M/S Fedders Lloyed Corporation ... vs M/S Sportinapayce ...
2011 Latest Caselaw 2516 Del

*     IN THE HIGH COURT OF DELHI AT NEW DELHI

+                  FAO (OS) Nos. 67-68/2011 and
                   C.M. Nos. 2672-73/2011 & 3433/2011

%                      Judgment reserved on: 5th April, 2011.
                       Judgment delivered on : 11th May, 2011.


M/S FEDDERS LLOYED CORPORATION LTD.                     ...APPELLANT

                           Through:     Mr. Sandeep Sethi, Sr. Advocate
                                        with Mr. P.S. Bindra, Advocate.
                   Versus

M/S SPORTINAPAYCE
INFRASTRUCTURE PVT. LTD & ANR.                       ...RESPONDENTS

                           Through:   Mr. Nikhil Rohtagi, Advocate.

CORAM:
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L.MEHTA

1. Whether the Reporters of local papers
   may be allowed to see the judgment?            Yes
2. To be referred to Reporter or not?             Yes

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


M.L. MEHTA, J.

1. This appeal is filed against the impugned order dated

2nd February, 2011 of learned Single Judge in CS(OS) No.

2208/2009, whereby the appellant‟s application being IA No.

14978/2009, under Order XXXIX Rules 1 and 2 CPC, was

rejected and simultaneously application being IA No.

15460/2009, under Order XXXIX Rule 4 CPC of the respondent

No. 1 was allowed.

2. The appellant/plaintiff filed a civil suit for declaration,

cancellation and mandatory injunction in respect of bank

guarantee which was furnished by the appellant/plaintiff in

favour of respondent No. 1 for a sum of `50,00,000/- on 3rd

June, 2009. The respondent No. 1 was awarded a contract by

Delhi Development Authority (hereinafter, referred to as

„DDA‟) for construction of swimming pool, training hall, fitness

centre and athletic track at Commonwealth Games Village for

a total value of `63 crores. A part of the said work was sub-

contracted by respondent No. 1 to appellant for a sum of `6

crores. According to the appellant, it completed almost 80%

of the work and submitted bills in the sum of `4,46,64,473/- to

respondent No. 1, but the latter released a sum of

`3,38,53,704/- leaving outstanding of `1.08/- crores which was

not cleared despite repeated requests. A specific request was

also made vide letter dated 3rd August, 2009 in this regard.

3. DDA was also allegedly complaining to respondent No. 1

regarding the slow progress of work on account of lack of

planning and because of non-deployment of the agreed

financial resources. A specific letter dated 24th July, 2009 was

written by DDA complaining the execution of only 40% work

as against expected 75%. Eventually, for being dissatisfied

with the work carried out by respondent No. 1, DDA

terminated the contract vide letter dated 30th October, 2009.

The work which was being performed by the appellant/plaintiff

was specifically awarded by the DDA to it vide letters dated

12th November, 2009 and 19th November, 2009. It was in this

background that respondent No. 1 sought to encash the bank

guarantee.

4. It appears that there were some talks of settlement and since

the bank guarantee was about to expire it was got extended

by the appellant/plaintiff uptill 22nd January, 2010 vide its

letter date 16th October, 2009. On account of termination of

contract, petition under Section 11 of Arbitration and

Conciliation Act was also filed by the DDA for reference of

dispute with respondent No. 1 to arbitration. It appears that

since there was no head way in the settlement, respondent

No. 1 invoked the bank guarantee on 17th November, 2009.

The appellant/plaintiff amended the plaint by incorporating

some averments relating to fraud against respondent No. 1.

The appellant/plaintiff sought to restrain the respondents from

invoking the bank guarantee on the grounds, namely, fraud,

irretrievable injustice and special equity.

5. With regard to fraud, the appellant/plaintiff averred that the

very basis of getting the work from DDA was based on the

fraud committed by respondent No. 1 since its share capital

was merely `10,00,000/- and it has no reserves, surplus or

fixed assets. It had received loans to the tune of `9.42 crores

and had given loans to the extent of `9.48 crores for the year

ending 31st March, 2009 and suffered losses to the tune of

`34,922/- and that if these facts were disclosed to DDA, the

latter would not have awarded contract to respondent No. 1.

