Delhi High Court
Bharat Heavy Electricals Ltd. vs Mass Global Investment Co & Ors on 12 September, 2012
Author: Pradeep Nandrajog
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment Reserved on: September 06, 2012
Judgment Pronounced on: September 12, 2012
+ FAO(OS) 429/2012
BHARAT HEAVY ELECTRICALS LTD. ..... Appellant
Represented by: Mr.A.S.Chandhiok, Sr.Adv.,
Mr.Sandeep Sethi, Sr.Adv. instructed by
Mr.Kamaljeet Singh, Mr.Bhagat Singh, Mr.Vidit
Gupta, Ms.Harleen Singh, Mr.Akshay Palavi,
Mr.Prashant Mehta, Advs.
versus
MASS GLOBAL INVESTMENT CO & ORS ..... Respondents
Represented by: Mr.C.A.Sundaram, Sr.Adv.,
Mr.Neeraj Kishan Kaul, Sr.Adv. instructed by
Ms.Divya Kapur, Ms.Manjira Dasgupta, Adv. for
respondent No.1.
Mr.S.L.Gupta, Adv. for State Bank of India.
AND
FAO(OS) 430/2012
BHARAT HEAVY ELECTRICALS LTD ..... Appellant
Represented by: Mr.A.S.Chandhiok, Sr.Adv.,
Mr.Sandeep Sethi, Sr.Adv. instructed by
Mr.Kamaljeet Singh, Mr.Bhagat Singh, Mr.Vidit
Gupta, Ms.Harleen Singh, Mr.Akshay Palavi,
Mr.Prashant Mehta, Advs.
versus
MASS GLOBAL INVESTMENT CO & ORS ..... Respondents
Represented by: Mr.C.A.Sundaram, Sr.Adv.,
Mr.Neeraj Kishan Kaul, Sr.Adv. instructed by
Ms.Divya Kapur, Ms.Manjira Dasgupta, Adv. for
FAO(OS) 429/2012 & 430/2012 Page 1 of 59
respondent No.1.
Mr.S.L.Gupta, Adv. for State Bank of India.
CORAM:
HON'BLE MR. JUSTICE PRADEEP NANDRAJOG
HON'BLE MR. JUSTICE MANMOHAN SINGH
PRADEEP NANDRAJOG, J.
1. The requirement of law, while deciding an appeal, is to lay the
appellate track parallel to the track on which the learned Trial Judge has
undertaken the journey, and if the destination reached is a place other than
the one reached by the learned Trial Judge, to highlight the junction from
where the direction in the track was made; for only then can a reader of the
appellate opinion understand with clarity, with least time spent, on what
account the two decisions are at variance.
2. But, we regret our inability to adhere to the aforesaid principle
of law on account of the reason, as conceded to by learned counsel for the
parties during arguments in the appeal, the learned Single Judge has not
noted many facts which were relied upon by the parties and has therefore not
dealt with the submissions which were advanced, requiring us to have a
virtual original hearing on the subject of : Whether the appellant was entitled
to injunct respondent No.2 bank to pay any money to respondent No.1, the
beneficiary under the two bank guarantees which were to secure repayment
of the advance received by the appellant from respondent No.1 and one bank
guarantee to secure due performance of the contract i.e. three bank
guarantees issued by respondent No.2 in favour of respondent No.1 at the
asking of the appellant.
3. On March 04, 2007, contract No.4/2000 was executed between
the appellant and respondent No.1, a company incorporated in Jordan,
requiring the appellant to execute, on a turnkey basis, a Gas Turbine Power
Plant: 4XFr9E at Kurdistan, Iraq.
4. Being a turnkey contract, the appellant had to design the power
project, supply the equipment, after testing, install the same and thereafter
commission the plant and operate it for the period specified in the contract at
the agreed price US$ 117 million. It is not in dispute that by a
supplementary agreement dated August 04, 2008, scope of work being
reduced, the price was reduced to US$ 100 million.
5. As the nomenclature of the turnkey contract: „4XFr9E‟
suggests, 4 gas turbine units had to be erected.
6. The contract envisaged a performance guarantee of 10% of the
value of the contract to be issued to secure due performance of the
obligations of the appellant under the contract, as also advance payments to
be made by respondent No.1 to the appellant, return whereof had to be
secured by means of bank guarantees, as and when advance payments were
made.
7. Accordingly, at the asking of the appellant, respondent No.2
issued a bank guarantee to secure due performance of its obligations by the
appellant under the contract in favour of respondent No.1 in sum of US$
11.7 million, the relevant part whereof reads as under:-
"According to the said contract the principal will furnish
a performance bond for US$ 11,700,000.00 (say US
dollars eleven million seven hundred thousand only) in
favour of Messrs Mass Global Investment Co., Jordan
(The Beneficiary) as security in the event that the
Principal failed to fulfil his contractual obligations under
and in conformity with the terms of the Contract.
At the request of Messrs Bharat Heavy Electricals
Limited (BHEL), New Delhi, India we State Bank of
India, CAG Branch, 11th Floor, Jawahar Vyapar Bhavan,
11th Floor, 1 Tolstoy Marg, New Delhi - 110001, India
(Guarantor) hereby irrevocably undertake to pay to you
on your first written demand any amount upto USD
11,700,000.00 (Say US Dollars Eleven Million Seven
Hundred Thousand only) upon receipt of your written
request for payment accompanied with your signed
statement stating:
(a) That the Principal has failed to fulfil their
obligation in accordance with the conditions of the
contract, and
(b) The amount which the Principal has failed to
fulfil.
(c) The Principal has failed to perform or fulfil any
of the material acts or obligations set forth under the
contract, despite 30 calendar days notice having elapsed
and the Principal still failing to remedy failure/defects
and consequently beneficiary demanding payment of an
amount of _______________ under the bank guarantee
no._______________ dated _____________.
This guarantee shall become effective upon payment of
US$ 9,000,000.00 (US dollars nine million) to the
Principal to their account with us."
8. In terms of the contract, receiving an advance payment in sum
of US$ 11 million, at the asking of the appellant, respondent No.2 issued a
bank guarantee dated August 06, 2007 in favour of respondent No.1, the
relevant term(s) whereof reads as under:-
"According to the said contract you will make first
advance payment of US$ 11,000,000.00 (say US dollars
eleven million only) of which two million has been
already paid to Messrs Bharat Heavy Electricals Limited
(BHEL), New Delhi - 110003, India in security for the
adjustment of the advance payment a guarantee by a bank
shall be furnished.
At the request of Messrs Bharat Heavy Electricals
Limited (BHEL), New Delhi, India we State Bank of
India, CAG Branch, 11th Floor, Jawahar Vyapar Bhavan,
11th Floor, 1 Tolstoy Marg, New Delhi - 110001, India
(The Guarantor) hereby irrevocably undertake to pay to
you on your first written demand any amount upto
USD11,000,000.00 (Say US Dollars Eleven Million
only) upon receipt of your written request for payment
accompanied with your signed statement stating:
(a) That the Principal has failed to fulfil their
obligation for adjustment of the advance payment in
accordance with the conditions of the contract, and
(b) The amount which the Principal has failed to
fulfil.
This guarantee shall become effective upon payment of
US$ 9,000,000.00 (US dollars nine million) to the
Principal to their account with us."
9. Having received a further advance payment in sum of US$
6,727,265.00, at the asking of the appellant, respondent No.2 issued another
bank guarantee on December 10, 2007 in favour of respondent No.1, on
identical terms as the earlier guarantee, except that the value of the guarantee
was the sum received in advance i.e. US$ 6,727,265.00.
10. With respect to the bank guarantees to secure repayment of the
advance received by the appellant from respondent No.1, admittedly vide
amendment made on December 29, 2009, while extending the two bank
guarantees till March 30, 2010, the value of each guarantee was reduced to
US$ 2 million.
11. The appellant claims to have not only successfully executed the
installation of the four gas turbine units but even commissioning thereof
after completing testing of the four units on May 11, 2009, June 04, 2009,
November 19, 2009 and February 26, 2010 and has a grievance that the
respondent No.1 has not issued the requisite taking over certificate.
12. Respondent No.1 invoked the two bank guarantees pertaining to
repayment advance vide two identically worded letters dated March 21, 2010
which read as under:-
"Dear Sirs,
Reference is made to your Guarantee
th
No.0999607FG0000699 Dated 6 of Aug.2007 for
USD11,000,000.00.
We Mass Global Investment Co. P.O. Box 546,
Amman 11953 - Jordan (the Beneficiary) hereby certify:
1. That the Principal M/s Bharat Heavy
Electricals Limited (BHEL), New Delhi - 110 003,
India has failed to fulfill their obligation for adjustment
of the advance payment in accordance with the
conditions of the contract and also that the Principal is in
breach of his obligation(s) under the underlying
contract(s); and
2. the amount which the principal has failed to
fulfil USD2,000,000.00 say USD TWO MILLION only.
3. the respect in which the Principal is in breach is
in respect of delay in shipping part of required materials
and goods and not executing part of the services at site in
accordance with the contract."
13. It also issued a letter of even date i.e. March 21, 2010 invoking
the performance guarantee which reads as under:-
"Dear Sirs,
Reference is made to your Guarantee
th
No.0999607FG0000700 Dated 6 of Aug.2007 for
USD11,700,000.00.
We Mass Global Investment Co. P.O. Box 546,
Amman 11953 - Jordan (the Beneficiary) hereby certify:
1. That the Principal M/s Bharat Heavy
Electricals Limited (BHEL), New Delhi - 110 003,
India has failed to fulfill their obligation in accordance
with the conditions of the contract and also that the
Principal is in breach of his obligation(s) under the
underlying contract(s), and
2. the amount which the principal has failed to
fulfil USD11,700,000.00 say USD eleven million seven
hundred thousand only.
3. the Principal M/s Bharat Heavy Electricals
Limited (BHEL), New Delhi - 110 003, India has failed
to perform or fulfil any of the material acts or obligations
set forth under the contract, despite 30 calendar days
notice having elapsed and the Principal still failing to
remedy failure/defects and consequently beneficiary
demanding payment of an amount of USD11,700,000.00
say USD eleven million seven hundred thousand only
under the bank guarantee No.0999607FG0000700 dated
6th of Aug.2007.
4. the respect in which the Principal is in breach is
in respect of delay in performing and executing the
contract/project and also they did not finish the project
until now."
14. This led the appellant to file a suit for permanent and mandatory
injunction to restrain defendant No.2 from making payment under the bank
guarantees to respondent No.1.
