Bharat Heavy Electricals Ltd. vs Mass Global Investment Company & ...
2012 Latest Caselaw 5149 Del

*                    HIGH COURT OF DELHI AT NEW DELHI

+                     CS(OS) No.583/2010

                                   Date of Decision : 31.08.2012

BHARAT HEAVY ELECTRICALS LTD.       ...... Plaintiff
                    Through: Mr. A.S. Chandhiok, ASG
                             with Mr. Bhagat Singh,
                             Mr. Vidit Gupta,
                             Mr. Akshay Patani &
                             Ms. Harlen Singh, Advs.

                                 Versus

MASS GLOBAL INVESTMENT COMPANY & ORS.
                                   ...... Defendants
                    Through: Mr. N.K. Kaul, Sr. Adv.
                             with Ms. Diya Kapur, Adv.
                             for defendant no.1

CORAM :
HON'BLE MR. JUSTICE V.K. SHALI

V.K. SHALI, J.

IA No.4049/2010

1. This order shall dispose of an application under Order

XXXIX Rules 1 and 2 read with Section 151 of the Code of

Civil Procedure, 1908 (hereinafter referred to as „CPC‟), by

virtue of which the plaintiff had originally prayed for passing

an ad interim injunction restraining the defendant no.1 from

encashing Advance Payment Guarantee-1, Advance

Payment Guarantee-2 and the Performance Bank Guarantee

from the Defendant No.2. It was also prayed that the

defendant no.2 be restrained from making any payment to

the defendant no.1 in pursuance to the said Guarantees.

2. The matter had come up for hearing on 27.3.2010 when the

Court had recorded the statement of the learned counsel for

the defendant no.1 that it shall maintain status quo vis-à-

vis all the three Bank Guarantees. It was also observed that

the said order shall be applicable qua the defendant no.2

also. This status quo order was to continue till the next date

of hearing unless otherwise ordered. Although no specific

order thereafter has been passed, extending the order, but

the statement of the learned counsel for the defendant no.1

has been treated as if the stay order was in operation till

date.

3. One of the issues which is being dealt with by the present

order is as to whether the said stay order or rather the

statement of the learned counsel for defendant no.1

prohibiting itself from encashing the Bank Guarantees is to

be continued or not or in other words, whether an ad

interim order restraining the defendant no.1 from encashing

the three bank guarantees and the defendant no.2 from

making any payment to the defendant no.1 in pursuance to

the said Bank Guarantees could be passed.

4. This order shall also dispose of an application bearing IA

No.2852/2011 filed by the plaintiff during the pendency of

the suit, by virtue of which it has been prayed that (1) the

suit itself may be disposed of in terms of the Settlement

Agreement dated 22.8.2010 arrived at between the plaintiff

and the defendant no.1 and/or alternatively allow the

plaintiff to withdraw the present suit in terms of the prayer

(1) above.

5. Briefly stated, the facts of the case are that the plaintiff,

Bharat Heavy Electricals Ltd. (hereinafter referred to as

"BHEL"), is a company incorporated under the provisions of

the Indian Companies Act, 1956 and is owned and

controlled by the Government of India. The plaintiff

company is a leading manufacturer and engineering public

sector enterprise engaged in the business of design,

manufacturing and installation services of power generating

equipment on turnkey basis for Thermal, Hydro, Gas and

Nuclear Power Plants, both in domestic and international

markets. The Suit has been filed on behalf of the company

through one of its authorized representatives.

6. The defendant no.1, Mass Global Investment Company

(hereinafter referred to as "MGI") is a company registered

under the law of Jordan, having its Registered Office at

Amman, the capital of Jordan. The defendant no.2 is the

State Bank of India (hereinafter referred to as "SBI"),

having its Registered Office at Jawahar Vyapar Bhawan,

11th Floor, Tolstoy Marg, New Delhi. It is the case of the

plaintiff that the defendant no.1 was in the process of

acquiring a turnkey basis power plant being 4xFr9E Gas

Turbine in Sulaymaniyah Power Project, Kurdistan, Iraq

(hereinafter referred to as the "Project") and it was

desirous of hiring the services of a contractor who had the

requisite skill, know-how and the resources for design,

supply, installation, testing, starting, commissioning and

operating the project of such magnitude. In pursuance to

the said requirements of the defendant no.1, it contacted

the plaintiff, which was having all such requisite skills. The

negotiations between the plaintiff and the defendant no.1

resulted in signing of a contract No.4/2007 on 4.3.2007 for

turnkey execution of the Project (hereinafter referred to as

the "Contract"). The contract was allegedly signed in New

Delhi and thus it has been claimed that cause of action has

accrued within the jurisdiction of this Court. Further, the

contract was amended on 4.8.2007, so as to make certain

technical annexures and internal orders as a part of the

contract itself.

7. It has been alleged that in terms of the contract, Article 2

lays down for carrying out the obligations by the

contracting parties in accordance with the principles of good

faith and fair dealings. In terms of Article 4.1, the scope of

the contract and the services to be rendered by the plaintiff

to the defendant no.1 was to design, supply, erect, test,

commission and various other civil works on turnkey basis

of the power plant under the provisions of the Contract. The

details of the turnkey execution of the power plant are

detailed in Article 4.2 of the Contract. It has been alleged

that Articles 4.3 and 4.6 of the Contract contained the

obligations to be performed by the defendant no.1. It has

also been alleged that in terms of Article 4.9 of the

Contract, the defendant no.1 was under a duty and an

obligation to take all the requisite steps in order to assist

the plaintiff in the performance of its obligations. It has

been further alleged that Article 26, which was to be read

with Schedules B and G of the Contract, provided the

obligations of the defendant no.1 as under:-

"Article 26-Payment Conditions 26.1 General. Payment of the Contract price shall be made by the Employer to the Contractor in accordance with the payment conditions set out in Contract Schedules B and G. Banking charges incurred inside India shall be for the account of the Contractor, while those incurred outside India shall be borne by the Employer.

All sums duly invoiced by the Contractor shall be paid by the Employer. The amounts due other than the payments

covered under L/C shall be transferred, unless otherwise agreed, by tale transmission or SWIFT to the Contractor's bank in the Contractor's country to the account of the Contractor, and the Employer shall be deemed to have performed its payment obligations when the respective sums due, have been received by the Contractor's bank in immediately available funds.

26.2 Documentary Credit (L/C). The parties have agreed on payment by Documentary Credit (L/C). The employer shall arrange for Documentary Credits (L/C) to the amounts specified in Contract Schedules B and G in favour of the Contractor, to be issued by JP Morgan/Citibank/HSBC or Standard Chartered Bank or any other first class bank acceptable to the Contractor, on behalf of Trade Bank of Iraq (TBI) subject to the Uniform Customs and Practice for Documentary Credits published by the International Chamber of Commerce as in force at the date of signing the Contract.

The Documentary Credit (L/C) shall be for payment at sight with partial shipments and trans/shipments permitted.