It was also averred that various other contractors have also

not been paid their dues by respondent No.1.

6. With regard to fraud, the learned Single Judge recorded

finding that these facts cannot be said to constitute fraud

because, admittedly, respondent No. 1 had executed

substantial portion of contract allocated to it worth `63 crores

and that admittedly a sum of `3.36 crores was also received

by the appellant/plaintiff from respondent No. 1. Even the

share holding of `10,00,000/- only would not constitute fraud

amounting to the nature of egregious. With regard to the plea

of irretrievable injustice and special equity, the

appellant/plaintiff averred that keeping in view the financial

position of respondent No.1, if the money of the bank

guarantee was released, the appellant/plaintiff will suffer

irretrievable injustice inasmuch as in the event of it

succeeding in the suit it will not be possible to recover the

aforesaid amount from respondent No.1. It is averred that

since there were also other claimants of respondent No. 1, the

equities existed in favour of the plaintiff and all such

claimants. With regard to irretrievable injustice and special

equities, the learned Single Judge recorded that the bank

guarantee being an independent contractor could be invoked

by respondent No.1 irrespective of any dispute that may arise

between the plaintiff and respondent No.1. The learned Single

Judge held that the bank guarantee being irrevocable as also

unconditional, the same was liable to be invoked at the option

of respondent No.1. The learned Single Judge was of the view

that the kind of irretrievable injustice as approved by the Apex

Court in the case of Itek Corpn. V. First National Bank of

Boston 566 Fed Supp 1210 was not made out in the present

case.

7. The impugned order has been assailed on various grounds by

learned counsel for the appellant/plaintiff. The submissions as

made before us by learned counsel for the appellant are more

or less the same as made before the learned Single Judge

based on the grounds of fraud, irretrievable injustice and

special equity. In addition learned counsel for the appellant

submits that the contract of respondent No. 1 was terminated

by DDA because of no fault of the appellant/plaintiff, but due

to mis-planning and inadequate labour by respondent No.1.

Learned counsel submits that at no point of time, neither DDA

nor respondent No. 1 ever complained against the progress of

work of appellant/plaintiff. He submits that the contract came

to be terminated only because of the acts of omission or

commission of respondent No.1. He further submits that the

award of contract to the appellant/plaintiff by DDA was itself a

recognisation of the pace and quality of work done by the

appellant/plaintiff. Learned counsel submits that the learned

Single Judge in the impugned order has also recorded a

finding of fact that DDA cancelled the contract of respondent

No. 1 only in account of mis-planning and delay in execution

of project. The learned Single Judge specifically recorded that

the cancellation of contract by the DDA cannot be attributed

to any act on the part of plaintiff/appellant and so the

appellant/plaintiff cannot be held responsible for cancellation

of contract of respondent No.1 by DDA. The learned counsel

submits that the financial position of respondent No. 1 was

poor, in the sense that as per its balance-sheet as on 31st

March, 2010 it had secured and unsecured loans of about

`18,30,12,970/- whereas during the same financial year it had

incurred losses to the tune of `14,46,16,640/-. Further its

share capital being merely `10 lakhs and there being no

reserves or surplus or fixed assets, if the bank guarantee is

permitted to be encahsed it shall cause irretrievable injury to

the appellant inasmuch as it will never be able to retrieve the

same amount from respondent No. 1. Learned counsel also

brought to our notice some of the letters purported to have

been written by other sub-contractors claiming various

amounts from respondent No. 1 in respect of different works

executed by them for the same project. Based on all these

pleas and submissions, the learned counsel for the

appellant/plaintiff submits that invoking of the bank guarantee

needs to be restrained immediately.