15. Eschewing reference to the prolix pleadings in the plaint and the
written statement containing the rival versions which led to the delay in
executing the works and whether or not the owner of the work was justified
in not taking over the works or whether it was the appellant which had to
receive money from respondent No.1 for the works executed; pleading fraud
in invoking the bank guarantees, in para 13 and 14 of the plaint it was
pleaded as under:-
"13. That the Contract was to be performed in
relation to 4 Units. Two Units, i.e. Unit 1 and Unit 2 of
the Project have been commissioned and synchronized
successfully on 11 May, 2009 and 4 June, 2009
respectively. Unit 3 was commissioned and
synchronized on 19 November 2009. Unit 4 was
commissioned and synchronized on 26 February 2010.
The fact of successful running of all four Units in their
full capacity, was intimated by the Plaintiff to the
Defendant No.1 on 10 March 2010.
14.That as would be evident from the above, the Plaintiff
herein has complied with its obligations under the
Contract. However, as would be evident from the
discussion below, the defendant No.1 herein has been in
constant violation of its contractual obligations, and has
also acted in an illegal, mala fide and fraudulent manner,
causing grave prejudice to the Plaintiff herein."
16. With respect to the two bank guarantees to secure advance
payments received by the appellant from respondent No.1, in the context
whether the guarantees were validly invoked in terms of the guarantees, in
para 39 of the plaint it is pleaded as under:-
"39. That the terms of the APG1 and APG2
mandates the Defendant No.1, while demanding money
from the Defendant No.2, shall provide statements
stating:
"(a) that the Principal has failed to fulfil their
obligation for adjustment of the advance
payment in accordance with the conditions of
the contract, and
(b) the amount which the Principal has failed to
fulfill."
A bare perusal of the letters written by the Defendant
No.1 herein to the Defendant No.2, seeking to encash the
APG1 and APG2, would clearly show that the Defendant
No.1 herein has failed to meet the above-mentioned
stipulations. Assuming without admitting that the
Defendant No.1 is entitled to the amounts demanded by it
under APG1 and APG2, the plaintiff humbly submits that
the Defendant No.1 has completely failed to indicate let
alone prove that any of the aforesaid conditions of APG1
and APG2 have been fulfilled. The statements made by
the Defendant No.1 are vague, baseless, incorrect and
have been made in a fraudulent manner, merely with
malafide attempt to encash the APG1 and APG2
illegally, to defeat the rights and interest of the Plaintiff
under the Contract, and to cause grave financial loss to
the Plaintiff herein. The Plaintiff humbly submits that
the above-mentioned illegal and malafide action on part
of the Defendant No.1 herein is not only against the
provisions of the Contract, but is also impermissible
under the law, as well as equity."
17. And with respect to the guarantee pertaining to performance, in
paragraph 40 of the plaint it is pleaded as under:-
"40. That the terms of PBG clearly states that while
demanding any amount under the guarantee the
Defendant No.1 has to provide statements to the
Defendant No.2 in following terms:
"(a) That the Principal has failed to fulfill their
obligation in accordance with the conditions of
the contract; and
(b) the amount which the Principal has failed to
fulfill.
(c) the principal has failed to perform or fulfill any
of the material acts or obligations set forth
under the contract, despite 30 calendar days
notice having elapsed and the principal still
failing to remedy failure/defects and
consequently beneficiary demanding payment
of an amount of ____ under the bank guarantee
No.____ dated _____."
A bare perusal of the letters written by the Defendant
No.1 herein to the Defendant No.2, seeking to encash the
PBG, would clearly show that the Defendant No.1 herein
has failed to meet the above-mentioned stipulations. It is
most respectfully submitted that the statements made by
the Defendant No.1, vide its letter dated 21 March 2010,
addressed to the Defendant No.2, are incorrect and
baseless. The Plaintiff states and submits that no such
notice pursuant to any alleged failure/defect on Plaintiff‟s
part, was received from Defendant No.1 prior to the
instant illegal attempt of the Defendant No.1 to encash
the PBG. This clearly shows that the malafide nature of
the actions on part of the Defendant No.1 in its dealings
with the Plaintiff and its complete disregard to the clear
and unambiguous terms of the Contract and its
contractual obligations. It is most respectfully submitted
that the there was no delay in performing its obligations
by the Plaintiff. On the contrary, it is submitted that the
Plaintiff herein, as has already been detailed herein
above, has at all times complied with its contractual
obligations and it is the Defendant No.1 who has sought
to wrongfully withhold the amounts payable to the
Plaintiff and has now also sought to encash the Bank
Guarantees in fraudulent manner, in complete disregard
of the clear and unambiguous terms of the Contract and
its contractual obligations and in clear violation of law."
18. With respect to the plea of irretrievable injury if the guarantees
were permitted to be encashed, in paragraph 46 of the plaint it is pleaded as
under:-
"46. That it is most respectfully submitted that the
Plaintiff is entitled to an ad interim ex-parte injunction
restraining the Defendant No.2 from extending the
APG1, PBG and APG2 in terms as sought by the
Defendant No.1 or making any payment under the APG1,
PBG and APG2 in the event of Defendant No.1 seeking
to encash the said bank guarantees or any part thereof.
The Plaintiff further submits that the Defendant No.1 has
not suffered any loss or damage under the Contract, and
if the reliefs prayed for in the present Suit are not been
granted, it would cause grave and irreparable loss to the
Plaintiff herein. If the Defendant No.1 takes away the
amount under the Bank Guarantees, the Plaintiff will
never be able to recover it as the Defendant No.1 is only
based in Jordan and has no assets outside Jordan. The
Plaintiff states that there is no established system in
Jordan to enable the Plaintiff to recover the amount even
if there is an award in favour of the Plaintiff. Hence
there would be irretrievable injustice to the Plaintiff if the
Defendant No.2 pays the amounts under the Bank
Guarantees."
19. The response of respondent No.1 to the averments made in para
13 and 14, 39, 40 and 46 of the plaint, being an intermix of the justification
for the stand taken by it while simultaneously traversing the averments made
in the plaint, being unnecessarily prolix and lengthy; and if reproduced by us
would span nearly 20 pages, require us to summarize the response by noting
that while responding to averments in para 13 of the plaint, respondent No.1
did not dispute the dates set out in the plaint when the four units were
commissioned and synchronized, but highlighted that as per contract the
corresponding dates were January 31, 2008, February 10, 2008, May 22,
2008 and June 05, 2008. It was pleaded that though commissioned,
respondent No.1 had not taken over the plants as several material elements
were found missing and significantly were not running on liquid fuel and this
was a material non-performance inasmuch as the plants were required to run
on dual fuel system being liquid and gas. With reference to the averments
made in para 14 of the plaint, apart from highlighting delay in performance
of the contract, material failures in operation of the plant i.e. its inability to
perform while running on a dual fuel system, failure to deliver the functional
power etc. were highlighted and in addition various defects in the power
plant and failure to deliver some key components were highlighted i.e. it was
asserted that it was not a case where the guarantees were being invoked in
the teeth of the appellant having commissioned the works in question. It was
thus justified that respondent No.1 was entitled not to take over the plant.
Responding to the averments made in paras 39 and 40 of the plaint, it was
pleaded that respondent No.1 was justified in invoking all the three
guarantees, and with respect to the performance guarantee various facts were
pleaded with reference to e-mails exchanged between parties to highlight
non-performance of the obligations by the appellant. Response to the
averments made in para 46 of the plaint, need to be extracted. It is as under:-
"Contents of Para 46 are denied and it is submitted that
the Answering Defendant is entitled to encash the said
guarantees in view of Plaintiff‟s failure to fulfill
materials obligations under the Contract and the delay
caused by the Plaintiff in performance of the Contract.
Furthermore the Guarantees are irrevocable guarantees
which are payable on first written demand of the
Answering Defendant specifying conditions, prescribed
in the respective guarantees for invocation of the same.
As the Defendant has invoked the guarantees in terms
specified for the same, Defendant No.2 is bound to
release the said payments and no injunction restraining
defendant No.2 from releasing the said amount lies
against Defendant No.2. It is settled law that bank
guarantees have to be invoked in terms thereof and
disputes pending between the parties cannot be
considered in releasing the guaranteed amounts.
It is denied that the Plaintiff has not suffered any loss or
damage under the Contract. It is submitted that the loss
suffered by the Answering Defendant in view of the
delays and failures of the Plaintiff in performance of its
obligations under the contract, far exceeds the guaranteed
amounts. It is also pertinent to reiterate that in total, the
Answering Defendant has paid the Plaintiff $96,979,850
of the contract price of approximately @ 118,18,750.
However due to failures by the Plaintiff to deliver
equipment and services, the Plaintiff is liable to refund
$6,500,747 of the Contract price already paid. The
Answering Defendant is entitled to invoke the
performance guarantee to recover at least a portion of the
loss and damage caused to it due to the above stated
failures of the Plaintiff and grave prejudice will be
caused to the Answering Defendant if he is not able to
recover the same. Further grave prejudice to
international trade and commerce if bank guarantees are
not honoured. On the other hand no prejudice will be
caused to the Plaintiff as the Plaintiff has remedy in
arbitration in London governed by ICC rules to recover
any moneys that it can prove are owed to it whether on
account of invocation of the guarantees or otherwise. A
foreign arbitral award is enforceable in Jordan as it is a
signatory of the New York Convention and there can
therefore not be an apprehension that the monies will not
be recovered."
20. Realizing that it had overlooked the fact that the performance
guarantee was limited to 10% of the contract value, and when issued the
contract value was US$ 117 million, which was reduced to US$ 100 million
as also the fact that during execution of the works, respondent No.1 had
reduced the scope of supplies, thereby further reducing the price payable to it
under the contract, a lesser amount was required to be secured towards due
performance of the contract, the appellant moved an application to amend
para 41 of the plaint and substitute the same by pleading afore-noted facts;
and the obvious object to amend the pleading was to bring home the point
that the performance guarantee could not be invoked for the value thereof.
21. Issuing summons in the Suit to the respondents, as recorded in
the order dated March 27, 2010, counsel for the respondent No.1 who
appeared when the Suit was listed for admission before the learned Single
Judge made a statement that said respondent shall maintain status quo vis-à-
vis the bank guarantees. Thereafter pleadings were completed and matter
lingered on. On May 06, 2010 I.A. No.5975/2010 was listed before the
Court in which appellant had made a prayer, as noted above to amend the
plaint.
22. Parties thereafter attempted a negotiated settlement. The matter
was adjourned from time to time.