26.3 The Employer shall open the L/Cs within the periods and as specified in Contract Schedule B.‖

8. Article 27 of the Contract made a provision for the Bank

Guarantees to be provided by the Plaintiff, which reads as

under:-

―Article 27 - Bank Guarantees provided by the Contractor

27.1 Advance Payment Guarantee. To secure the repayment of the advance payment specified in Contract Schedule G, the Contractor shall, within the time limit indicated therein, get issued at its cost, by JP Morgan/Citibank/HSBC or Standard Chartered Bank in the

Contractor's country, first demand bank guarantees of the same amounts, in favour of the Employer which shall be subject to the Uniform Rules for Demand Guarantees published by the International Chamber of Commerce, Pub. No.458. The advance payment guarantee shall be valid from the date of receipt by Contractor of the advance payment into its designated bank account, until full recovery of the advance payment by the employer. The value of the guarantee shall automatically decrease pro rata with the payments made to the Contractor. Upon recovery of the whole amount of the advance payment the guarantee shall become null and void and shall be returned to the Contractor.

27.2 Performance guarantee. To secure the proper performance of the Contract the Contractor shall, upon the date stated in Contract Schedule B get issued at its cost by JP Morgan, Citibank, HSBC or Standard Chartered Bank, in the Contractor's country, a first demand bank guarantee in favour of the Employer amounting to ten percent (10%) of the Contract Price which shall be subject to the Uniform Rules for Demand Guarantees published by the International Chamber of Commerce, Pub No.458.

The value of this performance guarantee shall be reduced to five percent (5%) of the Contract Price upon Taking Over or Provisional Taking Over in accordance with the provisions of Article 23 against presentation of the Taking Over Certificate or the Provisional Taking Over Certificate and shall become null and void and be returned to the issuing bank upon Final Acceptance. In the event the Plaint is taken over in separate stages or sections, the performance guarantee shall be decreased in value pro rata the value of each such stage or section.‖

9. It has been stated that the plaintiff, in terms of Contract,

furnished Bank Guarantees through the defendant no.2,

which were amended from time to time. A brief description

of the Bank Guarantees, which are purported to have been

furnished by the defendant no.2 to the defendant no.1 for

and on behalf of the plaintiff, are as under:-

―(i) Advance Payment Guarantee No. being 0999607FG0000699 dated 6 August, 2007 (―APGI‖) valid till 30 March 2010, with a reduced value of USD 2,000,000 (as amended on 29 December 2009).

(ii) Advance payment Guarantee No. being 0999607FG00001132 dated 10 December 2007 (―APG2‖) valid till 30 March 2010 with a reduced value of USD 2,000,000 (as amended on 29 December 2009)

(iii) Performance Guarantee No. being 0999607FG0000699 dated 6th August, 2007 (PBG) valid till 30 March 2010 with a reduced value of USD 117,00,000 (as amended on 29 December 2009).‖

10. It has been alleged in the plaint that the Contract was to be

performed in relation to four units of power generation. Unit

Nos.1 and 2 of the Project are stated to have been

commissioned and synchronized successfully on 11.5.2009

and 4.6.2009 respectively. Unit No.3 is stated to have been

commissioned and synchronized on 19.11.2009 and Unit

No.4 was commissioned and allegedly synchronized on

26.2.2010. It has been further stated that all the four units

were successfully running in their full capacity as on

10.3.2010. It has, thus, been alleged, on the basis of the

aforesaid facts, that the plaintiff herein has complied with

all its obligations in terms of the Contract.

11. It was alleged that the defendant no.1 was not furnishing

the Taking Over Certificate so far as the Unit Nos.1 and 2

are concerned and so far as the unit nos.3 and 4 are

concerned, the performance schedule was not given by the

defendant no.1. It was alleged that that this was being

done purposely to avoid their obligations with a malafide

intention and to invoke the Bank Guarantees. It has been

alleged that the defendant no.1 was constantly committing

breach of its contractual obligations and was acting in an

illegal, malafide and fraudulent manner and causing grave

prejudice to the plaintiff. It has been alleged in the plaint

that sometime in December, 2008, the defendant no.1

requested the plaintiff to extend the APG1 and APG2. In its

letter dated 27.12.2008, the defendant no.1 is alleged to

have stated as under:-

―......Concerning our request to extend the two bank guarantee, kindly be sure that Mr. Chaudhuri will send the extension on Monday as he promised and if he does not send it by Monday we will send Mr. Shadi to India to take the necessary action.‖

12. It has been alleged by the plaintiff that on 27.4.2009, it

received three swift messages from the defendant no.2 with

reference to APG2, which read as under:-

―WE MASS GLOBAL INVESTMENT CO. P.O. BOX 546 11953 AMMAN - JORDAN HEREBY DEMAND PAYMENT OF YOUR GUARANTEE NUMBER 0999607FG0001132 DEMAND AMOUNT: USD 4,000,000.00 SAY USD FOUR MILLION ONLY. ACCORDINGLY, PLEASE REMIT DEMANDED AMOUNT TO OUR ACCOUNT NUMBER 57899 WITH JORDAN COMMERCIAL BANK ..... AS AN ALTERNATIVE FOR PAYMENT, WE MAY ACCEPT AN EXTENSION TO THE GUARANTEE VALIDITY UNTIL 30 OF JUNE, 2009. HOWEVER, IF WE DON'T APPEAR TO HAVE RECEIVED SUCH EXTENSION WITHIN 3 BANKING DAYS FROM THE DATE OF THIS CLAIM, OUR CLAIM WILL STAND VALID AND YOU HAVE TO PROCEED FOR PAYMENT AS CLAIMED‖.

13. It has been alleged by the plaintiff that a perusal of the

aforesaid communication by the defendant no.1 would

clearly show that it was arbitrary, illegal and unilateral and

in total breach of its contractual obligations, as it was

compelling the plaintiff to extend the Bank Guarantees,

repeatedly holding threats that in case the supply

agreement is not performed, the defendant no.1 will invoke

the Bank Guarantees and it would cause grave financial

harm to the plaintiff. It has been alleged that the aforesaid

action on the part of the defendant no.1 was being taken by

duress. It has also been alleged by the plaintiff that as it

had successfully performed all its obligations, consequently

it had raised invoices for the goods supplied and the

services provided. However, the defendant no.1 failed to

make payment on account of the same. On the contrary,

the defendant no.1 was holding out threats to the plaintiff

that in case the plaintiff did not comply to its dictates, it will

be forced to invoke the three Bank Guarantees purported to

have been given by it through the defendant no.2. It has

been alleged that the defendant no.1, without any

intimation to the plaintiff and without any sufficient cause,

mobilized its own agencies at the Project site in relation to

Unit Nos.3 and 4 and the defendant no.1 further, in

complete violation of the provisions of Article 6.1, sought to

invoke the Bank Guarantees. In a nutshell, it was feebly

alleged that a fraud was being committed.

14. So far as the three parameters for grant of injunction are

concerned, it was averred that the plaintiff has a prima

facie good case, the balance of convenience is also in its

favour and that it would suffer an irreparable loss in case

an injunction restraining the defendant no.1 from invocation

of Bank Guarantees is not granted.

15. In view of the above said contentions, the Plaintiff has

prayed for an ad interim injunction restraining the

Defendant No.1 from encashing the two advance payment

guarantees and one performance guarantee and the

defendant no.2 from making any payment in respect of

such guarantees.