8. On the other hand, learned counsel for respondent No.1

submits that what has been averred and submitted by and on

behalf of appellant/plaintiff did not call for restraining of

invoking the bank guarantee which was unconditional and

unqualified. The leaned counsel for respondent No. 1 relies

on the cases, namely, Hindustan Steel Works

Construction Ltd. v. Tarapore & Co. AIR 1996 SC 2268;

Hindustan Construction Co. Ltd. v. State of Bihar & Ors.

(1999) 8 SCC 436; Intertoll ICS Cecons O & M Company

Pvt. Ltd. v. NHAI 129 (2006) DLT 146; Dawarikesh Sugar

Industries Ltd. v. Prem Heavy Engineering Works (P)

Ltd. & Another, (1997) 6 SCC 450; State of Maharashtra

v. National Construction Co., 1996 1 SCC 735 and

Bolivinter Oil SA v. Chase Manhattan Bank (1984) 1 All

ER 351.

9. To discuss the matter further, it may be necessary to examine

the bank guarantee furnished by appellant/plaintiff in favour

of respondent No. 1. The same has also been reproduced in

the impugned order. The relevant portion of the bank

guarantee, which has a bearing on our findings, is as follows:

"Whereas the Beneficiary and M/s Sportina Payce Infrastructure Pvt. Ltd. Entered into a Agreement dated 06 November 2008 for construction of commonwealth Games Village for common wealth Games Delhi 2010 near Akshardham Temple Off Road No.NH-24, in terms of the said agreement we „The Bank‟ agree to give this Bank Guarantee on request of M/s Fedders Lloy Corp. Ltd.

This Guarantee is issued subject to the condition that the liability of the Bank under this Guarantee is limited to a maximum of Rs.50,00,000/- (Rs. Fifty Lacs Only) and this guarantee shall remain in full force up to an can be invoked only by a written demand or claim under this guarantee served on the bank by the beneficiary at the following address Commercial Branch Janpath, New Delhi by way of Registered Post or by hand delivery duly obtaining acknowledgment form „The Bank on or before.

We „The Bank‟ expressly agree that our liability and obligation under the guarantee:

(a) Shall be absolute, unconditional, irrevocable and payable on a mere demand made by the Beneficiary, without any demur, irrespective of any disputes or differences of whatsoever nature between the beneficiary and Fedders Lloyd Corp. Ltd.

(b) Shall not be discharged released, altered or otherwise effected in any manner by reason of any arrangement or compromise made between the beneficiary and Fedders Lloyd Corp. Ltd."

10. A plain reading of the above portion of the bank guarantee

would show that it is not a performance bank guarantee but is

an unconditional and irrevocable one. The bank has agreed to

pay to the beneficiary, namely, respondent No.1 the amount

so guaranteed without any demur or protest in case it is so

demanded by this respondent.

11. The question for consideration would be as to whether the

averments and allegations were sufficient enough to restrain

invocation of unconditional bank guarantee, The learned

Single Judge has referred to various judgments of this Court as

also of the Apex Court and is of the view that the plea of fraud

that has been set up by the appellant/plaintiff cannot be a

ground for going to the root of execution of bank guarantee.

12. It is a matter of common knowledge that in the contracts of

this nature, as in the instant case, the contractor normally

gives performance guarantee to the employer for due

fulfillment of its obligation. Normally such bank guarantees

are couched in a language which are unconditional bank

guarantees whereby the bank undertakes to give money to

the beneficiaries on demand, without demur or protest. When

such a demand is made the bank is not even permitted to

probe into the disputes between the parties.

13. Infact, the principles relating to the bank guarantees have

almost been settled from a series of judgments rendered by

the Supreme Court from time to time. The position was

summarized by the Supreme Court in paras 21 and 22 of its

judgment in the case of Dawarikesh Sugar Industries Ltd.

v. Prem Heavy Engineering Works (P) Ltd. & Another,

(1997) 6 SCC 450, after taking stock of its earlier judgments.