23. The parties were able to arrive at a settlement as a result of
various meetings held between August 18, 2010 and August 21, 2010. The
same was reflected in a minutes drawn up concerning the meetings held from
August 18, 2010 to August 21, 2010. Vide Serial No.2 of the minutes it was
recorded that in view of several unforeseen challenges faced, procurement
actions were taken and supplies effected by respondent No.1 pertaining to
some equipment, which as per the contract, had to be supplied by the
appellant. Vide Serial No.3 it was recorded that the four units were
commissioned and were running at base load as per grid demand with effect
from May 11, 2009, June 04, 2009, November 19, 2009 and February 26,
2010, i.e. the dates alleged by the appellant of having commissioned the four
units. The value of the equipment procured and brought at the site by
respondent No.1 was thereafter valued. With respect to the payments made
by respondent No.1 to the appellant, vide Serial No.7 of the minutes it was
recorded that parties have agreed that appellant had to pay US$ 13 million to
the respondent No.1. Vide Serial No.10 it was minuted that the four
unfinished systems listed at Serial No.10 would be completed by the
appellant pertaining to the existing contract.
24. How would appellant pay US$ 13 million to respondent No.1
was recorded as per Serial No.8. And the mode of payment was agreed to be
by way of an adjustment with respect to a new contract requiring appellant to
execute, on turnkey basis, either 2XFr 6B GTG Open Cycle project at
Sulemaniyah Cement Plant or one unit Frame-9E and in respect of which, it
was agreed that a new contract pertaining to either one of the two works
which would be executed by the appellant, would be executed by September
27, 2010. Vide Serial No.9 of the minutes it was recorded:
"Till signing of the contract by 27th September 2010,
between MGI and BHEL for supply of 2XFr 6B GTG
Units for Sulemaniyah Cement Plant or one Frame 9E
Unit, the encashment of three numbers of Bank
Guarantees by MGI and proceedings in Hon‟ble High
Court of New Delhi would be kept under hold."
25. To give a formal legal colour to what was agreed between the
appellant and respondent No.1 and was briefly minuted in the minutes of the
meetings held between August 18, 2010 and August 21, 2010, the appellant
and the respondent No.1 executed a SETTLEMENT AGREEMENT on
August 22, 2010; relevant portions of the recitals whereof read as under:-
"WHEREAS, during execution of the Turnkey 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 Guarantees 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 0999607FG0000699 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 11,700,000.00
(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 number CS(OS) No.583 of 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 Aug.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 this 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."
26. After recording the recitals, the parties set down in writing the
terms of the settlement agreement, relevant clauses, being 1 to 9, whereof
read as under:-
"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 demands, 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:-
(a) Compensation to be paid by BHEL to MGI in an
amount of USD 24,046,065.67 (Twenty Four Million and
Forty Six Thousand and Sixty Five United States Dollars
and 67/100) towards procurement by MGI of certain
materials and providing services at site part of BHEL
scope of works and pecuniary liabilities linked to
scheduled completion;
MINUS
(b) An amount of USD 11,046,065.67 (Eleven Million
and Forty Six Thousand and Sixty Five United States
Dollars and 67/100) due to BHEL by MGI pursuant to
the Turnkey Contract.
The Parties hereby irrevocably agree on the calculation
of the amounts and the amount itself herenabove and
irrevocably agree to affect a setoff.
Accordingly, BHEL hereby irrevocably acknowledges
that it owes MGI, and hereby irrevocably undertakes to
settle to MGI, an amount of USD 13 Million (Thirteen
Million United States Dollars) (hereinafter the
"Settlement Amount").
3. MANNER OF SETTLEMENT
The Parties agree that the settlement described herein
above shall be fulfilled as follows:
(a) MGI hereby agrees to purchase, and BHEL hereby
agrees to supply, the Turbines and Power Generation
Equipments comprising of 2x Fr 6B GTG Units for MGI
Sulymaniyh Cement Plant and as per the Technical
Proposals - Annex (1) of Schedule (1)) or one unit frame
9E. To that end, the Parties will negotiate in good faith
and shall exert all reasonable efforts to negotiate and sign
a supply agreement no later than 27 September 2010 or
such extended period as may be mutually agreed
(hereinafter the "Supply Agreement")
(b) It is agreed that the Settlement Amount (USD 13
Million) shall constitute 52% of the contract value of the
Supply Agreement. The Settlement Amount referred to
herein above shall be considered as advance payment for
the Turbines and Power Generation Equipments. The
Supply Agreement will expressly stipulate the receipt by
BHEL of the Settlement Amount as payment on account
(down payment) against the total contract price of the
Supply Agreement of USD 25 million (Twenty Five
Million United States Dollars).
(c) Upon signature of the Supply Agreement, BHEL will
issue an advance payment bank guarantee in an amount
equivalent to USD 13 Million (Thirteen Million United
States Dollars), effective from the date of operation of
letter of credit to be issued by MGI. The advance
payment bank guarantee shall be issued through a bank
of international repute (Citibank, Commerce Bank or any
other similar bank mutually agreed) as per mutually
agreed text. All banking charges towards issuance and
confirmation of the advance payment bank guarantee will
be BHEL‟s account.
(d) 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.
(e) The remaining 43% of the Contract value (of the
Supply Agreement) shall be payable to BHEL
progressively against presentation of shipping documents
on pro rata dispatches.
(f) The remaining 5% of the Contract value (of the
Supply Agreement) shall be payable to BHEL against
issuance of Taking over Certificates by MGI. This
clause will be further discussed during contract
discussion.
(g) Mode of payment for (e) and (f) above shall be
through a confirmed and irrevocable Letter of Credit to
be established by MGI in favour of BHEL within a
maximum of Thirty Days from the date of signing the
Supply Agreement. The above Letter of Credit shall be
issued through a bank of International repute (Citibank,
Commerce Bank or any other similar bank mutually
agreed) as per mutually agreed text. All banking charges
towards issuance and confirmation of L/C will be to
MGI‟s account.
(h) It is agreed that BHEL will issue a performance bank
guarantee as per mutually agreed text for 10% of the
contract price of the Supply Agreement within two weeks
from the date of opening of L/C by MGI in favour of
BHEL.
4. RELEASE, WAIVER, DISCHARGE
(a) 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.
(b) Release by BHEL. Upon: (i) signing this Agreement,
(ii) signing of the Supply Agreement, and (iii) fulfillment
by MGI of its obligations set out under clause 3(d) BHEL
holds MGI free of any responsibility and waives its rights
against MGI 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.
(c) 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,
misrepresentations, 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 hereto, in
relation to the Disputed Matters and Turnkey
Contract.
(d) Upon fulfillment of all terms and conditions of this
Settlement Agreement, the Parties agree that they will not
take any further action or any other measure of any
nature, against each other or any of its affiliated
companies, directors, officers, counsels, agents or other
representatives, in relation to the Disputed Matters and
Turnkey Contract.
(e) 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 of 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. COMPLETION OF WORKS
BHEL undertakes to complete the unfinished systems,
including: (1) Fire Fighting System by end of October
2010, (2) Commissioning of the GTG‟s Units for 3&4 on
liquid fuel without undue delay, (3) DM Water System,
and (4) CCTV.
6. INCONSISTENCIES
In the event of any discrepancies or conflicts between
this Settlement Agreement and Schedule (1), the terms of
this Settlement Agreement shall prevail.
7. CONFIDENTIALITY AND VALIDITY
In the event this Settlement Agreement is not executed
for any reason whatsoever, none of the Parties will have
the right to use or refer to this Settlement Agreement and
Schedule (1) to arbitration or a court of law, or any other
quasi judicial proceeding.
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. COSTS
The lawsuit court fees paid by BHEL in connection with
the suit filed in the Delhi High Court shall not be claimed
by BHEL.
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 is
practicable."
27. Relevant would it be to note that annexed as Schedule-1 to the
agreement afore-noted was a detailed document delineating the scope of
work pertaining to 2XFr-6B Gas Turbine Unit as also the mode of payment
pertaining thereto.
28. As per the appellant, the settlement agreement dated August 22,
2010 read with the minutes of the meeting dated August 18, 2010 - August
21, 2010 is a complete accord between the parties and discharges the liability
of the appellant under the original contract dated March 04, 2007 as
modified on August 04, 2007. Thus, the appellant filed an application
registered as IA No.2852/2011 praying that the suit should be disposed of in
terms of the settlement and the bank guarantees be discharged.
29. In the application, with reference to the Supply Agreement
which was envisaged to be executed not later than September 27, 2010 (refer
clause 3(a) of the Settlement Agreement dated August 22, 2010), it was
pleaded in the application in para 7 as under:-
"7. It is further submitted that even though
the formal Supply Agreement was not signed/executed
by the parties, however pursuant to the process of
finalizing the Supply Agreement, BHEL in accordance
with the Settlement Agreement and in utter good faith
had commenced performing its obligations as stipulated
under the Settlement Agreement. BHEL till date has
completed approx 35% - 40% of the works in relation to
engineering, procurement, manufacture and assembly of
the two turbines. The said works performed by BHEL in
relation to the Turbines amount to INR 37 crores i.e.
USD 8.4 million (at the prevailing currency exchange
rates). The works were carried out by BHEL in good
faith and with due knowledge of MGI. The same was
informed to MGI orally during various discussions
BHEL had with the representatives of MGI and was
further brought to the notice of MGI vide the letter sent
by BHEL on 11 February 2011 along with the
photographs of the ongoing works in respect of the
2XFr6B Turbines."
30. In the reply filed by respondent No.1 to the aforesaid
application it was pleaded that the execution of the Supply Agreement was a
condition precedent for a binding obligation to arise and highlighted that 20
issues pertaining to the supply had yet to be agreed upon: (i) site conditions,
(ii) computation of liquidated damages, (iii) performance parameters of the
turbines, (iv) liquidated damages for failure to attain guaranteed
performance, (v) liquidated damages for delay/late delivery, (vi) delivery
terms, (vii) delivery period, (viii) number of lots, (ix) performance bank
guarantee, (x) warranty/defect liability, (xi) shipping dates, (xii) indemnity,
(xiii) supervision of erection and commissioning, (xiv) inspection, (xv)
approval of sub-vendors, (xvi) payment terms, (xvii) default and termination
and consequences thereof, (xviii) rectification and cure, (xix) dispute
resolution, and (xx) terms pertaining to staff, accommodation, travel, custom
clearance etc. It was thus pleaded that no settlement agreement which would
discharge appellant‟s liabilities under the contract in respect whereof the
bank guarantees were issued was arrived at between the parties. It was
prayed that the application be dismissed.
31. Vide impugned order dated August 31, 2012 the learned Single
Judge has dismissed IA No.2852/2011 and has also vacated the injunction
granted in favour of the appellant, i.e. has dismissed I.A.No.4049/2010. As
recorded by us in para 1 and 2 of the present decision while commencing our
journey, the learned Single Judge has not noted many facts on which parties
had placed reliance and thus we may very briefly note that after referring to
the pleadings of the parties, in para 19 of the impugned decision, the learned
Single Judge has noted that though in the plaint grant of injunction was
prayed on the plea of fraud and alternatively on the plea of irretrievable
injury to the plaintiff, but the same was not canvassed during course of
submission. But, opining that the bank guarantees are unconditional demand
guarantees, in paragraphs 24 onward till the learned Single Judge decided IA
No.4049/2010, with the discussion concluding in paragraph 40 of the
impugned order, the entire discussion pertains to whether a case of fraud or
irretrievable injury was made out with reference to the case law on the
subject.