16. The defendant had filed its written statement and reply to

the application and contested the claim of the plaintiff. So

far as the question of issue of three bank guarantees by the

plaintiff in favour of the defendant no.1 to be invoked

through the defendant no.2 is concerned, that is not in

dispute. As regards the breaches, which are allegedly

attributed to the defendant no.1, the same have been

denied. It has been averred by the defendant no.1 that the

plaintiff has approached the High Court with unclean hands

and has suppressed the correct facts. The plaintiff, at all

times, has not complied with its contractual obligations and

completed the works in relation to the project in terms of

milestone which were agreed to between the parties. In this

regard, the defendant no.1 has also denied the

commissioning and synchronization of all the four units on

the touchstone of milestones agreed. The defendant no.1

has stated that below given is the comparison of the details

of the four power units which were to be executed by the

plaintiff on turnkey basis, which will show that they have

not been within the stipulated time:

Sl.No. Stipulated dates Dates of of completion of commissioning and the contract synchronization(not taken over by the defendant no.1) Unit 1 31.5.2008 11.5.2009

Unit 2 10.6.2008 4.6.2009

Unit 3 20.9.2008 19.1.2009

Unit 4 5.10.2008 26.2.2010

17. It has been stated by the defendant that there is no fraud

committed by the defendant no.1 in invocation of the Bank

Guarantees. On the contrary, despite repeated intimations

to the plaintiff, bringing to its notice the breaches

committed by it on account of non-discharge of its duties, it

was warned that the defendant no.1 will be forced to invoke

the three Bank Guarantees. Still the work having not been

completed within the stipulated time, the defendant no.1

was well within its rights to invoke the three Bank

Guarantees in accordance with the terms and conditions of

the Settlement Agreement. The defendant no.1 has also

stated that the plaintiff, in its rejoinder, has admitted that

the liquidated fuels system, fire fighting system and the

water system are not essential for running the units on fuel

gas. This admission in rejoinder by the plaintiff in itself

shows that the work is not complete.

18. So far as the invocation of three Bank Guarantees is

concerned, the defendant no.1 has stated that the Bank

Guarantee is an independent contract between the

guarantor and the beneficiary and the same has to be

honoured in order to give commercial credibility to the

unconditional Bank Guarantees and that no injunction to

invoke the Bank Guarantees can be given, except in two

cases, which are exceptional in nature. It is stated that the

Apex Court has repeatedly held that such an injunction can

be given only in case of fraud or irretrievable injury. It was

stated that both these contingencies were not available in

the instant case to the plaintiff and therefore, the

application under Order XXXIX Rules 1 and 2 be dismissed.

19. The learned counsel for the plaintiff, in the instant case,

though had taken the plea of fraud for the grant of

injunction at the time of filing of the suit, however, this plea

of fraud, or for that matter even the plea of irretrievable

injury to the plaintiff, was not canvassed during the course

of submission by the learned ASG.

20. The learned counsel for the defendant no. 1 has stated that

as per the contract between the Plaintiff and the Defendant

no. 1, to guarantee the proper performance of the Plaintiff‟s

obligations, the Defendant No. 2 had provided one

unconditional demand guarantee of $ 11.7 million and in

order to guarantee the advance paid under the contract to

the Plaintiff, the Defendant No. 2 had provided two

unconditional demand guarantees of $ 2 million each to the

defendant no. 1, payable upon a written demand by the

defendant no. 1. It has further been alleged that the

plaintiff failed to perform its obligations within the

contractually stipulated period and the defendant no. 1,

thus became entitled to encash the bank guarantees. The

defendant no. 1 later agreed to extend the bank guarantees

for further periods from time to time in order to provide the

plaintiff an opportunity to cure its breaches of non-

performance and non-delivery of equipment and services

for which advances had already been paid.

21. The Learned counsel for the defendant no.1 has contended

that the plaintiff is not entitled to Injunction. It has been

stated by the learned counsel that as per the settled law,

unconditional bank guarantees are independent and

separate contracts between Defendant No. 1 and Defendant

No. 2 which are absolute in nature and therefore, the

Plaintiff is not entitled to seek an injunction preventing

encashment of the bank guarantees. To support this

contention, reliance has been placed upon the following

judgments:

(i) U.P. State Sugar Corporation vs. Sumac International Ltd., (1997) 1 SCC 569

(ii) Himadri Chemicals Industries Ltd. vs. Coal Tar Refining Co., (2007) 8 SCC 110

(iii)State Trading Corporation Ltd. -vs- Jainsons Clothing Corporation & Anr., (1994) 6 SCC 597

22. It is well settled that the bank guarantee is an independent

contract, the invocation of which, especially if it is

unconditional guarantee, ought not and cannot be stayed

by the Court. This principle admits only two exceptions in

allowing an application for injunction i.e. fraud and

irretrievable injury and there is no third exception. Illegality

in invocation, breach of faith, misuse of guarantee by failing

to act in accordance with the purpose for which it was

given, failure of consideration of contract, threatened call

for unconscionable ulterior motive, lack of honest or bona

fide belief by the beneficiary that the circumstances such as

poor performance against which performance bond provided

actually exists have all been rejected as grounds for

injunction. Reliance in this regard has been placed upon the

following judgments:

(i)BSES Ltd. vs. Fenner India Ltd. & Anr., (2006) 2 SCC 728

(ii)U.P. State Sugar Corporation vs. Sumac International (supra)

(iii) U.P. Co-operative Federation vs. Singh Consultants & Engineers Pvt. Ltd., (1988) 1 SCC 174

23. The Bank Guarantees in the present case are unconditional

demand guarantees explicitly stated to be governed by the

ICC Uniform Rules on Demand Guarantees (URDG), payable

upon the signed statements in the form set out in the

guarantees. It has been contended that the demand

guarantees of this nature are unconditional bank

guarantees. Reliance in this regard has been placed upon:-

(i) General Electric -vs- Punj Sons, (1991) 4 SCC 230

(ii) NTPC -vs- Flowmore, (1995) 4 SCC 515

(iii) Reliance Salt -vs- Cosmos Enterprises, (2006) 13 SCC 599

(iv) STC -vs- Jainsons, (1994) 6 SCC 597

(v) Sikkim Subba -vs- Union Bank of India & Anr., 1993(2) Arb. LR 140

(vi) Chola Turbo -vs- Development Credit, 2008 VI AD (Del) 408

24. There is no fraud in either the issuance or invocation of the

bank guarantees or otherwise in connection with the bank

guarantees. The learned counsel for the defendant no.1 has

brought to the notice of the Court that such a fraud must be

(a) in connection with the bank guarantee, (b) of an

egregious nature that shocks the conscience of the Court

and vitiates the entire guarantee (c) it is proved by clear

evidence in the bank‟s knowledge, (d) it is primarily for the

bank to plead a case of fraud, a bank guarantee being an

independent contract between the banker and the

beneficiary, (e) wrongful termination of the contract cannot

make the invocation fraudulent, (f) fraud must have nexus

prior to entering into the contract and (g) bald averments

of fraud are not sufficient, there must be clear evidence.

Such conditions have not been satisfied by the plaintiff.

25. It has further been submitted that the invocation of the

bank guarantees was bonafide and far from fraudulent as

the plaintiff had clearly committed the breach of the

performance of its obligations under the turnkey contract

entered into between the plaintiff and the defendant no.1.

To support this contention, the learned counsel has pointed

out that there was delay in the completion of the project

and it could not be finished within the time schedule. The

defendant no.1 had to complete civil construction of Units 1

and 2 and complete Units 3 and 4 because the plaintiff had

failed to complete civil construction and erection works due

to disputes with its sub-contractors, Al-Bilal. Further, it has

been contended that the plaintiff had failed to deliver the

key components of the plant and also had failed to remedy

the defects in the power plant.

