THIS GUARANTEE IS MADE TO US IN WRITING ON OR
BEFORE THE AFORESAID EXPIRY DATE AS PROVIDED
ABOVE IN THE REFERRED SAID CONTRACT OR UNLESS THIS
GURANTEE IS EXTENDED BY US, ALL YOUR RIGHTS UNDER
THIS GUARANTEE SHALL BE PROFEITED AND WE SHALL BE
DISCHARGED FROM THE LIABILITIES HEREUNDER.
THIS GUARANTEE SHALL BE A CONTINUING GUARANTEE
(WHICH MEANS THE GUARANTEE WILL ALSO BE VALID IF
THE BANK IS IN LIQUIDATION OR BANKRUPTCY) AND
SHALL NOT BE DISCHARGED BY ANY CHANGE IN THE
CONSTITUTION OF THE BANK OR IN THE CONSTITUTION OF
THE SELLER.
UNQUOTE
IN CONSIDERATION OF YOUR ISSUING THE WARRANTY
BOND IN FAVOUR OF THE PRESIDENT OF INDIA THROUGH
THE JOINT SECRETARY (ORDNANCE), MINISTRY OF
DEFENCE, AT OUR REQUEST AGAINST OUR COUNTER
GUARANTEE NO.821-02-0009989-G, WE, ABSA BANK LIMITED,
TRADING AS ABSA CORPORATE AND MERCHANT BANK,
INTERNATIONAL BANKING SA - PRETORIA CENTRE,
HEREBY IRREVOCABLY AND UNCONDITIONALLY CONFIRM
THAT WE UNDERTAKE TO PAY YOU ON YOUR FIRST
WRITTEN DEMAND BY AUTHENTICATED S.W.I.F.T. / TELEX
MESSAGE STATING THAT YOU HAVE BEEN CALLED UPON
TO MAKE PAYMENT UNDER AND IN TERMS OF YOUR
GUARANTEE, NOTWITHSTANDING ANY CONTESTATION OR
PROTEST BY THE SELLER, BY OURSELVES OR ANY OTHER
THIRD PARTY, THE SUM NOT EXCEEDING THE MAXIMUM
AMOUNT OF USD186.750.00 (ONE HUNDRED AND EIGHTY SIX
THOUSAND SEVEN HUNDRED AND FIFTY UNITED STATES
DOLLARS).
OUR RESPONSIBILITIES TO YOU IN RESPECT OF
OBLIGATIONS UNDER THIS COUNTER-GUARANTEE SHALL
BE GOVERNED BY SOUTH AFRICAN LAW AND WE HEREBY
SUBMIT IRREVOCABLY TO THE EXCLUSIVE JURISDICTION
OF THE COURTS IN SOUTH AFRICA.
WE CONFIRM THAT THE COUNTER-GUARANTEE WILL
BECOME EFFECTIVE IMMEDIATELY UPON ISSUANCE OF
YOUR WARRANTY BOND TO THE PRESIDENT OF INDIA AND
WILL CEASE TO BE VALID ON 22 JANUARY 2009.
PLEASE NOTE THAT THE GUARANTEE MUST BE DELIVERED
TO THE FOLLOWING JOINT SECRETARY (ORDNANCE) IN
INDIA:
ALOK RANJAN
TEL NO: 09 91 11 23014222
FAX NO:09 91 11 23794602
PLEASE CONFIRM YOUR ACTIONS BY AUTHENTICATED
S.W.I.F.T.
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 8
MENTIONING YOUR / OUR REFERENCE NUMBER AND
FORWARD TWO COPIES OF YOUR GUARANTEE TO
OURSELVES IN DUE COURSE.
THANK YOU IN ADVANCE FOR YOUR KIND CO-OPERATION.
REGARDS
ABSA BANK LTD.