These paras are as follows:-

"Para 21: Numerous decisions of this Court rendered over a span of nearly two decades have laid down and reiterated the principles which the courts must apply while considering the question whether to grant an injunction which has the effect of restraining the encashment of a bank guarantee. We do not think it necessary to burden this judgment by referring to all of them. Some of the more recent pronouncements on this point where the earlier decisions have been considered and reiterated are Svenska Handelsbanken v. Indian Charge Chrome (1994) 1 SCC 502, Larsen and Toubro Ltd. v. Maharashtra SEB (1995) 6 SCC 68, Hindustan Steel Workers Construction Ltd. v. G.S.Atwal and Co. (Engineers) (P) Ltd. (1995) 6 SCC 76, and U.P.State Sugar Corporation v. Sumac International Ltd. 1 (1997) CLT 195 (SC). The general principle which has been laid down by this Court has been summarized in the case of U.P.State Sugar Corporation (1997) 1 SCC 568 as follows: (SCC p.574, para 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 the 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."

Dealing with the question of fraud it has been held that fraud has to be an established fraud. The following observations of Sir John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank (1984) 1 All ER 351 are apposite:

"... The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the fact of fraud and as to the bank's knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank's credit in the relatively brief time which must elapse between the granting of

such an injunction and an application by the bank to have it discharged."

The aforesaid passage was approved and followed by this Court in U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. [1988] 1 SCC

Para 22: The second exception to the rule of granting injunction, i.e., the resulting of irretrievable injury, has to be such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately succeeds. This will have to be decisively established and it must be proved to the satisfaction of the court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution."

14. In the case of State of Maharashtra v. National

Construction Co., 1996 1 SCC 735 the Supreme Court also

clarified the position in the following manner:-

"The rule is well settled that a bank issuing a guarantee is not concerned with the underlying contract between the parties to the contract. The duty of the bank under a performance guarantee is created by the document itself. Once the documents are in order the bank giving the guarantee must honour the same and make payment ordinarily unless there is an allegation of fraud or the like. The courts will not interfere directly or indirectly to withhold payment, otherwise trust in commerce internal and international would be irreparably damaged. But that does not mean that the parties to the underlying contract cannot settle the disputes with respect to allegations of breach by resorting to litigation or arbitration as stipulated in the contract. The remedy arising ex contractu is not barred and the cause of action for the same is independent of enforcement of the guarantee."

15. From the above principles as laid down by the Supreme Court

in the aforesaid cases it comes out to be that subsequent

disputes in the performance of contract between the parties

do not give rise to cause to issue an injunction against

enforcing the guarantee. Though, fraud is made an exception

and could be invoked to restrain invocation of bank guarantee,

but various conditions to accept such a ground are, viz. (a)

fraud has to be of egregious nature; (b) Further, while dealing

with the question of fraud it is to be established that it is an

established fraud. The evidence relating to this fraud must be

clear, both with regard to the fact of fraud and to the bank‟s

knowledge.

16. In the case of Dwarikesh Sugar (supra) it was also held that

while examining the allegations of fraud, the Court is

precluded from embarking on the inquiry if by encashment of

bank guarantee the beneficiary is trying to take enrichment

since the principle of undue enrichment has no application in

such cases.

17. The second exception that is available for restraining

invocation of bank guarantee is of irretrievable injury which

has to be of such circumstances as would make it impossible

for the guarantor to reimburse himself, if he ultimately

succeeds. Therefore, while examining this exception, the

Supreme Court has laid down that the party seeking injunction

will have to decisively establish/prove to the satisfaction of the

Court that there would be no possibility whatsoever of the

recovery of the amount from the beneficiary by way of

restitution.

18. Now, coming back to the facts of the case, we are of the

considered opinion that all that has been averred and

submitted about fraud as a ground seems to be not attracted

in the present case. The learned Single Judge has rightly

recorded his findings in this regard and we do not see any

reason to differ with him. With regard to irretrievable injury,

the pleas which are sought to be taken are mainly with regard

to the financial conditions of respondent No. 1 and also

demands of some outstanding dues by other contractors from

respondent No.1.

19. From the entire factual matrix, as has been examined, it is

seen that some disputes have arisen between the

appellant/plaintiff and respondent No. 1 on one side and also

between respondent No. 1 and the DDA on the other. The

disputes have led to the filing of arbitration proceedings by

DDA against respondent No. 1. The present suit has also

arisen because of appellant‟s dispute with respondent No. 1.