26. It has been stated by the learned counsel that the notices

of breach were sent by the defendant no.1 to the plaintiff

vide letters dated 16.11.2008, 26.5.2009 and 27.7.2009.

Communications stating the defects in respect of the Units

and asking the plaintiff to cure the same were also sent to

the plaintiff via various e-mails.

27. It has been contended by the learned counsel that this is

not a case where any irretrievable harm or injustice of the

kind contemplated by the Itek Corporation v. The First

National Bank of Boston etc. (566 Fed Supp. 1210) would

be caused to the plaintiff if the bank guarantees are

encashed. The Itek case test, as stated by the learned

counsel, has been reiterated by the Supreme Court in U.P.

State Sugar Corporation‟s case (supra), Himadri Chemicals

case (supra) which lays down that an exceptional

circumstance must be made out which would make it

impossible for the guarantor to reimburse himself if he

ultimately succeeds, akin to the Itek case (supra). In the

case of Himadri Chemicals, the Supreme Court rejected the

application for interim injunction made by the plaintiff

wherein it had pleaded that it would be unable to recover

the money, if it ultimately succeeds as the respondent was

a foreign company in Iran, having no assets in India. In

this case, it was held that mere apprehension was not

enough but the plaintiff needs to establish an exceptional

circumstance that would make it impossible to recover.

Likewise, it has been contended that in the present case, no

such exceptional circumstance exists.

28. It has further been submitted by the learned counsel that

there is no difficulty in recovery of monies if the plaintiff

ultimately succeeds. Also, there is an ICC Arbitration Clause

in the contract between the plaintiff and the defendant no.1

and Jordan is signatory to the New York Convention on

Enforcement of Foreign Awards and it has enacted a law for

the enforcement of foreign awards and such a law would

provide adequate remedy and opportunity to the plaintiff to

recover the monies.

29. In the light of the above mentioned submissions, it has

been contended by the learned counsel for the Defendant

No. 1 that the Plaintiff is not entitled to the grant of

injunction against encashment of the bank guarantees and

has also prayed that the application under Order 39 Rules 1

and 2 of the CPC made by the Plaintiff be dismissed and

exemplary costs be imposed upon them.

30. The law relating to invocation of bank guarantees is by now

well settled by a catena of judgments. In U.P. State Sugar

Corporation vs. Sumac International Ltd. AIR 1997 SC

1644, the Apex Court observed that:

The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in

connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would over ride the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may coexist in some cases.‖

31. It is equally well settled in law that bank guarantee is an

independent contract between the bank and the beneficiary

thereof. The bank is always obliged to honour its guarantee

as long as it is an unconditional and irrevocable one. The

dispute between the beneficiary and the party at whose

instance the bank has given the guarantee is immaterial

and of no consequence.

32. In BSES Ltd. Vs. Fenner India Ltd. and Anr., AIR 2006

SC 1148, the Supreme Court held as under:

―10. There are, however, two exceptions to this Rule. The first is when there is a clear fraud of which the Bank has notice and a fraud of the beneficiary

from which it seeks to benefit. The fraud must be of an egregious nature as to vitiate the entire underlying transaction. The second exception to the general rule of non- intervention is when there are 'special equities' in favour of injunction, such as when 'irretrievable injury' or 'irretrievable injustice' would occur if such an injunction were not granted. The general rule and its exceptions has been reiterated in so many judgments of this Court, that in U.P. State Sugar Corporation v. Sumac International Ltd. : AIR1997SC1644 (hereinafter 'U.P. State Sugar Corpn') this Court, correctly declare that the law was 'settled'.‖

33. In Himadri Chemicals Industries Ltd. Vs. Coal Tar

Refining Company AIR 2007SC 2798, the Apex Court

summarized the principles for grant of injunction to

restrain the enforcement of a bank guarantee or a letter of

credit in the following manner:

"14(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the Beneficiary is entitled to realize 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 realization 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."

34. In Mahatma Gandhi Sahakra Sakkare Karkhane vs.

National Heavy Engg. Coop. Ltd. And Anr. AIR 2007SC

2716, the Supreme Court observed:

"22. If the bank guarantee furnished is an unconditional and irrevocable one, it is not open to the bank to raise any objection whatsoever to pay the amounts under the guarantee. The person in whose favour the guarantee is furnished by the bank cannot be prevented by way of an injunction from enforcing the guarantee on the pretext that the condition for enforcing the bank guarantee in terms of the agreement entered between the parties has not been fulfilled. Such a course is impermissible. The seller cannot raise the dispute of whatsoever nature and prevent the purchaser from enforcing the bank guarantee by way of

injunction except on the ground of fraud and irretrievable injury.

......

28. What is relevant are the terms incorporated in the guarantee executed by the bank. On careful analysis of the terms and conditions of the guarantee in the present case, it is found that the guarantee is an unconditional one. The respondent, therefore, cannot be allowed to raise any dispute and prevent the appellant from encashing the bank guarantee. The mere fact that the bank guarantee refers to the principal agreement without referring to any specific clause in the preamble of the deed of guarantee does not make the guarantee furnished by the bank to be a conditional one." [Emphasis supplied]

35. The question, which arises for consideration to decide this

application for interim injunction, is whether the present

case falls under any or both the exceptions as laid down in

U.P. State Sugar Corporation vs. Sumac International

Ltd. (Supra). The court needs to consider both the

exceptions namely (i) fraud of an egregious nature (ii)

irretrievable injury on invocation of the bank guarantee.

36. With regard to the exception of fraud, the judgment of the

Apex Court in STC -vs- Jainsons (supra) mentions the

definition of fraud in a contractual agreement. The relevant

portion of the judgment states:

―5. The question, therefore, is whether there is any fraud committed by the respondent as regards the contract of guarantee which the appellant was entitled to invoke. Under Section 126 of the Indian Contract Act 1872 a contract of guarantee is a distinct separate contract to discharge the liability of a third person in case of his default. Section 17 of the Contract Act postulates fraud that:

17. "Fraud" defined. - "Fraud" means and includes any of the following acts committed by. a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract....

(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

(2) the active concealment of a fact by one having knowledge or belief of the fact;

(3) a promise made without any intention of performing it; (4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent.‖

37. The essential question which arises is whether the present

case comes within the purview of the definition of fraud as

stated above. The Apex Court in more than one decision

took the view that fraud, if any, must be of an egregious

nature as to vitiate the underlying transaction. On a

thorough perusal of the pleadings, neither there are any

specific allegations made by the Plaintiff which can be

attributed as a fraudulent conduct on the part of the

Defendant No. 1 nor any conditions laid down in the

definition of fraud as postulated in Section 17 of the Indian

Contract Act are made out. Only vague allegations and

submissions have been made in the plaint, which do not

establish the element of fraud in the invocation of bank

guarantees by the Defendant No. 1. In the absence of any

specific allegation of fraud much less the fraud of an

egregious nature so as to vitiate the entire transaction, the

first exception is not made out in the instant case.

38. On the question of irretrievable injury, it has to be of the

nature noticed in the Itek case (supra). In that case an

exporter in the U.S.A. entered into an agreement with the

Imperial Government of Iran and sought an order

terminating its liability on stand by letters of credit issued

by an American bank in favour of an Iranian Bank as part of

the contract. The relief was sought on account of the

situation created after the Iranian revolution when the

American Government cancelled the export licences in

relation to Iran and the Iranian Government had forcibly

taken 52 American citizens as hostages. The U.S.