TRADING AS ABSA CORPORATE AND MERCHANT BANK
INTERNATIONAL BANKING SA - PRETORIA CENTRE
PHYSICAL ADDRESS: POSTAL
ADDRESS:
31 ST FLOOR, VOLKSKAS CENTRE P.O. BOX 1748
230 VAN DER WALT STREET PRETORIA
0002 PRETORIA
TELEPHONE : 27 12 3107667
FASCIMILE : 27 12 3207607
TELEX : 320275 IBPTA SA / 322201 IBPTA
S.W.I.F.T. : ABSAZAJJCPT"
SECOND TYPE
" Bank of Baroda
(1:F01ABSAZAJJACPT7492700512) (2:I760BARBINBBXONDN)
(4:
:27:1/1
:20:821-02-0009435-g
:23:REQUEST
:30:030819
:77C:ATTENTION: MR JS ARORA - INTERNATIONAL
BUSINESS BRANCH
YOUR FACSIMILE MESSAGE OF 16 AUGUST 2003 TO OUR
ANDRE SNYMAN OF OUR HEAD OFFICE IN JOHANNESBURG
REFERS.
WE ACCEPT YOUR CHARGES OF 0.45 PERCENT P.A.
HOWEVER THE APPLICANT, DENEL (PTY), LTD HAS
REQUESTED YOUR KIND RECONSIDERATION TO
EXCEPTIONALLY CHARGE YOUR COMMISSION ON A
QUARTERLY BASIS INSTEAD OF IN ONE AMOUNT UP-FRONT,
FOR GUARANTEES RELATING TO THE CONTRACT OF
USD50.900.000.00 WITH THE INDIAN GOVERNMENT.
UNDER OUR FULL AND IRREVOCABLE RESPONSIBILITY AND
OUR COUNTER GUARANTEE NO.821-02-0009435-G PLEASE
ISSUE A PERFORMANCE GUARANTEE IN FAVOUR OF THE
PRESIDENT OF INDIA THROUGH THE JOINT SECRETARY
(ORDNANCE), MINISTRY OF DEFENCE, AS PER THE TEXT
PROVIDED HEREUNDER,
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 9
QUOTE:
TO : THE PRESIDENT OF INDIA, NEW DELHI
THROUGH
THE JOINT SECRETARY (ORDNANCE)
MINISTRY OF DEFENCE
GOVERNMENT OF INDIA
NEW DELHI, INDIA
PERFORMANCE GUARANTEE NUMBER: . . . . . . . . . . . . . . . . . . . .
......
WHEREAS YOU HAVE ENTERED INTO A CONTRACT
REFERENCE NUMBER 18(6)/99/D(GS-IV)/D(01) (HEREINAFTER
REFERRED TO AS THE "SAID CONTRACT") DATED 23 APRIL
2002 WITH M/S. DENEL (PTY) LTD ACTING THROUGH ITS
DIVISION SOMCHEM (HEREINAFTER REFERRED TO AS "THE
SELLER") HAVING ITS PRINCIPLE OFFICE AT REEB ROAD,
FIRGROVE, 7130, REPUBLIC OF SOUTH AFRICA FOR THE
SUPPLY OF 155 MM BI-MODULAR ARTILLARY CHARGES AND
WHEREAS THE SELLER HAS UNDERTAKEN TO PRODUCE A
BANK GUARANTEE FOR AN AMOUNT OF USD2.545.000,00
(TWO MILLION FIVE HUNDRED AND FORTY FIVE THOUSAND
UNITED STATES DOLLARS ONLY) BEING 5 PCT (FIVE
PERCENT) OF THE TOTAL CONTRACT VALUE, TO SECURE ITS
OBLIGATIONS TO THE PRESIDENT OF INDIA.