32. There is obviously a disconnect in what the learned Single
Judge has recorded in paragraph 19 and what follows thereafter. If the
appellant had not argued the application with reference to the plea of fraud in
invoking the guarantee as also the plea of irretrievable injustice, where was
the occasion for the learned Single Judge to labour on the said issues?
Further, even the issue: Whether the guarantees were invoked in terms
thereof arising out of the pleadings in paragraphs 39 and 40 of the plaint and
the response thereto have just not been discussed by the learned Single
Judge. Even with respect to the discussion on the subject of fraud and
irretrievable injury, we find no discussion in the context of the pleadings in
paragraph 13, 14 and 46 of the plaint and the response thereto in the
corresponding paragraphs of the written statement.
33. With respect to the view taken that the Settlement Agreement
dated August 22, 2010 is not a complete accord, the learned Single Judge has
opined (refer para 55 of the impugned decision) that execution of the Supply
Agreement was an integral part of the Settlement Agreement and since the
Supply Agreement was not executed, it could not be said that the parties had
entered into an agreement which could be treated as a compromise between
the parties requiring the suit to be disposed of in terms of the compromise.
34. Learned counsel for the parties, Shri Amarjit Singh Chandhiok,
Additional Solicitor General and Shri Sandeep Sethi, Senior Advocate who
appeared for the appellant and Shri C.A.Sundaram, Senior Advocate and
Shri Neeraj Kishan Kaul, Senior Advocate who appeared for respondent
No.1 did not dispute the legal proposition: that of the many modes by which
a contract can be discharged, one mode is the same process by which it was
created i.e. by a mutual agreement. Learned senior counsel did not dispute
that parties to an original contract may enter into a new contract in
substitution of the previous contract. Learned senior counsel were not at
variance that the legal incidents of the substituted contract stand pithily
summarized on the subject of: „Discharge By Agreement‟, i.e. accord and
satisfaction, in the Treatise: CHITTY ON CONTRACTS (13th Edition-2008)
in paras 22-014 and 22-015 in the following terms:-
"22-014 Form of accord. At common law, accord and
satisfaction was no answer to a claim on a specialty, but
the rule was otherwise in equity and the latter now
prevails. The accord need not be in writing even if the
contract which it is sought to discharge, or for the breach
of which a claim is made, is required by law to be made
or evidenced in writing. An oral accord will suffice,
unless the accord itself constitutes a contract or
transaction which is required to be made or evidenced in
writing.
22-015 Executory satisfaction. At one time, a number
of cases appeared to establish the rule that satisfaction
was of no effect unless it was executed. While the
satisfaction remained executory, that is to say, so long as
the agreement to give satisfaction remained unperformed,
the original claim was not discharged, nor would any
action lie for breach of the accord. Even a tender of
performance of the satisfaction agreed upon was
adjudged insufficient. Only executed satisfaction would
suffice. This rule, however, was never completely
accepted and it is now established that satisfaction may
be executory. The question is one of the construction of
the accord: whether it was intended that the promise itself
or the performance of the promise should discharge the
original claim:
"The rational distinction seems to be, that if the
promise be received in satisfaction, it is a good
satisfaction; but if the performance, not the promise,
is intended to operate in satisfaction, there will be no
satisfaction without performance."
In the modern law, therefore, a claimant may still
insist upon the performance of some act by the other
party in satisfaction of his claim. In that case, there is
no satisfaction until performance, and the other party
remains liable on the original claim until the
satisfaction is executed. More often, however, the
claimant will agree to accept the other party‟s promise
of performance in satisfaction of his claim. The
original claim is then discharged from the date of the
agreement and cannot be revived. The claimant‟s sole
remedy, in the event that the other party fails to
perform, is by action for breach of the substituted
agreement, and he has no right of resort to the original
claim. If he wishes to preserve his right to proceed
with the original claim should the other party fail to
perform, an express term should be incorporated in
the agreement to that effect."
35. Thus, with reference to the substituted contract, it needs to be
discerned whether under the accord it is the promise which is received in
satisfaction of the dispute or whether it is the performance and not the
promise which is intended to operate in satisfaction of the accord.
36. The legal position and how the issue has to be approached, finds
a reflection in the decision of the Privy Council reported as 1914 AC 618
Payana Reena Saminathan v. Panna Lanapalaniappa, and the decision of
the House of Lords reported as 1918 AC 1 Morris v. Baron & Co., which
were cited with approval in the majority opinion of the Supreme Court in the
decision reported as AIR 1959 SC 1362 UOI v. Kishorilal Gupta & Bros.
The legal position being: Where the respective rights under a contract are
abandoned in consideration of the acceptance of promises under a new
agreement, new rights are born and the new agreement becomes a new
departure and the rights of the parties are fully represented by it. The
approach to the issue has to be to find either express words in the substituted
contract to said effect i.e. parties abandoning their rights in the previous
agreement and new rights being born under the new agreement or to find
whether the first contract is got rid of by a second contract which is capable
of being performed, i.e. the reciprocal obligations being set out with clarity,
and consequences of breach provided. In other words, if under the new
alleged contract, it is found that it lacks essential features of it being capable
of being performed, it would not be a case where parties have abandoned
their rights under the original contract. Since, fortunately for us, learned
senior counsel for the parties were not at variance on the legal position, our
task has become simple i.e. to peruse the Settlement Agreement and
determine whether the parties have agreed therein to get rid of the first
contract and create new obligations i.e. the promise being received in
satisfaction of the discharge under the original claim or whether it was the
performance (and not the promise) which was intended to operate in
satisfaction; and this exercise to be performed keeping in view the decisions
of the Privy Council and the House of Lords which were approved in the
majority decision by the Supreme Court in Kishorilal Gupta‟s case (supra).
37. With reference to the recitals of the Settlement Agreement dated
August 22, 2010, which have been reproduced by us in paragraph 25 of our
opinion, the first recital throws light that disputes had risen between the
parties with reference to the execution of the turnkey contract and the second
and the third recitals records that pursuant to the dispute, respondent No.1
had invoked the two advance payment bank guarantees and the performance
bank guarantee, and in respect whereof the appellant had obtained an interim
injunction. The fourth recital records that parties have agreed to settle all
disputes and differences on the terms and conditions herein after recorded
i.e. the operative covenants of the contract. The recital expressly makes it
clear that the minutes of the meetings from 18th to 21st August 2010 shall be
considered as an integral part of the Settlement Agreement. The last recital,
has a key to unravel the deadlock. It expressly records that after mutual
negotiations a settlement was arrived at and the purport of this Settlement
Agreement was to not only reduce the terms of the settlement in writing but
to discharge the parties from their obligations under the original contract
upon implementation of its terms and conditions as stated herein below.
Prima facie, the recital makes it very clear that it is not the promise but the
satisfaction of the promise which would have discharged the parties from
their obligations under the original contract.
38. However, there is much more to note and say on the subject for
the reason it is settled law that intention of the parties has to be gathered
after reading, as a whole, the contractual documents. We highlight that the
same very recital which prima facie leans in favour of the view that it was
not the promise but the performance of the promise which was intended to
be the satisfaction to discharge the obligations under the original contract,
records that the Settlement Agreement constitutes a final and irrevocable
settlement of all claims and demands of the parties in respect of the turnkey
contract, a language which is prima facie suggestive of the contrary i.e. that
the parties have agreed to venture a new journey.
39. But what are the operative clauses of the contract? It is
probably somewhere hidden within them, that the true intention of the parties
has to be found. Indeed it is.
40. We have reproduced the relevant clauses, being 1 to 9 of the
agreement in para 26 above of our opinion; and we revisit them one by one.
Clause 1 records that the parties are fully, unconditionally, irrevocably and
comprehensively bound to the Settlement Agreement in connection with the
disputed matters and their claims arising pursuant to the turnkey contract.
But, in the same very clause, i.e. the second part, records that it is the
execution of the Settlement Agreement in accordance with the terms and
conditions thereof that the parties would irrevocably and unconditionally
relinquish and waive their claims and demands under the turnkey contract.
41. In clause 1, the parties have not expressed themselves with
clarity and on the one hand have recorded that the Settlement Agreement
binds them unconditionally, comprehensively and irrevocably and in the
same breath have proceeded to record that the claims and demands under the
turnkey contract shall be discharged upon execution of the Settlement
Agreement. The problem is with the use of the word 'execution' in the
second part of the clause. Did the parties understand 'execution' to mean the
signing of the Settlement Agreement, for to execute an agreement would
mean parties appending their signatures thereto, or the parties used the word
'execution' as a synonym for the word 'performance'; to be understood to
mean that upon performance of the terms and conditions of the Settlement
Agreement the parties would relinquish and waive their claims and demands
under the turnkey contract?
42. Clause 1 also has scope for a debate and till now, if it was
boxing round, and we were match referees, we would say it is „One : One‟.
43. Does clause 2 tilt the balance? It records that the appellant has
to compensate respondent No.1 in sum of US$ 24,046,065.67 towards
procurement by respondent No.1 of materials and services provided at site
for scope of work which had to be executed by the appellant. It records that
for the work done a balance amount of US$ 11,046,065.67 is payable by
respondent No.1 to the appellant; and thereafter the clause records that by
affecting set-off, the appellant acknowledges a liability to pay US$ 13
million to the respondent.
44. The clause helps us no bit to understand on the subject we are
discussing. It simply records an accord that with respect to the turnkey
contract, after squaring off the respective claims i.e. affecting set-off,
appellant acknowledges a liability to pay US$ 13 million to the respondent
No.1. But whether the promise is the satisfaction to discharge the parties
from their obligations under the turnkey contract or it is the performance
thereof, the subject with which we are grappling, the clause throws no light.