Government had blocked all Iranian assets under the

jurisdiction of United States and had cancelled the export

contract. The court upheld the contention of the exporter

that any claim for damages against the purchaser if decreed

by the American Courts would not be executable in Iran

under these circumstances and realization of the bank

guarantee/Letters of credit would cause irreparable harm to

the plaintiff. This contention was upheld. To avail of this

exception, therefore, exceptional circumstances which make

it impossible for the guarantor to reimburse himself if he

ultimately succeeds, will have to be decisively established.

Clearly, a mere apprehension that the other party will not

be able to pay, is not enough. In the Itek case (supra),

there was a certainty on this issue. Secondly, there was

good reason, in that case for the court to be prima facie

satisfied that the guarantors i.e. the bank and its customer

would be found entitled to receive the amount paid under

the guarantee. The Supreme Court in U.P. State Sugar

Corporation‟s case (supra), Himadri Chemicals‟s case

(supra) has reiterated the principles applicable in the Itek

case (supra) that an exceptional circumstance must be

made out which would make it impossible for the guarantor

to reimburse himself if he ultimately succeeds.

39. On a meticulous examination of the facts of the present

case, the plaintiff has failed to plead or establish any

exceptional circumstance where it cannot recover any

monies if it ultimately succeeds. All the pleas taken by the

Plaintiff regarding irretrievable injury seem to be vague and

not supported by any evidence.

40. In my considered opinion, the plaintiff has not been able to

show any of the contingencies, namely, that any fraud has

been committed in encashing the 3 Bank Guarantees from

the defendant no.1 or that there is an irreparable injury

which will be caused to the plaintiff in case the 3 Bank

Guarantees are invoked and accordingly, the plaintiff is not

entitled to any injunction on that score. It is also not the

case where the conditions which were contemplated in Itek

case (supra) were available to the plaintiff which may

warrant the grant of interim order in favour of the plaintiff,

restraining the defendant from invoking 3 Bank Guarantees,

two of which are Advance Payment Guarantees and the

third one is the Performance Bank Guarantee. No doubt, the

defendant no.1 is a foreign company registered in Jordan

and the plaintiff is a public sector undertaking in India.

Nevertheless, it cannot be said that as on date, with the

conditions prevailing in the Middle East, either domestically

or internationally, where the company is registered, is in

turmoil so as to prevent the retrieval of the amount by the

plaintiff, in case the need so arises. On the contrary, the

defendant no.1 has admitted that it is a signatory to the

Charter which warrants adjudication of the International

Arbitration Disputes with the venue in London which clearly

shows that ultimately it is a country which believes in

adjudication of disputes through the processes of law

and, therefore, restraining the defendant from realization of

the proceeds of the three Bank Guarantees, with regard to

which they had maintained status quo vide statement made

by their counsel on 27.3.2010, cannot be permitted to

continue. Accordingly, to that extent, the application

bearing IA No.4049/2010 of the plaintiff deserves to be

dismissed.

IA No.2852/2011 in CS(OS) No.583/2010

41. The second application is now taken up which the plaintiff

has filed during the pendency of the petition, wherein the

plaintiff has prayed for decreetal of its suit in terms of the

settlement purported to have been arrived at by it with the

defendant no.1. A brief overview of the context in which

this application was filed is also required to be given.

42. After the statement made by the defendant no.1 that it

shall not invoke the three Bank Guarantees, the matter was

adjourned on a couple of dates and ultimately, on

19.8.2010, Mr. Gopal Subramanium, the learned Solicitor

General and Mr. A.S. Chandhiok, the learned Additional

Solicitor General made a submission that the parties are

exploring the possibility of a settlement. This fact was not

denied by Mr. N.K. Kaul, the learned Senior Counsel

appearing for the defendant no.1. The suit kept on being

adjourned on the ground of settlement and ultimately it is

alleged by the plaintiff that the settlement was arrived at

between the plaintiff and the defendant No.1. It is in this

context that the present application was filed.

43. The plaintiff, in this application, has stated that the

discussions were held in the meetings between the parties,

namely, BHEL and MGI. The parties mutually agreed to

resolve their disputes and arrived at a settlement dated

22.8.2010, which was purported to be final, signed,

executed and irrevocable. The Settlement Agreement is

alleged to have superseded all previous negotiations and

the contract between the parties. It is stated that in terms

of the settlement/agreement, each of the parties had

agreed to irrevocably relinquish and waive all its claims and

demands and release the other party from all its liabilities

and amounts under the contract. Under the Supply

Agreement, the amount of USD 13 million was agreed to be

settled by way of supply of 2XFr6B Turbines and Power

Generation Equipments to MGI by BHEL. Under the

Settlement Agreement, the MGI agreed to pay to the BHEL

USD 25 million as price for the supply of 2XFr6B turbines

and power generation equipments. The Settlement

Agreement is alleged to have constituted 52% of the

contract value and the remaining 48% of the contract value

of Supply Agreement was to be paid by MGI. It was stated

that under the Settlement Agreement, it was also agreed

between the BHEL and the MGI that a detailed „Supply

Agreement‟ would be entered into between the parties.

Subsequent to the execution of the Settlement Agreement,

the following events are stated to have taken place in

furtherance of signing of the Supply Agreement:-

"(i) BHEL requested MGI to send plot plan and site data for evaluation and incorporation in contract of performance guarantee figures of the GTGs.

(ii) BHEL and MGI exchanged their comments on the draft supply agreement.

(iii) In the meeting held from 6-15 October, 2010 in Amman, BHEL submitted Performance Guarantee figures of GTG to MGI.

(iv) After BHEL sent its revised Performance Guarantee figures, MGI on 6.1.2011, had sent revision of the site data for recalculation by BHEL of Performance Guarantee figures of GTGs."

44. It was averred that although the formal Supply Agreement

was yet to be signed, however, in anticipation of the

signing of the said Agreement and in good faith, the

plaintiff had started performing its obligations as per

Settlement Agreement. It was averred that 35% to 40%

of the work relating to engineering procurement,

manufacture and assembly of two turbines was done. It is

stated that on 20.1.2011, the plaintiff received a letter

from the defendant no.1, terminating the Agreement

unilaterally on account of non-signing of the Supply

Agreement. The plaintiff sent the reply dated 28.1.2011,

giving reasons for not signing the Supply Agreement. A

part of the fault for such non-signing was attributed to the

defendant no.1/MGI.

45. Accordingly, it was prayed that the suit itself be disposed of

in terms of the Settlement Agreement dated 22.8.2010 and

allow the plaintiff to withdraw the suit in terms of prayer (1)

of the application.