WE, BANK OF BARODA, . . . . . . . . . . . . . , HEREBY EXPRESSLY,
IRREVOCABLY AND UNRESERVEDLY UNDERTAKE AND
GUARANTEE AS PRINCIPLE OBLIGOR ON BEHALF OF THE
SELLER THAT IN THE EVENT THAT THE PRESIDENT OF
INDIAN SUBMITS A WRITTEN DEMAND TO US THAT THE
GOODS HAVE NOT BEEN SUPPLIED ACCORDING TO THE
CONTRACTUAL, OBLIGATIONS, WE WILL PAY YOU, ON
DEMAND AND WITHOUT DEMUR, ANY SUM UP TO A
MAXIMUM OF USD2.545.000.00 (TWO MILLION FIVE
HUNDRED AND FORTY FIVE THOUSAND UNITED STATES
DOLLARS ONLY).
YOUR WRITTEN DEMAND SHALL BE CONCLUSIVE
EVIDENCE TO US THAT SUCH REPAYMENT IS DUE UNDER
THE TERMS OF THE SAID CONTRACT. WE UNDERTAKE TO
EFFECT PAYMENT UPON RECEIPT OF SUCH WRITTEN
DEMAND.
WE SHALL NOT BE DISCHARGED OR RELEASED FROM THIS
UNDERTAKING AND GUARANTEE BY ANY ARRANGEMENTS,
VARIATIONS MADE BETWEEN YOU AND THE SELLER,
INDULGENCE TO THE SELLER BY YOU, OR ANY
ALTERATIONS IN THE OBLIGATIONS OF THE SELLER OR BY
ANY FORBEARANCE WHETHER AS TO PAYMENT, TIME
PERFORMANCE OR OTHERWISE.
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 10
IN NO CASE SHALL THE AMOUNT OF THIS GUARANTEE BB
INCREASED.
THIS GURANTEE SHALL REMAIN VALID UNTILL 15 MARCH
2007 (HEREINAFTER REFERRED TO AS "EXPIRY DATE").
UNLESS A DEMAND OR CLAIM UNDER THIS GUARANTEE IS
MADE TO US IN WRITING ON OR BEFORE THE AFORESAID
EXPIRY DATE AS PROVIDED ABOVE ON UNLESS THIS
GUARANTEE IS EXTENDED BY US, ALL YOUR RIGHTS
UNDER THIS GUARANTEE SHALL BE PROSCRIBED AND WE
SHALL BE DISCHARGED FROM THE LIABILITIES
HEREUNDER.
THIS GUARANTEE SHALL BE A CONTINUING GUARANTEE
(WHICH MEANS GUARANTEE WILL ALSO BE VALID IF THE
BANK IS IN LIQUIDATION OR BANKRUPTCY) AND SHALL
NOT BE DISCHARGED BY ANY CHANGE IN THE
CONSTITUTION OF THE BANK OR IN THE CONSTITUTION OF
THE SELLER.
UNQUOTE
IN THE CONSIDERATION OF YOUR ISSUING THE
PERFORMANCE GUARANTEE IN FAVOUR OF THE PRESIDENT
OF INDIA THROUGH THE JOINT SECRETARY (ORDNANCE),
MINISTRY OF DEFENCE, AT OUR REQUEST AGAINST OUR
COUNTER GUARANTEE NO. 821-02-0009435-G, WE, ABSA
BANK LIMITED. TRADING AS ABSA CORPORATE AND
MERCHANT BANK, INTERNATIONAL BANKING SA -
PRETORIA CENTRE, HEREBY IRREVOCABLY AND
UNCONDITIONALLY CONFIRM THAT WE UNDERTAKE TO
PAY YOU ON YOUR FIRST WRITTEN DEMAND BY
AUTHENTICATED S.W.I.F.T. / TELEX MESSAGE STATING
THAT YOU HAVE BEEN CALLED UPON TO MAKE PAYMENT
UNDER AND IN TERMS OF YOUR GUARANTEE,
NOTWITHSTANDING ANY CONTESTATION OR PROTEST BY
THE SELLER, BY OURSELVES OR ANY OTHER THIRD PARTY,
THE SUM NOT EXCEEDING THE MAXIMUM AMOUNT OF
USD2-545.000.00 (TWO MILLION FIVE HUNDRED AND FORTY
FIVE THOUSAND UNITED STATES DOLLARS ONLY).