Thus, till clause 2 it can be said that the parties are: „One : One‟. Let us see
whether clause 3 helps us. Its caption: „MANNER OF SETTLEMENT‟, is
expected to resolve the issue. Sub-para (a) of clause 3 records that the
promise under the accord to pay US$ 13 million to respondent No.1 would
be satisfied by the appellant by supplying either Turbines and Power
Generation Equipments comprising 2XFr6B GTG Units as per technical
proposals annexed as Annexure-1 to the Settlement Agreement or one unit
frame 9E, and for which contract the parties shall further negotiate and sign,
not later than September 27, 2010, a Supply Agreement. Sub-para (b) of
clause 3 records that US$ 13 million payable under the turnkey contract by
the appellant to respondent No.1 shall be adjusted as payment under the
Supply Agreement, whether it would relate to the 2XFr6B GTG Units or 9E
Unit frame, and this would constitute 52% of the contract value, meaning
thereby that the contract value for the proposed new contract would be US$
25 million. Prima facie, the game now leans in favour of respondent No.1
inasmuch as law requires that to break from the past contract, with reference
to an accord, the new contract has to be an executable contract and this
would mean the terms of the further journey and the new destination have to
be clearly defined. In other words, the execution of a Supply Agreement
was essential, to put it in yet different words, it was the execution of the
Supply Agreement which would have severed the parties from their
respective obligations to each other under the turnkey contract. But Sub-
para (c) of clause 3 of the Settlement Agreement records that when the
Supply Agreement was signed only then the settled amount i.e. US$ 13
million would be treated as an advance payment under the Supply
Agreement and simultaneously would oblige the appellant to issue an
advance payment bank guarantee in the amount equivalent to US$ 13
million. Simultaneously, to secure payment of further sum of US$ 12
million by respondent No.1 to the appellant, it would open a Letter of Credit.
The balance now shift in favour of respondent No.1 Sub-para (d) of clause 3
further shifts the balance in favour of respondent No.1 and against the
appellant, inasmuch as the clause clearly envisages that when the Supply
Agreement is signed i.e. executed and the condition of advance payment
bank guarantee referred to in para (c) of the clause is complied with,
respondent No.1, shall discharge the bank guarantees pertaining to the
turnkey contract and simultaneously, the parties shall make a joint
application to the Delhi High Court for resolution of the pending claims.
Sub-paras (e) and (f) of the clause record the stages at which the remainder
48% of the contract value under the Supply Agreement would be paid. Sub-
para (h) requires appellant to issue a performance guarantee for 10% of the
contract price under the Supply Agreement.
45. Clause 4, under the caption „RELEASE, WAIVER,
DISCHARGE‟, records that upon signing of the Supply Agreement and
issuance of the bank guarantee referred to in sub-para (c) of clause 3, alone
would respondent No.1 waive its rights against the appellant as regards the
disputed matters under the turnkey contract.
46. Clause 4 needs to be spoken of a little more. Since a contract is
the result of mutually agreed terms being accepted by the parties, its
novation by way of an accord has obviously to be the result of mutually
agreed terms. Whether it is the promise under a new agreement which is
intended to discharge the parties i.e. satisfy the claims under a previous
agreement or it is the satisfaction of the promise which was intended to
discharge the parties i.e. satisfy the claims under the previous agreements, is
the position which needs to be determined with reference to the language of
the accord. But what we find in the instant case is that the parties have
clearly intended to charter the journey through a different route. Clause 4 of
the accord clearly evidences that the mutually agreed terms of the accord are
that it is the signing of the Supply Agreement and issuance of the advance
payment bank guarantees referred to in sub-para (c) of clause 3 which was
intended by the parties to be the satisfaction of the accord to discharge the
appellant and respondent No.1 from their respective obligations under the
turnkey contract. The parties have clearly contemplated that unless, not only
the Supply Agreement is executed but is put into the journey of
„performance‟, the relationship, the rights and liabilities under the turnkey
contract would not stand discharged.
47. It had to be so. The accord is that with respect to the turnkey
contract, after effecting set-off, the appellant owed US$ 13 million to
respondent No.1, which amount became the advance payment in the hands
of the appellant pertaining to the new contract i.e. the Supply Agreement to
supply either equipment pertaining to the 2XFr6B GTG Units or the Unit
Frame 9E. Respondent No.1 had to be secured repayment of the said
advance under a bank guarantee. Further, it had to be secured, by way of a
performance guarantee, for the due performance of the obligations under the
new contract. The situation was akin to a baton being passed at a relay race.
Unless the previous runner, on the track, within the limited distance
recognized by the rules of the race, passes on the baton to the next runner,
alone she can fade away from the race, with the next runner completing the
next lap. Without the baton in hand, the next runner cannot run the lap.
With this analogy, one can understand that the intention of the parties was
that unless the accord i.e. the settlement amount i.e. US$ 13 million was not
secured by another bank guarantee and due performance of the new contract
was not secured by a performance guarantee, the parties would remain tied
with the umbilical cord to the turnkey contract. This is the reason why, as
per sub-paras (d) and (e) of clause 4, the parties clearly recorded that till the
Supply Agreement was executed and it took off with respect to respondent
No.1 being secured through a security advance guarantee and a performance
guarantee, neither party would be discharged from the obligations under the
turnkey contract. And what more clear language could the parties use, other
than in sub-para (e) of clause 4 when they recorded that the current
injunction proceedings shall temporarily be put on hold till the parties signed
the Supply Agreement.
48. Clause 5 of the Settlement Agreement is interesting. It shows
that even if the Supply Agreement was executed and the guarantees
envisaged under sub-para (c) of clause 3 were issued, not everything
pertaining to the turnkey contract would have stood discharged. Four items
of work which were unfinished pertaining to the turnkey contract were
required to be completed by the appellant. Thus it can be said that clause 5
of the Settlement Agreement is a residue clause, saving the performance of
some obligations under the turnkey contract. However, we hasten to add that
the clause in question is of no help to resolve the issue at hand which we are
discussing; but would simultaneously highlight that clause 3 and clause 4
have sufficient indicators, signposts and signage to point the direction in
which the parties intended to move. The victory is not on points but on a
clean knock out.
49. Clause 6, 7 and 8 of the Settlement Agreement have no bearing
on the issue at hand; and thus we reach clause 9, which requires that in the
event of any provision of the Settlement Agreement becoming invalid,
illegal or unenforceable or is declared so by any Court of competent
jurisdiction, the 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 agree upon one or more provisions which may be substituted
for the provision declared invalid, illegal or unenforceable, as nearly as is
practicable.
50. Prima facie clause 9 reflects the intention of the parties to save
such part of the Settlement Agreement which can be save upon a part thereof
being declared illegal, invalid or unenforceable.
51. We propose to discuss further clause 9 after we note the rival
submissions of the learned Senior Advocates who appeared for the parties
because the issue of severability would be inter linked to not only their
submissions but even to the overall structure of the agreement.
52. Mr. Amarjeet Singh Chandhiok, learned Additional Solicitor
General, had rightly urged that the Settlement Agreement, though factually
one entity, has two distinct severable parts, i.e. it is an agreement which is
factually one but conceptually two. The first part of the Settlement
Agreement, which is distinct from the second part thereof, is that the parties
have recorded a complete accord pertaining to the Disputed Matters relating
to the turnkey contract. They have listed the terms of the settlement in the
two sub-paras of clause 2 of the Settlement Agreement. Briefly recorded,
parties have settled that pertaining to the turnkey contract, the appellant
would pay to respondent No.1, by way of compensation, a sum of US$ 24,
046,065.67 and that for the work done by the appellant and accepted by
respondent No.1 US$ 11,046,065.67 are payable. Setting off the two sums,
the parties have recorded that appellant would pay to respondent No.1 sum
of US$ 13 million. Pertaining to the turnkey contract, the parties have
further agreed, as recorded in clause 5 of the Settlement Agreement, that
pertaining to the turnkey contract, the appellant would complete the
unfinished systems listed in clause 5 of the Settlement Agreement. In other
words, the parties have agreed that the turnkey contract shall be closed upon
the appellant completing the unfinished systems mentioned in clause 5 of the
Settlement Agreement and paying US$ 13 million to respondent No.1. The
Settlement Agreement, after crystallizing as aforesaid, and being a complete
accord, requiring satisfaction of the promise by the appellant to pay US$ 13
million to respondent No.1, proceeds to record the manner in which the
satisfaction of the promise would be made. And here enters the distinct
subsequent agreement, a new agreement, embodying the terms of the
satisfaction of the promise under the accord and clearly envisages that under
a Supply Agreement (to be executed by the parties not later than September
27, 2010), on the terms contained therein, the appellant would supply either
Turbines and Power Generation Equipment comprising of 2XFr 6B GTG
units or one unit frame 9E. Pertaining to the 2XFr 6B GTG units, as per
Annexure-1 to the Settlement Agreement, the description and the
specifications of the supplies to be made have been clearly spelled out as
also the terms of payment. The price has been agreed to, i.e. US$ 25 million.
It has been recorded that the amount crystallized under the accord pertaining
to the turnkey contract, i.e. US$ 13 million, payable by appellant to
respondent No.1, would be treated as an advance payment under the Supply
Agreement and the balance sum of US$ 12 million would be paid: 43%
progressively against presentation of shipping documents on pro-rate
dispatches and 5% against issuance of taking over certificate. The
Settlement Agreement further records that the mode of payment by
respondent No.1 to the appellant would be through confirmed and
irrevocable Letter of Credit. However, the Settlement Agreement i.e. the
Annexure-1 thereto, clearly requires the parties to negotiate further and agree
the date wherefrom supplies would be effected as also other commercial
terms and conditions. If the alternative pertained to 2XFr 6B GTG Units, the
parties were obliged to discuss further the proposal for installation and
commissioning of the Units, and these are to be found in clauses 3(iii)(c), (g)
and clause 5 of an appendix to the schedule. Clause 6 of the said appendix
requires appellant to submit an offer to the respondent No.1 regarding 2XFr
6B GTG Units with an option to buy Frame 9 instead of Frame 6.
53. As regards the alternative contemplated by the Settlement
Agreement, with respect to either supplying 2XFr 6B GTG Units or one unit
frame 9E, it is not in dispute that the parties agreed that the Supply Contract
would be with respect to the former, i.e. 2XFr 6B GTG Unit.
54. What happened due to which the parties could not execute the
Supply Agreement by September 27, 2010, is not clear from the pleadings of
the parties, but apparently the dialogue continued to settle such terms which
were required to be settled for the contract to be formally drawn up; and
needless to state the said unsettled terms were the ones which the parties had
in mind when they recorded in the Settlement Agreement that they would
negotiate further and agree to the dates wherefrom supplies would be
effected as also other commercial terms and conditions. These negotiations
took the parties till early January 2011, evidenced by a letter written by
respondent No.1 to the appellant on January 03, 2011, requiring the appellant
to reach Amman so that the matter pertaining to the 2XFr 6B GTG Units
could be finalized and the Supply Agreement drawn and executed. In the
said letter, respondent No.1 informed the appellant to ensure that somebody
should reach Amman latest by January 15, 2011, so that negotiations could
be held over the next two days and contract finalized by January 17, 2011.
On January 14, 2011, the appellant requested the meeting to be postponed,
and on January 20, 2011, the respondent No.1 terminated the Settlement
Discussions informing that there was an unjust delay, attributable to the
appellant, in executing the Supply Contract, date of execution of which was
fixed as September 27, 2010 under the Settlement Agreement. It was also
informed that the appellant was in breach of clause 5 of the Settlement
Agreement which obliged the appellant to complete the listed incomplete
works pertaining to the turnkey project.