As per the principles relating to bank guarantee, as noted

above, the type of bank guarantee as executed by respondent

No. 2 bank in favour of respondent No. 1 was an independent

contract not depending upon any dispute that may arise

between appellant/plaintiff and respondent No. 1. If the

restraint orders are issued, based on the plea that the

company entitled to invoke the bank guarantee did not have

reserve or surplus, then also the purpose of execution of bank

guarantee would get frustrated. That was not the intent or

the objective of bank guarantee furnished by the

appellant/plaintiff in favour of respondent No.1. The bank

guarantee being unconditional and unqualified was not

dependent upon the performance or the financial condition of

the parties. The respondent No. 1 was within its rights and

authority to invoke bank guarantee and the bank was under

an obligation to honour the same.

20. Having said, as above, we ought not to have interfered in the

impugned order in the normal course. However, keeping in

view some peculiar facts, which have emerged in this case as

stated hereinabove, we are of the view that some condition is

required to be put on the rights of respondent No. 1 in

invoking the bank guarantee. The factors for doing so are: (i)

Undisputedly appellant/plaintiff submitted bills in the sum of

`4,46,64,473/- to respondent No. 1, but got release of

`3,38,53,704/-, leaving outstanding of `1.08/- crores

receivable from respondent No. 1. This has not been

controverted by respondent No. 1 and infact remains

uncontroverted till date; (ii) On our asking, learned counsel for

respondent No.1 admitted that so far no claim of any kind has

been made by respondent No.1 against the appellant/plaintiff

with regard to the said contract; and

(iii) there is some prima facie evidence regarding outstanding

claims of other contractors against respondent No. 1. These

factors not only make the move on the part of the respondent

No. 1 to invoke the bank guarantee a suspect, but more

importantly show that there is a possibility of the

appellant/plaintiff succeeding in establishing some monetary

claim against the respondent No. 1 resulting in the refund of

bank guarantee amount as well. Even that alone would not

have persuaded us to impose any condition. However, this

assumes great importance and significance when we examine

the peculiar financial health of the respondent No. 1 in

conjunction. The reflection of the Balance Sheet for the period

ending 31st March, 2009 showed respondent No. 1 having

suffered some losses. This financial health was weakened

considerably as can be discussed from the balance sheet for

the period ending

31st March, 2010. In this year respondent No. 1 had secured

and unsecured loans of about `18,30,12,970/- and had

incurred losses to the tune of `14,46,16,640/-. Further its

share capital being merely `10 lakhs and there being no

reserves or surplus or fixed assets, the financial position of

respondent No. 1 is apparently not sound but very shaky.

These peculiar facts appear to be the cause of reasonable

apprehension of the appellant/plaintiff and it seems to be

rightly well founded, in as much as in the event of

appellant/plaintiff succeeding in the present suit, the

restitution may be difficult though not impossible given the

overall state of affairs.

21. Influenced by all that has been noted above, we are tempted

to put some reasonable condition on the right of respondent

No. 1 in invoking the bank guarantee against

appellant/plaintiff to ensure that the right of latter remains

protected in the event of its succeeding in the present suit.

This unusual course is adopted, in the peculiar facts, based on

equity and in the interest of justice.

22. In the given circumstances, we are of the considered view that

the impugned order needs to be maintained with a

modification that respondent No. 1 shall be entitled to invoke

the bank guarantee, subject to its furnishing security of the

same amount to this Court in terms of this order as indicated

above. Respondent No. 1 will be required to furnish security

of the said amount to the satisfaction of the Registrar General

of this Court. This security shall remain alive till the final

disposal of the suit of the appellant/plaintiff.

23. The present appeal as well as all the pending applications,

being C.M. Nos. 2672-73/2011 & C.M. No. 3433/2011, stand

disposed of accordingly.

M.L.MEHTA (JUDGE)

A.K. SIKRI (JUDGE) MAY 11, 2011/AK