OUR RESPONSIBILITIES TO YOU IN RESPECT OF
OBLIGATIONS UNDER THIS COUNTER GUARANTEE SHALL
BE GOVERNED BY SOUTH AFRICAN LAW AND WE
IMMEDIATELY UPON ISSUANCE OF YOUR PERFORMANCE
GUARANTEE TO THE BENEFICIARY AND WILL CEASE TO BE
VALID ON 15 APRIL 2007.
PLEASE CONFIRM YOUR ACTIONS BY AUTHENTICATED
S.W.I.F.T. MENTIONING YOUR / OUR REFERENCE NUMBER
AND FORWARD TWO COPIES OF YOUR GUARANTEE TO
OURSELVES IN DUE COURSE.
THANK YOU IN ADVANCE FOR YOUR KIND CO-OPERATION.
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 11
REGARDS
ABSA BANK LTD.
TRADING AS ABSA CORPORATE AND MERCHANT BANK
INTERNATIONAL BANKING SA - PRETORIA CENTRE
PHYSICAL ADDRESS : POS
6.(ii) A sample invocation letter is as under :-
"{1:F01ABSAZAJJACW10390238519}-{2:O7671846091016
SBINZAJJAXXX75241331770910161846N}-{3:{10B:SC28298}}-{4:
:27:1/1
:20:SBI/GUAR/83/91
:21:9989G/9756G
:23: REQUEST
:30:091016
:26E:2
:31C:091016
:77C:KIND ATTENTION: GUARANTEE DEPARTMENT
WE HAVE RECEIVED A MESSAGE DATED 15.10.2009 FROM
THE BENEFICIARY OF THE GUARANTEE, GOVERNMENT OF
INDIA, MINISTRY OF DEFENCE, SOUTH BLOCK, NEW DELHI
110011 WHICH IS BEING REPRODUCED BELOW FOR YOUR
NECESSARY ACTION-
"QUOTE
EXTENSION OF TWO BANK GUARANTEES (1) PERFORMANCE
BANK GUARANTEE NO SBI/GUAR/83 DATED 07.10.2003 FORUS
DOLLARS 195000.00 WHICH IS VALID UPTO 31.10.2009 AND (2)
WARRANTY BOND NO SBI/GUAR/91 DATED 27.11.2003 FOR
USD186750.00 WHICH IS VALID UPTO 22.12.2009 M/S DENEL
(PTY) LTD SOUTH AFRICA ACTING THROUGH ITS DIVN
SOMCHEM SOUTH AFRICA FOR SUPPLY OF DEFENCE STORES
AGAINST CONTRACT NO 18(6)/99/D(GS-IV)/D/(O-1) DATED
23.4.2002
DEAR SIR AS THE GOODS HAVE NOT BEEN SUPPLIED
ACCORDING TO THE CONTRACTUAL OBLIGATIONS BY THE
SELLER UNDER THE SAID CONTRACT THE VALIDITY OF
ABOVE MENTIONED BANK GUARANTEES BE EXTENDED
UPTO 31.10.2010 AND 22.12.2010 RESPECTIVELY FAILING
WHICH THIS LETTER MAY BE TREATED AS NOTICE FOR
ENCASHMENT OF BOTH THE ABOVE BANK GUARANTEE
AND DEMAND DRAFTS / CHEQUES FOR THE FULL VALUE OF
GUARANTEES IN FAVOUR OF PCDA HQRS MINISTRY OF
DEFENCE NEW DELHI MAY BE SENT IMMEDIATELY.