55. It was rightly urged, and with which submissions we agree, by
Sh.Amarjeet Singh Chandhiok, learned Additional Solicitor General, that the
Settlement Agreement has two distinct parts and that the severability clause
No.9 does not render the Settlement Agreement to be void or non-est, if a
part of it was illegal, invalid or unenforceable. We also agree with the
submissions made by the learned Additional Solicitor General that this
would include a breach of a part of the Settlement Agreement, requiring the
remainder to be enforced. But this takes the appellant nowhere.
56. Every Settlement Agreement, which is by way of an accord
pertaining to a dispute under an existing contract, is bound to have two
limbs. The first limb is to record the term of the settlement, which would
mean the promise by one party to the other. The second limb would be the
manner in which the promise would be satisfied. Thus, the submissions
urged by the learned Additional Solicitor General would take us nowhere to
resolve and untie the knot, with which we are grappling, i.e. whether the
parties agreed under the accord that the promise be received in satisfaction of
the accord or it was the performance of the promise which would operate in
satisfaction of the accord. And on the facts of the instant case, as we have
already opined in paragraph 52 above, there is a problem with the
identification of the promise itself. Whether the promise under the accord is
accepted in satisfaction of the accord or whether the performance of the
promise is the satisfaction of the accord, is thus not even arising for
consideration, inasmuch as the promise which was intended to be the sine
qua non of the accord has not been fully crystallized. What we find on facts
is that as per the accord, the settlement amount i.e. US$ 13 million, has been
recorded as payable by the appellant to respondent No.1 and completion of
the listed incomplete works as per clause 5 of the Settlement Agreement, and
this was the promise under the accord. But the parties did not leave the
matter at that. Contemplating what would be the promise, the parties were
conscious of the fact that apart from the Settlement agreed amount, the mode
of payment thereof would also be within the ambit of the promise: akin to a
situation where „A‟ promises to pay „B‟ a sum of `500/- at 12 Noon on
January 01, 2012. The promise would be not only to pay `500/- but the time
as well. Further, if the promise was to pay `500/- at 12 Noon at Volga
Restaurant in Connaught Place Volga Restaurant, i.e. the place would also be
the part of the promise. The promise would embrace the amount, the time
and the place.
57. We highlight once again that as per the law noted by us in
paragraph 36 above, where the parties under a contract abandon their rights
in consideration of the acceptance of a promise under a new agreement
whereunder new rights are born and the new agreement becomes a new
departure, unless the promise is clearly defined there cannot be in law: A
new defined contract.
58. To overcome the problem, learned Additional Solicitor General
urged that law recognizes the distinction between a condition precedent and
a condition antecedent. The former would be a sine qua non for a contract to
come into existence and the latter would be a part of the contract. Learned
Additional Solicitor General urged that the Settlement Agreement had
included as Schedule-1, the minutes of the meetings drawn up pertaining to
the meeting held between August 18, 2010 and August 21, 2010 as also an
Annexure-1, in which, i.e. both documents the contractual terms and
conditions pertaining to the supply of the equipment relating to 2XFr 6B
GTG Units were listed, and thus urged the learned Additional Solicitor
General, that the Settlement Agreement distinctly embodies the Supply
Agreement, execution whereof was a mere formality, i.e. the execution of the
Supply Agreement was a condition antecedent of the agreement between the
parties and not a condition precedent for a contract to come into existence.
In other words the submission was that the promise under the accord relating
to the terms of the discharge of the promise was a complete promise, and not
as urged by learned Senior Advocates appearing for respondent No.1.
59. The minutes of the meetings held between August 18, 2010 and
August 21, 2010, which are an integral part of the Settlement Agreement,
vide clause 3(iii)(g) and clause 4 stipulate as under:
"3(iii)(g) All other commercial terms and conditions shall
be mutually agreed between MGI and BHEL as per
following schedule:
Draft contract to be submitted by BHEL to MGI by 1 st
September 2010.
MGI to furnish their comments on the draft contract
by 9th September 2010.
Mutually agreed contract to be finalized and signed
between MGI and BHEL during a meeting on 27th
September 2010
For the purposes of the above, both parties shall agree to
adhere to the dates mentioned herein. However, in case of
minor changes/deviations, the parties shall mutually agree
upon the revised dates.
4. The time schedule mentioned in the offer dated 11th
August, 2010 was not acceptable to MGI and both parties
will mutually agree upon a revised time schedule during the
Purchase Contract discussions."
60. It is apparent that the parties had to agree some commercial
terms and conditions as also the time schedule to execute the contract
pertaining to 2XFr 6B GTG Units. It is true that the technical details
pertaining to the supply items have been put down in detail, but pertaining to
a supply and installation contract to be a concluded and a binding contract
coming into being, not only the price of the goods and the description
thereof, but even the time and mode of the delivery; installation and
execution thereof and other commercial terms, for example, excise, sales tax,
custom duties, transportation charges etc. etc. would require to be finalized
before an identifiable promise comes into existence. Sans all these, the
discussions pertaining to the promise would be inchoate. In the instant case,
the parties clearly understood that they had broadly agreed to some of the
essential features of the promise pertaining to the Supply Agreement, and
had additionally clearly understood that a few of them remained to be firmed
up and this is the reason why the Settlement Agreement clearly records that
unless the Supply Agreement is drawn up, the parties would not be released
of their obligations under the turnkey contract.
61. On facts, we may summarize that the Settlement Agreement is
an accord requiring appellant to pay US$ 13 million to the respondent No.1
and additionally complete the unfinished works detailed in clause 5 of the
Settlement Agreement. The promise under the accord i.e. to pay US$ 13
million is by way of executing another contract valued at US$ 25 million,
requiring the amount under the accord i.e. US$ 13 million to be treated as
advance payments under the said contract. The accord does not treat the
promise as satisfaction of the claims under the original contract nor does the
accord contemplate the performance of the promise to be the satisfaction of
the claim under the original contract, but contemplates a third kind of a
situation i.e. unless all the parameters of the promise were finalized and new
rights and liabilities were created, the past rights and liabilities were not to
be extinguished. With respect to the bank guarantees issued under the
turnkey contract, the Settlement Agreement i.e. the accord clearly
contemplates the validity thereof to be existing and the right and liability
thereunder to be existing till the Supply Agreement was executed and the
two guarantees i.e. Advance Payment Guarantee and Performance Guarantee
pertaining to the Supply Agreement executed. To put it in other words, as
regards the bank guarantees which were issued pertaining to the turnkey
contract, parties clearly agreed that these guarantees would enure till
discharged, and the discharge to be simultaneous with the execution of fresh
Advance Payment Guarantee and Performance Guarantee pertaining to the
Supply Agreement.
62. Realizing that the appellant had to overcome the aforesaid
intention of the parties, Shri Amarjit Singh Chandhiok, learned Additional
Solicitor General had urged that it is one thing to say that I have settled and
it is altogether another thing to say that I will tell somebody else that I have
settled. To make good the argument, learned Additional Solicitor General
referred to sub-para (d) of para 3 of the Settlement Agreement, which reads:
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.
63. The argument was that the execution of the Supply Agreement
being a condition antecedent to the accord, and in law a Supply Agreement
having come into existence, the bank guarantees stood discharged as far as
the respondent No.1 was concerned and this has been covenanted by the
parties in sub-para (d) of clause 3 of the Settlement Agreement. Dovetailing
clause 9 of the agreement under the caption: SEVERABILITY, learned
Additional Solicitor General urged that if for any reason the Supply
Agreement fell, or there was a dispute in relation thereto, the remainder
under the Settlement Agreement had to be severed and the same would
survive. In other words, what was urged was that whatever be the position
pertaining to the Supply Agreement, the accord in relation to the bank
guarantees being discharged had to be given effect to.
64. We have already opined against the stand taken by the appellant
with respect to the execution of the Supply Agreement being a formality or a
condition antecedent. We have already held that not all what would have
constituted the promise under the Supply Agreement was negotiated by the
parties when the Settlement Agreement was executed. Many aspects of the
promise pertaining to the Supply Agreement were settled and finalized, but
parties clearly understood that many aspects of the promise pertaining to the
Supply Agreement had yet to be finalized and thus they fixed the date
September 27, 2010 to do the needful, and thereafter, in writing, reduce the
terms of the Supply Agreement for future reference. We have already held
that the parties clearly agreed that till the bank guarantees contemplated
under the Supply Agreement were executed, the bank guarantees under the
turnkey contract would not be discharged. This intention is to be specifically
found in sub-para (d) of clause 3 of the Settlement Agreement where the
parties have recorded that respondent No.1 undertakes to discharge (and we
emphasize the use of the word 'undertakes') the bank guarantees under the
turnkey contract when appellant will get issued through a bank of
international repute the bank guarantee referred to in paragraph (c) of the
clause; and suffice would it be to state that as per said paragraph the bank
guarantee to be got issued through a bank of international repute was the
advance payment bank guarantee in sum of US$ 13 million.
65. It made commercial sense for respondent No.1 to so insist.
Under the Settlement Agreement i.e. the accord, which was a severable
accord, requiring: if the latter part failed the former to survive; the appellant
agreed liability to pay US$ 13 million to respondent No.1 and needless to
state this liability would have the composite element of non-performance of
the obligations by the appellant thereby entitling respondent No.1 to invoke
the performance guarantee as also excess payments made by respondent
No.1 to the appellant after effecting set-off and thus rendering the advance
payment guarantees liable to be invoked. The parties clearly understood,
may be at the insistence of respondent No.1, that it would not permit any
chink in its armour by releasing the bank guarantees under the turnkey
contract without obtaining back to back guarantees under the Supply
Agreement and these guarantees under the Supply Agreement were to be in
sum of US$ 13 million to secure advance payment under the second contract
i.e. the guarantee in sum of US$ 13 million and another bank guarantee in
sum of US$ 2.5 million to secure due performance of the Supply Agreement,
for the reason the performance guarantee had to be 10% of the value of the
supply contract which was agreed to be US$ 25 million.