46. The defendant no.1 filed reply to the application and did not

deny the signing of the Settlement Agreement dated

22.8.2010. However, it was denied that the said Settlement

Agreement, in any way, resolves the disputes between the

parties. It was stated that the Settlement Agreement is

irrelevant for the purpose of the present suit and cannot be

made as a basis for preventing the encashment of the Bank

Guarantees, which is an independent contract. It was stated

that under the Settlement Agreement, signed on

22.8.2010, a Supply Agreement was to be signed by

27.9.2010 or such extended date as may be agreed

between the parties. But, this Supply Agreement was

neither signed between the parties nor the date was

extended. Consequently, under the Settlement Agreement

itself, it was envisaged that the same would be void in case

the Supply Agreement is not signed. It is alleged that the

defendant no.1 wrote to the plaintiff on 20.1.2011,

explicitly stating that the Settlement Agreement was null

and void and in any event, the Agreement stood

terminated. It was also contended that in any case,

assuming, though not admitting, that the Settlement

Agreement was binding, the said Settlement Agreement

would not confer any jurisdiction on this Court to entertain

the application involving determination of issues regarding

Settlement Agreement as it was signed by the parties in

Jordan and is governed by English law. It was averred that

under the Settlement Agreement, the Supply Agreement

was to be executed and it was specifically laid down that in

case the Supply Agreement was not signed, it would render

the Settlement Agreement null and void without prejudice

to the stand taken by the defendant no.1. It was further

alleged that the only relevance of the Settlement

Agreement is the admission made by the plaintiff that the

plaintiff himself had delayed the performance of its

obligations under the contract and that the plaintiff had

agreed to pay to the defendant no.1 an amount of USD 13

million on account of the untimely performance. It was also

contended that even if the Settlement Agreement is taken

into account, it cannot form the basis of staying the

invocation of the Bank Guarantees because that was an

independent contract between the defendant no.1 and the

defendant no.2.

47. On the basis of these allegations, the defendant no.1

denied that either the application for decreeing the suit was

maintainable or that the decree should be passed in terms

of the Settlement as urged by the plaintiff in the

application.

48. I have heard Mr. A.S. Chandhiok, the learned ASG and

Mr. N.K. Kaul, the learned Senior Counsel for the defendant

no.1 on the application.

49. Mr.A.S.Chandhiok, the learned ASG has contended that

once the Settlement/Agreement dated 22.8.2010 was

signed between the plaintiff and the defendant no.1, it

resulted in novation between the parties and the three Bank

Guarantees which are purported to have been furnished by

the defendant no.2 to the defendant no.1 for and on behalf

of the plaintiff cannot be encashed because the

Settlement/Agreement supersedes all other agreements as

under the Settlement Agreement, the defendant no.1 had

relinquished all the rights qua the Bank Guarantees or it

can be said that it had discharged the Bank Guarantees. It

was contended that even if the submission of Mr. N.K. Kaul,

the learned Senior Counsel for the defendant no.1 that in

terms of the Settlement Agreement dated 22.8.2010, a

Supply Agreement was to be signed is accepted, even then

the non-signing of the Supply Agreement would not impinge

on the Settlement Agreement. For this purpose, Mr.

Chandhiok, the learned ASG has referred to Clause 9 of the

Settlement Agreement and has contended that the said

Clause envisaged severability between the Settlement

Agreement and the Supply Agreement. It was urged that

even if the Supply Agreement was not signed and it became

invalid, illegal, unenforceable or is declared so by any court

of competent jurisdiction, then only that part of the

Settlement Agreement would become invalid, as is held so.

On the basis of the same analogy, it was sought to be

urged that assuming that the Supply Agreement has not

been signed, the defendant no.1 could have appropriate

remedy for the same. But, it will not result in abrogation of

the Settlement Agreement dated 22.8.2010 in complete

and will not revive the status quo ante so as to permit the

defendant no.1 to seek encashment of the three Bank

Guarantees.

50. Mr. Chandhiok, the learned ASG has next urged that in

terms of the application, the plaintiff is only seeking a

decree in terms of the Settlement Agreement in the instant

case, though this was not the original prayer. For this

purpose, the learned ASG has relied on Order XXIII Rule 3

CPC, which lays down as under:-

―3. Compromise of suit.-- Where it is proved to the satisfaction of the Court that a suit has been adjusted wholly or in part by any lawful agreement or compromise in writing and signed by the parties, or where the defendant satisfies the plaintiff in respect of the whole or any part of the subject-matter of the suit, the Court shall order such agreement, compromise or satisfaction to be recorded, and shall pass a decree in accordance therewith so far as it relates to the parties to the suit, whether or not the subject-matter of the agreement, compromise or satisfaction is the same as the subject- matter of the suit:

Provided that where it is alleged by one party and denied by the other that an adjustment or satisfaction has been arrived at, the Court shall decide the question;

but no adjournment shall be granted for the purpose of deciding the question, unless the Court, for reasons to be recorded, thinks fit to grant such adjournment.‖

On the basis of Order XXIII Rule 3 CPC, it was contended

by Mr. A.S. Chandhiok since the plaintiff has now performed

its part of the obligation in terms of the Settlement

Agreement to the extent of 35% to 40% and this being the

valid Settlement Agreement, under which the defendant

no.1 has discharged, relinquished or abrogated its right to

invoke the Bank Guarantees, therefore, the said Bank

Guarantees cannot be invoked and the restraint order

passed on the basis of the statement made by the learned

counsel for the defendant no.1 on 27.3.2010 be made

absolute and the suit itself be decreed in terms of the

Settlement Agreement.

51. Mr. N.K.Kaul, the learned Senior Counsel for the defendant

no.1, has vehemently contested this submission of the

learned ASG. It was contended that the Settlement

Agreement clearly envisages the signing of the Supply

Agreement and it was specifically laid down that the Supply

Agreement is to be signed by 27.9.2010 and in the event of

the same not being signed by the plaintiff, the Settlement

Agreement was to be treated as invalid and void ab initio.

Attention in this regard was drawn to the relevant Clauses

of the Agreement. It was further contended that the

defendant no.1 had sent a letter dated 21.1.2011 to the

plaintiff, intimating that as the Supply Agreement was not

signed, therefore, the Settlement Agreement had become

void ab initio and obviously, the status quo ante was

restored in terms of the relationship of the parties or, in

other words, relationship of the parties was to be governed

as no new agreement was in existence. It was contended

that there was no impediment in seeking to invoke the

three Bank Guarantees furnished by the defendant no.2 to

the defendant no.1. It was also contended that even if the

contention of the learned ASG that the non-signing of the

Supply Agreement will not render the Settlement

Agreement void, is assumed to be correct, it will not result

in doctrine of severability coming into operation. It was

stated that the signing of the Supply Agreement was the

basis of the complete transaction between the parties,

therefore, the submission of the learned ASG does not have

any merit.

52. Alternatively, it was contended that assuming, though not

admitting, that the Settlement Agreement was having any

defect, the said Agreement would still not impinge on the

encashing of the Bank Guarantees for the simple reason

that it is the settled legal position that the Bank Guarantees

have to be treated as an independent contract de hors the

basic contract between the parties. It was contended that

this Settlement Agreement has no effect on the invocation

of the Bank Guarantees. It was contended that the prayer

of the plaintiff for decreeing the suit in terms of the

Settlement Agreement having been arrived at between the

parties under Order XXIII Rule 3 CPC is bereft of any merit

because the defendant no.2 is not a party to the said

Agreement.

53. I have carefully considered the submissions and gone

through the records.