RECEIPT OF THIS COMMUNICATION MAY PLS BE
ACKNOWLEDGED BY RETURN FAX AT 011-23018304 YOURS
FAITHFULLY SD/- JOINT SECRETARY TO THE GOVT OF INDIA
FOR AND ON BEHALF OF THE PRESIDENT OF INDIA
UNQUOTE"
WITH REGARD TO THE ABOVE MESSAGE WE REQUEST YOU
TO EITHER EXTEND THE GUARANTEE AS REQUIRED OR
ARRANGE FOR PAYMENTS OF THE SUM IN TERMS OF YOUR
COUNTER GUARANTEE.
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 12
REGARDS
CREDIT DEPARTMENT
STATE BANK OF INDIA, JOHANNESBURG
-)-(5:{CHK:310FD1E2AB3E)-(MAC:00000000))"
(Underlining is provided by me)
7. The learned senior counsel for the petitioner has taken me through the
aforesaid relevant contractual clauses, the Bank Guarantees and the invocation
letters, and then on the basis of co-relation between language employed in the
Bank Guarantees, the contractual clauses and the invocation letters it was
contended that the Bank Guarantees were given for specific contracts and only
for the warranty obligations specified in Clause 10.1 in the main contract but
since the invocation was not for warranty obligations as stated in the sub-clauses
of clause 10, hence the invocation of the Bank Guarantees were stated to be in
fraud of the purposes for which they were given and thus invocation was not in
accordance with the purpose of the Bank Guarantees. It was also contended
that by the invocation letter, what were the contractual obligations which were
breached were not mentioned, and consequently, it was contended that the
invocation is for that reason also not in terms of the Bank Guarantee. By
reference to clause 10.3 it was contended that since the period specified therein
has admittedly come to an end, thus, the Bank Guarantees have exhausted
themselves.
8 The learned Senior counsel for the petitioner also relied upon Larsen and
Toubro Ltd. Vs. Maharashtra State Electricity Board and others AIR 1996 SC
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 13
334 for the proposition that since the warranty period had expired the Bank
Guarantees therefore could not be encahsed. Reliance was then placed upon
Hindustan Construction Co. Ltd. Vs. State of Bihar & ors. (1999) 8 SCC 436
to contend that there is a fraud upon the petitioner and an unjust enrichment of
the respondent and also that there are special equities in favour of the petitioner
because the Bank Guarantees were only warranty Bank Guarantees which
could only be enforced for the breach of the warranty conditions pertaining to
technical specifications of the equipments or qua the warranty period of are not
being admittedly enforced for these purposes. It was also, relying on this
judgment, contended that the Bank Guarantees were not being enforced as per
its terms because the invocation letters were not in accordance with the Bank
Guarantees. Reliance was also placed upon the decisions of two learned Single
Judges of this Court in the cases of Hindustan Construction Company Vs.
Satluj Jal Vidyut Nigam Ltd. AIR 2006 Delhi 169 and Continental
Construction Ltd. Vs. Satluj Jal Vidyut Nigam Ltd. 2006 (1) Arb LR 321
(Delhi). These judgments are also relied upon for the same purposes as already
stated above.
9 In response to the arguments of the petitioner, Mr. Mohan Parasaran,
ASG and Mr. Rajiv Mehra, Sr. Advocate for the respondent No. 1 have relied
upon Clause 17.2 of the contract and which reads as under:-
"17.2 Giving or offering of any gift, bribe or inducement, or any attempt to any
such act on behalf of the Seller towards any officer/employee of the Buyer, or to any
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 14
other person in a position to influence the decision of the Buyer, directly or
indirectly, or any attempt to influence any officer/employee of the Buyer for
showing any favour in relation to this or any other Contract, shall render the Seller to
such liability/penalty as the Buyer may deem proper, including, but not limited to,
termination of the Contract, imposition of penal damages, forfeiture of the Bank
Guarantee and refund of the amounts paid by the Buyer."