66. We thus agree with the conclusion arrived at by the learned
Single Judge, but not on the reasoning of the learned Single Judge, and on
the strength of the reasoning herein above noted that no compromise was
effected between the parties of the kind which satisfied the dispute which
was the subject matter of the instant suit, requiring the suit to be disposed of
in terms of the compromise. The dispute settled by the parties was to close
the turnkey contract by setting off the amounts found due and payable to the
appellant with respect to the amounts paid by the respondent No.1 to it and
such amounts to which respondent No.1 would be entitled to on adjustment
for works not carried out by the appellant, and the net position being the
appellant was liable to pay US$ 13 million to respondent No.1. The matter
would have rested if the accord simply stopped there, requiring appellant to
pay, in cash, US$ 13 million the respondent No.1, and in said circumstance
the parties would have certainly decided that the suit could be disposed of as
compromised by appellant either simultaneously paying US$ 13 million to
respondent No.1 or that under the bank guarantees which were invoked by
respondent No.1, only said sum could be released. But, this did not happen
and thus it cannot be said that with reference to the dispute pertaining to the
bank guarantees a compromise took place which embraced the subject matter
of the suit. We highlight once again that as per sub-para (e) of clause 4 of
the Settlement Agreement pertaining to RELEASE, WAIVER AND
DISCHARGE the parties have clearly recorded that the current injunction
proceedings being deliberated by the High Court of Delhi shall not be
withdrawn till signing of the Supply Agreement and only by way of a joint
application to record the terms of the settlement so that a compromise decree
could be passed.
67. This takes us to the next part of the discussion pertaining to the
invocation of the three bank guarantees in question, which question would
have a sub-issue to be answered with reference to the Settlement Agreement
having two distinct parts and a Severability clause therein. Whether or not,
in the instant proceedings, it would arise for determination by the Court as to
who was responsible for the Supply Agreement not being executed inasmuch
as, the learned Additional Solicitor General urged that if respondent No.1
was responsible for non-execution of the Supply Agreement, and the take off
clause thereof not taking off, breach would be attributable to respondent
No.1 and since there was a complete accord pertaining to the turnkey
contract, the appellant would stand relieved of the obligations to have
furnished the bank guarantees, meaning thereby the bank guarantees would
have to be treated as discharged.
68. We are of the opinion that the said issue would not arise for
consideration in the instant suit and irrespective of the fact whether
respondent No.1 acted as a horrible party and was wholly responsible for the
Supply Agreement not being executed, the same would have no bearing on
the continued rights under the bank guarantees which were invoked, for the
reason this dispute would be a distinct dispute, required to be severed under
the severability clause of the Settlement Agreement and to be adjudicated
upon independently. We are thus not dealing with the issue that there is
some evidence to support the stand of the appellant that pertaining to the
supply contract it had started fabricating the equipment which was to the
knowledge of respondent No.1 and thus said respondent would be estopped
from acting in a manner which would breach the supply contract. Even if
this be so, the appellant would have an independent cause of action to sue for
breach thereof.
69. From the pleadings in the plaint we find that invocation of the
three bank guarantees has been challenged on the plea of fraud in the factual
setting pleaded in paragraphs 13 and 14 of the plaint which we have
reproduced in paragraph 15 of our opinion; on the plea that the bank
guarantees have not been invoked validly as per the pleadings in paragraph
No.39 and 40 of the plaint which we have reproduced in paragraph 16 and
17 of our opinion and lastly on the plea of irretrievable injury as per pleading
in paragraph 46 of the plaint, noted in para 19 above.
70. On the subject of there being a fraud in invoking the bank
guarantees, learned Additional Solicitor General who appeared for the
appellant, stated that the fraud was that notwithstanding the appellant having
completed the turnkey contract, the performance guarantee as also the two
guarantees pertaining to advance payments were invoked. It was highlighted
that in the pleadings, the respondent No.1 had admitted said fact while
responding to the averments made in para 13 of the plaint. Learned
Additional Solicitor General urged that there was an apparent malice in not
issuing the „Taking Over‟ certificate; and hence the fraud.
71. We have noted in para 15 of our opinion the pleadings in para
13 and 14 of the plaint and have highlighted, in para 19 of our opinion, that
since the response was prolix and lengthy, and if reproduced would span
nearly 20 pages, we would be summarizing the response; and while
summarizing the response have noted that as against the four contractual
dates: January 31, 2008, February 10, 2008, May 22, 2008 and June 05,
2008, the works were completed on the dates mentioned in para 13 of the
written statement i.e. May 11, 2009, June 04, 2009, November 19, 2009 and
February 26, 2010 i.e. with an extreme delay. The respondent No.1 has also
highlighted that though commissioned, several elements were found missing
and the biggest problem was a material non-performance, inasmuch as the
plants were required to run on dual fuel system i.e. liquid and gas. The
systems were capable of running only on liquid fuel. The written statement
also highlights various works not executed by the appellant which were then
executed by respondent No.1 to complete the works (and in respect of which
we find considerable evidence even in the Settlement Agreement of August
22, 2010). Besides, the written statement highlights the incomplete works,
which were listed in paragraph 5 of the Settlement Agreement.
72. The contract clearly envisaged the respondent No.1 to issue a
Taking Over certificate after the works were satisfactorily completed. In the
instant case, not only the pleadings in the written statement but even the
documents filed by both parties would reveal that prima-facie the works
were not completed as per contract. Four units were set up, but not as per a
turnkey contract. The units were not running on a dual fuel system. They
could not be operated on liquid fuel. If this be so, respondent No.1 could
have rejected the entire works and proceeded to invoke the bank guarantees
and additionally sue for a refund of all amounts paid to the appellant as also
damages. We need not reiterate our discussion with respect to the
Settlement Agreement which records unsatisfactory executed works; monies
payable to the respondent No.1 from the appellant and vice-versa; net
amount being payable to respondent No.1.
73. The plea of fraud, prima-facie, fails on the facts and thus we
need not note the case law cited on either side on the issue: Whether the plea
of fraud in invoking the bank guarantee would be with reference to a fraud in
the issuance of a bank guarantee or a fraud in enforcing the guarantee. But
we cannot refrain from observing that under what circumstances certain
decisions hold that a plea of fraud must relate to the issuance of the bank
guarantee, is not clear to us for the reason one of the first reported decisions
on a plea of fraud made prima-facie good, acting as an exception to the rule
of absolute independence of a bank guarantee, is the opinion of Shientag J.
reported as 31 NYS 2d 631 Sztejn v. J.Henry Schroder Banking Corp. The
year was 1941. Injunctions under letters of credit were not issued by
Courts. Mr.Sztejn had placed an order for quality bristles from India and
payment was secured by means of a letter of credit. Somehow Mr.Sztejn
discovered that the shipment made was crates of worthless rubbish. He went
to the bank with a request not to pay under the letter of credit and received a
response from the bank that being an independent undertaking of the bank it
had to pay when documents were presented with bill of exchange to
negotiate the letter of credit. Mr.Sztejn went to Court alleging fraud in
invoking the letter of credit and made prima-facie good his allegation, that as
against the contracted goods i.e. quality bristles, worthless material was
shipped. Noting a fraud, the Court issued an injunction. The exception
carved out by Shientag J. was accepted by the Courts in England in the
decisions reported as 1958 (2) QBD 127 Hamzen Milas & Sons v. British
Imex Industries Ltd., 1977 (2) All.E.R. 862 R.D.Harbottle Mercantile Ltd. &
Anr. v. National West Minister Bank Ltd., 1978 (1) All.E.R. 976 Edward
Oven Engineering Ltd. v Barklay's Bank International Ltd., and 1982 (2)
All.E.R. 720 UCM (Investment) v. Royal Bank of India, in which decision
the opinion of Shientag, J. was hailed as a landmark case by Lord Diplock, J.
74. In our opinion, the first judgment with respect to a plea of fraud
acting as an exception in a letter of credit, and which would apply even to
bank guarantees, and which opinion set the trend even in Common Law
Jurisdiction, pertained to a plea of fraud in invoking the guarantee and not at
the time when the guarantee was issued; and thus we hardly see any scope
for a debate on the subject that the plea of fraud recognized by Courts as an
exception would be limited to when the guarantee was issued.
75. However, on the facts of the instant case we find no fraud made
prima-facie good, when the bank guarantee was invoked.
76. On the subject of irretrievable injustice/injury, the said defence
against the bank guarantee being invoked, has been predicated by the
appellant with respect to the averments made in paragraph 46 of the plaint;
contents whereof have been noted by us in paragraph 18 of our opinion. The
plea is rested on the pleading that if respondent No.1 receives the amount
under the bank guarantees the appellant will never be able to recover it since
respondent No.1 is based in Jordan and has no assets outside Jordan and
there is no established system in Jordan to enable the appellant to recover the
amount if it has an award in its favour. The response to said paragraph has
been noted by us in paragraph 19 of our opinion and suffice would it be to
highlight that the admitted position is, as pleaded in the written statement,
that Jordan is a signatory to the New York Convention. The contract
between the parties has a remedy by way of arbitration in London; governed
by ICC Rules. Thus, on facts, it cannot be said that the appellant has made
out a prima facie case of irretrievable injury. In fact, what the appellant
really intended to plead was a case of special equity, for the reason an
irretrievable injury is always contemplated of a kind which was noted in the
celebrated decision reported as 566 Fed. Supp. 1210 Itek Corpn. v. First
National Bank of Boston which was noted with approval by the Supreme
Court in the decision reported as 1988 (1) SCC 174 U.P. Co-operative
Federation Ltd. v. Singh Consultants & Engineers. Special equities is also
an exception recognized against the rule of absolute invocation of bank
guarantees in terms of the bank guarantees. Courts have used the two
expressions „Special Equity‟ and „Irretrievable Injustice‟, as interchangeable
expressions. One instance of a Special Equity is to be found in the opinion
of Lord Dening M.R. reported as 1966 (2) Lloyd‟s List Law Reports 495
Elian & Rabbath (Trading as Elian & J Rabbath) v. Massas & Ors. In that
case the first defendants' Greek motor vessel 'Flora M' was chartered by
Lebanese charterers for carriage of plaintiffs' cargo (consigned to Hungary)
from Bairut to Rijeka. Discharge was delayed at Rijeka and Ship owners
exercised lien on cargo in respect of demurrage. Third defendant bank put up
guarantee in London in favour of second defendant (first defendants' London
agents) to secure release of cargo. There was a claim by Yugoslavians to
distrain on goods, involving ship in further delay and master of Flora M, on
lifting original lien, immediately exercised another lien in respect of extra
delay (which was raised when Hungarian buyers put up 2000). Two years
later, shipowners claimed arbitration with charterers to assess demurrage for
which first lien was exercised and claimed to enforce guarantee. Plaintiff
claimed declaration that guarantee was not valid and injunction to restrain
shipowners or their agents from enforcing guarantee. First and second
defendants appealed against granting of injunction by Blain, J. It was held by
the Court of Appeal that it was a special case in which the Court should
grant an injunction to prevent what might by irretrievable injustice. Lord
Denning, M.R., observed that although the shippers were not parties to the
bank guarantee, nevertheless they had a most important interest in it. If the
Midland Bank Ltd., paid under this guarantee, they would claim against the
Lebanese bank who in turn would claim against the shippers. The shippers
would certainly be debited with the account. On being so debited, they
would have to sue the shipowners for breach of their promise express or
implied, to release the goods. Lord Denning, M.R., further posed the
question were the shippers to be forced to take that course? Or can they
shortcircuit the dispute by suing the shipowners at once for an injunction?