54. Before dealing with the submission of the learned ASG for

and on behalf of the plaintiff, it would be better to

reproduce the relevant provisions of the Settlement

Agreement dated 22.8.2010, which are as under:-

THIS SETTLEMENT AGREEMENT is executed on this 22nd day of August 2010

BY AND BETWEEN:

(1) MASS GLOBAL INVESTMENT CO a company duly incorporated under the laws of Jordan, and having its registered office at Aman-Jordan, Wasfi A1 Tal Street, Building No.94, fifth floor, Post Code 11953, (hereinafter „MGI‟ WHJICH EXPRESSION SHALL INCLUDE ITS SUCCESSORS AND PERMITED ASSIGNS); and

(2) BHARAT HEAVY ELECTRICALS LTD. a company duly incorporated under the provisions of the (Indian) Companies At, 1956, owned and controlled by the government of India and having its registered office at BHEL House, Siri Fort, New Delhi - 110049, (hereinafter "BHEL" which expression shall include its successors and permitted assigns).

(Collectively hereinafter referred to as „parties‟ and individually as „Party‟)

WHEREAS, MGI and BHEL have entered into a Contract dated 4th March, 2007 and subsequently Contract Amendment dated 4th August, 2007 for the turnkey execution of 4xFr 9E Gas Turbine Power Plant in Sulaymaniah, Kurdistan, Iraq by BHEL to MGI on a turnkey basis in Kurdistan region, Iraq, (hereinafter the „Turnkey Contract")

WHEREAS, during execution of the Tunkey Contract, certain disputes had arisen between the parties in respect of the execution of the Power Plant and parts thereof (all such disputes hereinafter referred to as the „Disputed Matters")

―Whereas, pursuant to the said Disputed Matters MGI purported to invoke the three Bank Guarantees provided to MGI on behalf of BHEL under the terms of the Turnkey Contract, such guarantee being (1) Advance Payment Bank Guarantee number 0999607FG0001132, in its current amount of USD 2,000,000.00 (Two Million United States Dollars) (2) Advance Payment Bank Guarantee number 0999607FG000699 in its current amount of USD 2,000,000.00 (Two Million United States Dollars) and (3) Performance Bank Guarantee number 0999607FG0000700 in an amount of USD 11,7000,000.00 (Eleven Million, Seven Hundred Thousands United States Dollars) (hereinafter collectively the ―Bank Guarantees‖) WHEREAS, BHEL vide a suit filed in the Delhi High Court (bearing No.CS(OS) 583/2010) obtained an interim injunction on the said invocation of the three Bank Guarantees against MGI and State Bank of India, however, the final judgment for the above has not yet been issued as on date;

WHEREAS, Now, in pursuance of the meetings dated 19th to 21st June 2010; 31st July, 2010 to 4th August, 2010; 18th to 21st August, 2010 at Amman and 18th to 24th July, 2010 at Sulymaniyh site between the parties, the parties have accordingly agreed to settle all disputes and differences on the terms and conditions more particularly described and stated hereinafter, (minutes of the Amman meeting from 18th to 21st August, 2010 signed by the parties are enclosed herewith as Schedule [1] of this Settlement Agreement, which shall be considered an integral part and parcel of this Settlement Agreement);

.......

And Whereas, now, the Parties through their authorized representatives have mutually negotiated a settlement and have accordingly agreed to amicably resolve the Disputed Matters in good faith by entering into the Settlement Agreement, which shall, upon implementation of its terms and conditions as stated herein below, constitute a final and irrevocable settlement of all claims and demands of the parties in respect thereof in connection with the Turnkey Contract.

NOW THIS AGREEMENT WITNESSETH AS HEREIN UNDER FOLLOWS:

1. THE SETTLEMENT The parties agree that this Settlement Agreement and the terms set out herein shall be in full, unconditional, irrevocable, comprehensive and final settlement in connection with the Disputed Matters and all claims arising pursuant to the Turnkey Contract, from the date of the commencement of the parties' commercial relationship until the date of this Settlement Agreement Upon execution of this Settlement Agreement in accordance with the terms and conditions stated below, each party irrevocably and unconditionally relinquishes and waives all claims and demand, and further releases the other party from all liabilities and amounts whether known or unknown in connection with the Turnkey Contract in perpetuity.

2. TERMS OF SETTLEMENT In full, unconditional, irrevocable, comprehensive and final settlement of all claims and demands in respect of the Disputed Matters and the Turnkey Contract, the parties agree as follows:-

........

Accordingly, BHEL hereby irrevocably acknowledges that it owes MGI, and hereby irrevocably undertakes to settle to MGI, an amount of USD13 million (Thirteen Million United States Dollars) (hereinafter the ―Settlement Agreement‖).

3. MANNER OF SETTLEMENT ......

Upon signature of the Supply Agreement and the provision of the advance payment bank guarantee referred to above under paragraph (c), MGI undertakes to discharge the Bank Guarantees in full by issuing the necessary instructions to State Bank of India and simultaneously making a joint application to the Delhi High Court for dissolution of all pending claims.

......

4. RELEASE, WAIVER, DISCHARGE Release by MGI Upon: (i) signing of the Supply Agreement,

(ii) issuance of the advance payment bank guarantee referred to under clause 3(c) above, and (iii) fulfillment by BHEL of its obligations stated herein including clause (5), MGI holds BHEL free of any responsibility and waives its rights against BHEL as regards the Disputed Matters and any obligations, claims, compensations, liabilities or any other arising out of or in connection with the Turnkey Contract and the Disputed Matters and such release conferred herein shall be considered final and irrevocable.

......

In relation to any claims/counter claims, upon fulfillment of all the terms and conditions of this Settlement Agreement, the parties agree to fully and finally release, waive and forever discharge each other and any of its affiliated companies, directors, officers, counsels, agents or other representatives from:

--All claims, demands, debts, accounts, expenses, costs, liens, actions and proceedings of any and every kind, nature and description and under any legal theory be it contract, misrepresentation, fraud etc. whether known or unknown, which the parties has or might have or might assert in relation to the Disputed Matters and Turnkey Contract; and

-- Any legal liability arising, directly or indirectly, out of or in any way connected way connected hereto, in relation to the Disputed Matters and Turnkey Contract.

......

The parties hereby agree that the current injunction proceedings being deliberated by the High Court of New Delhi shall temporarily be put on hold until the signing of the Supply Agreement. To that end, the parties agree to jointly request the High Court of New Delhi to adjourn the proceedings until the parties move a joint application (if any) in CS(OS) No.583/2010 pending before the Delhi High Court to record the terms of this Settlement Agreement so that a compromise decree can be passed by the Delhi High Court in accordance with this Settlement Agreement. For the avoidance of doubt the joint application referred to above will be made only following signature of the Supply Agreement.

5. ....

6. .....

7. CONFIDENTIALITY AND VALIDITY ....

Furthermore, if the Supply Agreement is not signed by 27 September 2010 or such other extended date agreed in writing, this Settlement Agreement and Schedule (1) shall be considered null and void.

8.....

9.SEVERABILITY If for any reason whatsoever any provision of the Settlement Agreement is or becomes invalid, illegal or unenforceable or is declared by any court of competent jurisdiction or any other instrumentality to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions shall not be affected in any manner, and the parties shall negotiate in good faith with a view to agreeing upon one or more provisions which may be substituted for such invalid, illegal or unenforceable provisions, as nearly as its practicable.

10. .......

11........