It was contended, relying upon Clause 17.2, that in terms of the contract,
forfeiture is permissible of the Bank Guarantees either when there is an attempt
to influence any officer/employee of the respondent no.1 whether in relation to
the subject contract or in relation to any other contract or giving any
inducement by appointing an agent and when such position emerges then this
directly or indirectly causes breach of this Clause. It was contended that the
language of the Bank Guarantees were wide enough to cover all the breaches of
the stipulations or warranties as required by the contract and that Clause 17.2
was also very much a warranty/obligation related to the supply of the
equipments.
10 Both the parties are ad idem that by virtue of the language in the Bank
Guarantees, one has necessarily to read the terms of the contract along with the
language as contained in the Bank Guarantees. Whereas the petitioner relied
upon Clauses 10.1 to 10.6 and Clause 12.2, the respondent relied upon Clause
17.2. The Supreme Court in the case of Hindustan Construction Ltd. (supra),
in a Bank Guarantee which was similarly worded, observed that the terms of the
contract have to be read to appreciate the terms of the Bank Guarantee and also
to decide whether or not the invocation of the Bank Guarantee is in terms of the
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 15
contract or not in order to decide the issue of fraud/special equities. The terms
of the contract were also similarly relied upon by the Supreme Court in the case
of Larsen and Toubro Ltd. (supra) to hold that the Bank Guarantee has
exhausted itself because the Bank Guarantee was not enforceable after the
contractual purpose for which it had been given stood satisfied.
11 One important aspect, and which is crucial to the determination of the
matter in question in the present case, is the following language as found in both
the Warranty Bank Guarantee and the Performance Bank Guarantee. The
relevant language of both types of Bank Guarantees is as under:
"YOUR WRITTEN DEMAND SHALL BE CONCLUSIVE EVIDENCE TO US
THAT SUCH REPAYMENT IS DUE UNDER THE TERMS OF THE SAID
CONTRACT. WE UNDERTAKE TO EFFECT PAYMENT UPON RECEIPT OF
SUCH WRITTEN DEMAND."
The aforesaid language of the Bank Guarantees makes it clear that neither
the bank, and in fact not even this court, is entitled to decide an issue on merits
as to whether or not the repayment is due or not under the terms of the contract
because the language makes it clear that the invocation letter is to be treated as
conclusive of the circumstances existing which entitle the respondent no.1 to
encash the Bank Guarantees. When such clear language is found in the Bank
Guarantee, I do not think that it is permissible for the court, once Clause 17.2 is
shown to exist, to venture into disputed question of fact to find out whether or
not circumstances exist which entitle the respondent no.1 to encash the Bank
Guarantees in that there is or is not a violation of terms of the contract so that
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 16
repayment is or is not due under terms of the contract. A demand by the
invocation letter becomes conclusive in view of the aforesaid Clause in the
Bank Guarantees and thus payment of the Bank Guarantees cannot be
interdicted.
12. The contentions therefore raised on behalf of the petitioner that the Bank
Guarantees as per its terms show that they have only been given for a specific
contract and for only specific warranty obligations and only for a specific
period, in my opinion, are not such which deserves acceptance. Since the
petitioner itself seeks to rely upon the contractual clauses so as to understand
the language of the relevant Bank Guarantees, and if therefore contractual
clauses have to be referred to as urged on behalf of the petitioner, then surely
the contractual Clause 17.2 as relied upon and referred to by the respondent
no.1 should also be taken into account. The language of Clause 17.2 is general,
wide and exhaustive as regards the subject matter contained therein. It clearly
provides for encashment of the Bank Guarantee with respect to the breaches
specified therein, whether under the subject contract or under other contracts. I
am not entitled to whittle down the categorically wide scope and effect of the
language as found in Clause 17.2 because Bank Guarantees have a special
significance in the commercial world. The respondent no.1 is seeking to enforce
its rights under Clause 17.2 read with the unconditional language as used in the
Bank Guarantee and which it is entitled to do. Further, in my opinion, merely
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 17
because the Bank Guarantees refer to a particular contract, the same cannot be
conclusive of the matter because admittedly the Bank Guarantees are given in
furtherance of the contracts and which contracts contain the Clause 17.2.