He further observed at page 497 of the Report that this was a special case in
which injunction should be granted. Lord Denning, M.R. went on to observe
that there was a prima facie ground for saying that on telex messages which
passed (and indeed, on the first three lines of the guarantee) the ship owners
promised that, if the bank guarantee was given, they would release the
goods. He further observed that the only lien they had in mind at that time
was the lien for demurrage. But would anyone suppose that the goods would
be held for another lien? It can well be argued that the guarantee was given
on the understanding that the lien was raised and no further lien imposed and
that when the shipowners, in breach of that understanding imposed a further
lien, they were disabled from acting on the guarantee.
77. We may only highlight that the expression 'That it was a
special case' in which the Courts should grant an injunction to prevent what
might be irretrievable injustice had caught the eye of the Supreme Court in
U.P.Co-operative Federation case (supra) (refer para 16), and needless to
state with approval.
78. But, as we have already noted herein above, the pleadings in the
plaint, on the subject of either irretrievable injury or a special
circumstance/special equity are found to be prima-facie wanting in making
out a prima-facie case for grant of an injunction.
79. And this takes us to the last plea: Whether the guarantees were
invoked in terms thereof, and for which the rival pleadings would be as per
para 39 and 40 of the plaint, reproduced by us in para 16 and 17 of our
opinion, and the summarized response thereto in the corresponding
paragraphs of the written statement as per what we have noted in paragraph
19 of our opinion.
80. From the pleadings of the appellant, pertaining to the
performance guarantee, it is apparent that the fulcrum rests on the words: in
the event that the Principal failed to fulfill his contractual obligations under
and in conformity with the terms of the contract; and the argument is that the
terms of the contract not being fulfilled, as per the contract, is an integral
part of the bank guarantee. Thus, notwithstanding that a bank guarantee is
an independent contract, in the instant case, pertaining to the performance
guarantee, the parties have made the contract a part of the bank guarantee.
Extending the argument, reliance is placed upon sub para „a‟ of the bank
guarantee in question, where the words used are: That the Principal has
failed to fulfill their obligation in accordance with the conditions of the
contract. Sh.Amarjeet Singh Chandhiok, learned Additional Solicitor
General urged that the letter invoking the bank guarantee in question,
contents whereof have been noted by us in paragraph 13 above, is not in
conformity with the performance guarantee inasmuch as it merely reiterates
parrot like words of the bank guarantee. The words in the letter invoking the
bank guarantee to the effect that the principal has failed to fulfill their
obligation in accordance with the contract are unintelligible and are
meaningless words unless and until a reference was made to some particular
obligation which the principal had failed to perform in the judgment of the
respondent was the submission made. Pertaining to the two bank guarantees
to secure advance payments, learned Additional Solicitor General
highlighted sup-para „a‟ of the two guarantees where the words used were:
That the Principal has failed to fulfill their obligation for adjustment of the
advance payment in accordance with the conditions of the contract.
Subsequently reduced to US$ 2 million, the guarantee being the same,
learned Additional Solicitor General urged that for the submissions made
pertaining to the performance guarantee, the invocation of the two bank
guarantees with respect to advance payment being secured were not in
accordance with the terms of the guarantee. Reliance was placed upon the
decision of the Supreme Court reported as 1999 (8) SCC 436 Hindustan
Construction Co.Ltd. v. State of Bihar & Ors., where the words in the bank
guarantee pertaining to secure the advance mobilization loan: 'In the event
that the obligations expressed in the said clause of the above-mentioned
contract have not been fulfilled by the contractor giving the right of claim to
the employer for recovery of the whole or part of the advance mobilization
loan from the contractor under the contract' were interpreted by the
Supreme Court as clearly referring to the original contract and the guarantee
becaming liable to be invoked only in circumstances referred to in clause 9
of the contract and in that context opined, in para 14 of the opinion.
81. The decision afore-noted has been explained by the Supreme
Court in a later decision reported as AIR 2007 SC 2361 State Bank of India
& Anr. v. Mula Sahakari Sakhar Karkhana Ltd., in paragraphs 30 to 32, by
highlighting that the rectial in the bank guarantee which was being
considered by the Supreme Court in Hindustan Construction Co. Ltd.'s case
(supra) had indicated clearly, by referring to clause 9 of the contract, that the
parties were embodying the contract in the bank guarantee, and thereafter the
use of the words: 'in the event that the obligations expressed in the said
clause of the above-mentioned contract‟ made it clear that by referring
specifically to clause 9 in the recital and thereafter reflecting the same in the
operative part of the bank guarantee, the bank had qualified its liability to
pay the amount. In other words, the defaults had to be specifically listed or
in other words the guarantee was conditional.
82. The three bank guarantees at hand simply make a reference to
they being issued pursuant to the contract between the parties and we may
note that virtually all bank guarantees which we have come across refer, in
the rectial, to the guarantee being executed pursuant to a condition under the
main contract obliging the contractor to furnish a bank guarantee(s). A
recital in a bank guarantee to the effect, of it being issued pursuant to a term
in the contract, requiring the bank guarantee to be furnished would not mean
that the terms of the contract get embodied in the terms of the bank
guarantee, unless a condition of a contract is made an integral part of the
operative part of a bank guarantee as was to be found in the decision in
Hindustan Construction Co.‟s case (supra). Otherwise, the issue has to be
approached: On the premise that a bank guarantee is an independent contract
unrelated to the main contract.
83. The operative parts of the guarantees in question do not embody
any term of the contract as a condition for the invocation thereof. The
guarantees clearly use the expressions: 'hereby irrevocably undertake to pay
to you on your first written demand.'
84. With respect to the submissions urged that parrot like
reproduction of the language of the bank guarantees is insufficient, suffice
would it be for us to state that the advance payment guarantees simply
require the beneficiary, while raising the demand in writing, to incorporate in
the demand three statements: (i) the principal has failed to fulfill their
obligation in accordance with the conditions of the contract, (ii) the amount
which the principal has failed to fulfill; and (iiii) the principal has failed to
perform or fulfill any material act or obligation under the contract despite 30
days‟ calendar notice. The performance guarantee simply requires it to be
stated that the principal has failed to fulfill its obligation for adjustment of
the advance payment in accordance with the conditions of the contract and
secondly the amount which the principal has failed to fulfill.
85. A bank guarantee has to be strictly construed. If the parties
chose to incorporate as above, they have to be bound to what they chose. To
accept the argument advanced by the learned Additional Solicitor General
would mean that letters invoking bank guarantees have to be a virtual plaint.
86. Having negated the three grounds on which the invocation of
the bank guarantees was challenged, as per the pleadings, we proceed to note
some additional submissions made by learned Senior Counsel for the
appellant, which strictly speaking do not arise out of the pleadings in the
suit.
87. The first additional submission urged was that when issued, the
performance guarantee envisaged a contract value of US$ 117 million which
admittedly got reduced to US$ 100 million. Thus, it was urged that the
performance guarantee could not be invoked beyond a value 10% of the
original contract price.
88. It may be true that when the bank guarantee was issued at 10%
of the value of the contract i.e. to secure due performance and default valued
at US$ 11.7 million and later on the contract price was reduced, but it was
for the appellant to have got the bank guarantee modified suitably. As
regards the bank and the beneficiary, the guarantee amount remained the
same.
89. It was urged that since there are traces of acquiescence on the
part of respondent No.1 in the appellant proceeding to fabricate the
equipment covered by the Supply Agreement (which as we have noted above
was never executed), prima-facie it would be an invocation of the bank
guarantees which lacked good faith or it being enforced with an oblique
purpose.
90. In the decision reported as (2002) 1 SLR 1 Samwoh Asphalt
Premix Ptc. Ltd. v. Sum Cheong Piling Pte Ltd. the Court of Appeal in
Singapore held that where a bank guarantee was invoked as a 'bargaining
chip' or as a 'deterrent' or in an 'abusive manner' it would amount to calling
a guarantee for an oblique purpose, justifying the issuance of an injunction.
This decision was relied before the Supreme Court on the argument of 'lack
of good faith' and/or 'enforcing with an oblique purpose' in the decision
reported as 2006 (2) SCC 728 BSES Ltd. v. Fenner India Ltd. Refusing to go
for the bite, the Supreme Court held:-
"We are afraid that in the face of the law succinctly laid down
in U.P.Coop. Federation and reiterated in numerous
judgments of this Court referred to earlier, we are unable to
accept the wide proposition of law laid down in the foreign
judgments cited by Mr.Sorabjee. Whatever may be the law, as
to the encashment of bank guarantees in other jurisdictions,
when the law in India is clear, settled and without any
deviation whatsoever, there is no occasion to rely upon
foreign case-law."
91. This closes the legal debate, which reaches its destination
against the appellant.
92. But we have a word to be spoken of. What if, all the aforesaid
facts were told to a layman with a request to take a decision as a reasonable
man, using the tools of reason and logic. The fact would be that under the
turnkey contract the appellant managed to set up gas turbine units which
could operate only on one fuel system and not dual fuel system. Even the
executed works were not fully complete when the plant was put into
operation. The appellant delayed the setting up of the four turbine units. It
did not supply all the equipment which was to be supplied thereby
compelling respondent No.1 to procure and install at its own level the
equipment in question. The parties negotiated and mutually agreed that a net
sum of US$ 13 million is due from the appellant to respondent No.1. They
settled to close the contract requiring appellant to pay respondent No.1 a sum
of US$ 13 million and additionally (refer clause 5 of the Settlement
Agreement) that the appellant would complete the unfinished works. The
common man would obviously say that the appellant has become liable to
pay respondent No.1 US$ 13 million and such amount as would be payable
for the unfinished works listed in clause 5 of the Settlement Agreement. On
being further informed that the bank guarantees under the turnkey contract
are still alive and were clearly envisaged to be substituted by bank
guarantees in sum of US$ 13 million (to secure repayment of US$ 13 million
treated as advance payment in the hands of the appellant for the Supply
Agreement) and also issue a performance guarantee in sum of US$ 2.5
million for the Supply Agreement contract, and that the said guarantees were
not issued for the reason the Supply Agreement was never executed, and
required to factor in the same in the decision making process and then reach
the conclusion, the common man is bound to say, or at least in all reasonable
probability would say: that prima-facie the appellant must pay respondent
US$ 13 million and such sum as would be required to complete the balance
works.
93. We accordingly dismiss the two appeals but without there being
any order as to costs.
(PRADEEP NANDRAJOG)
JUDGE
(MANMOHAN SINGH)
JUDGE
SEPTEMBER 12, 2012
dk