12. GOVERNING LAW This Agreement is governed by the laws of England.‖

Sd/-

Sd/-

55. A perusal of the Settlement Agreement clearly shows that

the signing of the Supply Agreement between the parties

was an integral part of the Settlement and this Supply

Agreement was to be signed by a specified date, which was

fixed as 27.9.2010 or such extended date as may be agreed

between the parties. The sanction for the purpose of

adherence to this date was contained in the Settlement

Agreement itself and it was specifically laid down that in

case the Supply Agreement is not signed by that date, the

Settlement Agreement would be treated as void ab initio.

There is no denial of the fact that the Supply Agreement

between the plaintiff and the defendant no.1 has neither

been signed by 27.9.2010 nor the date has been extended.

As a matter of fact, till the submission of the arguments

before this Court, the said Agreement was not signed

between the parties, therefore, so far as the non-signing of

the Supply Agreement is concerned, that is not in dispute.

There is no doubt that the plaintiff in the application has

made an averment, although the Supply Agreement has not

been signed, but it has already performed 35% to 40% of

its obligation in terms of the Settlement Agreement. I think

this oral averment made by the plaintiff in its application

regarding performance of its obligation in terms of the

Settlement Agreement is totally inconsequential in the

absence of signing of Supply Agreement. In the absence of

signing of the Supply Agreement, obviously the sanction

would come into operation and the sanction which was

envisaged between the parties was that the Settlement

Agreement itself would be treated as void ab initio. If the

Settlement Agreement itself becomes void ab initio, then

obviously the parties get their rights and obligations revived

under the regime with which they were governed when the

Supply Agreement was not signed by them. Under the said

regime, the defendants were entitled to invoke the Bank

Guarantees in terms of the language of the Bank

Guarantees, which were unconditional. Moreover, the Bank

Guarantees are held repeatedly by the Courts to be

independent contracts and even if there is a dispute about

the basic agreement, still the invocation could not be

stopped in favour of the beneficiary. The only two

exceptions visualized by the Apex Court is fraud and

irretrievable injustice which contingencies are not available

in the instant case.

56. Another submission, which has been raised by the learned

ASG, is regarding the severability of the Settlement

Agreement from the Supply Agreement and the submission

that in case a part of the agreement is severable and it

gives right to any occasion to the defendant no.1, he can

sue for breach of contract does not convince me. It is not

the case where such a clause would come into operation.

The question of severability of a clause from a part of the

agreement would arise only when the transaction itself was

complete between the parties. The transaction between the

parties in the instant case was to settle their disputes in

two phases - firstly by signing the Settlement Agreement

and secondly by signing the Supply Agreement. Since the

Supply Agreement itself has not been signed, therefore this

transaction of Settlement itself being incomplete, in my

view, would not bring the question of severability into

operation. Therefore, this submission made by the learned

ASG does not persuade me to accept his plea so as to

prevent the defendant no.1 from seeking encashment of the

Bank Guarantees.

57. There is another reason for this Court to discard the

submission made by the learned ASG for preventing the

defendant no.1 from encashing the Bank Guarantees and it

is that the settled legal position is that the Bank Guarantees

is an independent contract between the beneficiary and the

guarantor and it is only these two parties who are to be

governed by the terms and conditions of the Bank

Guarantees. In the instant case, one of the Bank

Guarantees is a Performance Bank Guarantee and the other

two are Advance Bank Guarantees. All these three Bank

Guarantees are not in dispute so far as their language or

the factum of their being unconditional Bank Guarantees is

concerned. The invocation of the Bank Guarantees by the

defendant no.1 is also not faulted by the defendant no.2.

The original case, which was set-up by the plaintiff for

preventing the invocation of the Bank Guarantees by the

defendant no.1 against the defendant no.2, was fraud,

which had come up in the course of time by filing an

application under Section 151 CPC read with Order XXIII

Rule 3 CPC for decreetal of the suit in terms of the

Settlement Agreement. Therefore, this plea of fraud or

irretrievable injustice having been caused to the plaintiff on

account of invocation of the Bank Guarantees has already

been rejected by me earlier while dealing with the

application under Order XXXIX Rules 1 and 2 CPC. The

present plea has been set-up by the plaintiff by way of

subsequent developments inasmuch as a fresh Agreement

between the plaintiff and the defendant no.1 is sought to be

a ground for preventing the invocation of the Bank

Guarantees. Admittedly, this Agreement is between the

plaintiff and the defendant no.1, i.e., a party on whose

behalf the Bank Guarantees were given and the party for

whose benefit the Bank Guarantees were given. The party

which has given these Bank Guarantees is not a party to

the signing of this subsequent Agreement, which is called

as the Settlement Agreement. That being so, the

Agreement, to which the defendant no.2 is not a party or a

signatory, could not be made as a basis for preventing the

defendant no.2 from making the payment to the defendant

no.1 on account of such Bank Guarantees on their

invocation. Therefore, I feel that this is something which

goes to the very root of the matter because of which the

invocation of the Bank Guarantees by the defendant no.1

from the defendant no.2 cannot be prevented. Moreover,

the defendant no.1 himself has denied the validity of the

enforceability of the Settlement Agreement on account of

non-signing of the Supply Agreement. This being the factual

matrix, if one sees the plain language of Order XXIII Rule 3

CPC for decreeing the suit, then it envisages the satisfaction

of the Court in the first instance. Obviously, this satisfaction

would arise only when the parties are at ad idem and not at

variance. This portion gets further reinforced by the proviso

which lays that in case one party denies adjustment or the

satisfaction, the Court shall decide this question. Therefore,

for deciding this question, evidence may have to be

recorded but certainly the decree, as prayed for by the

plaintiff, cannot be passed. The defendant no.1 has also

placed reliance on judgment titled Jaywantraj Punamaiya &

Ors. -vs- H. Choksi & Co. Pvt. Ltd., 1997(10) SCC 193 to

contend that the Settlement Agreement being contingent on

signing of the Supply Agreement could not be relied upon.

To that extent, the submission of Mr. N.K. Kaul, the learned

Senior Counsel is accepted.

58. Further, if the Settlement Agreement itself is not valid,

there is no question of discharge or relinquishment of rights

qua the Bank Guarantees. Similarly, the Agreement

envisaged filing of a joint application for keeping the

restraint orders against the invocation of the Bank

Guarantees in suspension, which was not done in the

present case. This shows that the parties are not

unanimous on the resolution of their disputes or the

modalities thereof.

59. For the abovementioned reasons, I am of the considered

opinion that the suit of the plaintiff cannot be decreed in

terms of Order XXIII Rule 3 CPC, as the application of the

plaintiff is totally misconceived and accordingly the

application of the plaintiff bearing No.2852/2011 is

dismissed.

60. The net result of dismissal of both these applications

bearing Nos.4049/10 and 2852/11 is that the statement,

which was made by the learned counsel for the defendant

no.1 on 27.3.10 before this Court, stating that the status

quo with regard to all the three Bank Guarantees shall be

maintained, which status quo has been maintained by the

defendant no.1 till date, although the same has not been

specifically recorded in the order subsequent thereto, the

defendant no.1 is not bound to continue with the said

statement and I feel that the plaintiff is not entitled to any

ad interim injunction. Accordingly, the applications of the

plaintiff, bearing IA No.4049/10 under Order XXXIX Rules 1

and 2 CPC as well as IA No.2852/11 are dismissed. DASTI.

CS(OS) No.583/2010

61. List the matter on 28.9.2012 before the Joint Registrar for

further proceedings.

V.K. SHALI, J.

August 31st , 2012 tp