Similarly, the expression warranty obligation as used in the Bank Guarantee is
again not conclusive inasmuch as there are different forms of warranties under a
contract because in substance a warranty is only an obligation of performance.
In my opinion, Clause 17.2 is also a warranty obligation of performance of the
terms and conditions of the contract. The language of the Bank Guarantees in
question are not so equivocal so as to be solely relatable only to sub-clauses of
Clause 10 as found in the contract and not to other clauses including clause
17.2. If that be so, I am unable to accept the argument as raised on behalf of the
petitioner that the Bank Guarantees can only be enforced either with respect to
the warranty obligations under Clauses 10.1 and 10.3 or the performance bond
obligation under Clause 12.2 of the contract.
The only thing I need to add to for the sake of completeness is that the
clause numbers of the different contracts vary, however, the language of the
clauses used in the contracts are identical in nature. Reference to the number of
Clauses therefore in the present judgment is for the sake of convenience and
pertaining to the contractual clauses of OMP 710/2009.
13 Therefore, though, the legal proposition as urged by the counsel for the
petitioner is correct and accepted, but when the same are applied to the facts of
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 18
the present case, then however the conclusion which emerges is that the
respondent is fully entitled to encash the Bank Guarantees for the reasoning
given herein above and more particularly because of Clause 17.2 found in the
contract. In doing so, the respondent no.1 cannot be interdicted because this
court does not go into an issue of existence or non-existence of breach of the
stipulations as found in the contract because that is a matter to be ultimately
decided by the Arbitrators and not by this court.
14 The second contention as raised, pertained to the dis-entitlement of the
respondent no.1 to encash the subject Bank Guarantees which are alleged to be
only for specific contracts and not for breach of obligations under other
contracts is covered by the reasoning given by me above.
15 The point which was urged by the senior counsel for the petitioner with
respect to the Bank Guarantees in question having exhausted themselves
because the object thereof, being the expiry of the defect liability period, or the
delivery period will also be covered by reasoning and the conclusion given by
me above.
16 On behalf of respondent no.1, attention of this court was invited to an
order passed by the Arbitration Tribunal on 9.4.2007 (sic, 2008). Relying upon
this order of Arbitration Tribunal, it is contended that the relief as prayed for in
the petitions OMP 710 & 711/2009 were specifically refused by the arbitrators
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 19
and hence these petitions cannot lie. The following portion of the order of the
Arbitration Tribunal dated 9.4.2008 is relevant and the same reads as under:
"1. The Claimant's application for interim relief dated 7 December
2007 is refused on the ground that many of the contentions relied on by the
Claimant involve issues of law and facts which are contested by the Respondent,
which require determination after the hearing of evidence and full argument; and
as to which the Claimant has not established at this stage a sufficiently strong
prima facie case; no case has been made out that these issues cannot be
satisfactorily dealt with at the last mentioned hearing in May 2008; the balance of
convenience is in favour of deciding the claims for relief at that hearing and not
by an order for interim relief."
17 The said order was passed on an application under Section 17 of the
Arbitration and Conciliation Act, 1996 filed by the present petitioner and in
which application, inter-alia, the following averments were made and relief
prayed:-
"1.2 encashing Bank Guarantees or compelling the Claimant
wrongfully to extend the validity of Bank Guarantees in contracts other
than the Subject Contracts;"
18 In my opinion, Para 1 of the order of the Arbitration Tribunal reproduced
by me above, clearly shows that the very reliefs now asked for were declined by
the Arbitration Tribunal to the petitioner, and therefore, also on general
principles of res judicata, the present petitions are barred, not maintainable and
are clearly liable to be dismissed.
19 It was contended on behalf of the petitioner that filing of the petitions is not
barred because fresh cause of action has arisen inasmuch as the fresh extension
of the Bank Guarantees has created new Bank Guarantees and further since the
Arbitration Tribunal is presently no longer functional, grave prejudice is being
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 20
caused to the petitioner and therefore the petitioner was entitled to move this
court under Section 9 seeking the appropriate interim reliefs. In my opinion, in
the facts and circumstances of the present case, mere delay in disposal of the
arbitration proceedings cannot be such a ground so as to hold that a fresh cause
of action has accrued to the petitioner merely because the Bank Guarantees in
question were extended subsequent to passing of the order dated 9.4.2008 by the
Arbitration Tribunal. In certain cases and particular facts and circumstances of
a case, it may be possible, though, I do not positively say so, that delay along
with the other facts may create a situation entitling the filing of a fresh
application, however, in the present case it cannot be so because the respondent
no.1 is not to be blamed for the present state of the arbitration proceedings
because it is not on account of any action or inaction of the respondent no.1 that
the arbitration proceedings have prolonged or are stalled. As already stated
before, the arbitration proceedings have come to a halt, firstly on account of the
death of the presiding arbitrator, secondly on account of recusal of the arbitrator
appointed by the petitioner itself and thirdly on account of the petitioner having
filed proceedings for removal of the arbitrator appointed by the respondent no.1.
Since the present petition does not amount to respondent no.1 seeking to take
any advantage of its own action or inaction, I do not think that the facts of the
present case create any fresh cause of action entitling the petitioner to file these
petitions under Section 9.
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 21
20 In my opinion, therefore, neither is there any prima facie case in favour of
the petitioner nor is there any balance of convenience in favour of the petitioner
who would be caused grave irreparable injury entitling it to the reliefs as
prayed for. I may only note that an aspect as regards to the balance of
convenience and irreparable injury is that the respondent no.1 is not seeking to
straightaway encash the Bank Guarantees. In the first instance, it has only
asked for extension of the period of validity of the Bank Guarantees. It is only
if the Bank Guarantees are not extended, only in such circumstances, the
respondent no.1 has prayed that the banks must make payments under the Bank
Guarantees. In my opinion, this stand of Union of India/respondent no.1 is also
reasonable bringing the balance of convenience in favour of the respondent no.1
and against the petitioner. There is clearly neither an egregious fraud by the
respondent No.1 nor any special equities in favour of the petitioner. The
petitions are therefore liable to be and are dismissed.
21 Since in my opinion, the present petitions, in view of the aforesaid facts,
are clearly misconceived, I find that the petitions ought to be dismissed with
costs. The Supreme Court in Para 37 of the judgment reported as Salem
Advocate Bar Association Vs. Union of India (2005) 6 SCC 344 has observed
that it is high time that actual costs are imposed. In fact the Supreme Court in
the case of U.P.Coop. Federation Vs. Three Circles (2009) 10 SCC 374 has
held that courts are in fact entitled to impose interests on the costs which are
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 22
awarded. In the present case, considering the fact that respondent no.1 has been
unnecessarily forced into this litigation, inasmuch as, all that had been asked for
in the first instance was only an extension of the Bank Guarantees and not
encashment thereof, and also keeping in mind that similar prayers of the
petitioner were rejected earlier by the Arbitration Tribunal , I deem it fit that the
respondent no.1 should file an affidavit of its authorised officer for the fees, it
has paid to its advocates for these cases. The affidavit shall be supported by the
certificates of the fees of the counsel that they have received and are entitled to
receive in terms of an existing commitment the fees payable for these cases.
Such affidavit and costs stated therein duly supported by the certificate of the
advocates shall be the costs in favour of the respondent and against the
petitioner. The necessary affidavit be filed within four weeks.
22 With these observations, the petitions are disposed of.
VALMIKI J.MEHTA, J
March 22, 2010
ib
O.M.P. Nos.703/2009, 710/2009 & 711/2009 Page 23
