Delhi High Court
Isco Track Sleepers Pvt. Ltd. vs Delhi Airport Metro Express Pvt. ... on 4 June, 2014
.* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment pronounced on : June 04, 2014
+ O.M.P. 704/2013
ISCO TRACK SLEEPERS PVT LTD ..... Petitioner
Through: Mr. R.K. Sanghi & Mr. Satyendra
Kumar, Advs.
versus
DELHI AIRPORT METRO EXPRESS PVT LTD & ANR
..... Respondents
Through: Mr. Arvind Nigam, Sr. Advocate
With Mr. Dinesh Pardasani,
Ms. Isha J Kumar & Ms. Sneha,
Advs. for R-1.
Ms. Shilpa Gupta, Adv. for R-2
+ O.M.P. 702/2013
PATIL RAIL INFRASTRUCTURE PVT LTD ..... Petitioner
Through: Mr. R.K. Sanghi & Mr. Satyendra
Kumar, Advs.
versus
DELHI AIRPORT METRO EXPRESS PVT LTD & ANR
..... Respondents
Through: Mr. Arvind Nigam, Sr. Advocate
with Mr. Dinesh Pardasani,
Ms. Isha J Kumar & Ms. Sneha,
Advs. for R-1.
Ms. Shilpa Gupta, Adv. for R-2.
CORAM:
HON'BLE MR.JUSTICE MANMOHAN SINGH
OMP Nos.702/2013 & 704/2013 Page 1 of 38
MANMOHAN SINGH, J.
OMP No.704/2013
1. The petitioner has filed the petition under Section 9 of the
Arbitration and Conciliation Act, 1996 (hereinafter referred to as "the
Act") seeking the following reliefs:
(a) Pass ex parte ad interim order restraining the
respondent No.1 and respondent No.2 encashing the
Bank Guarantee in any manner whatsoever;
(b) Pass an ex-parte ad interim order restraining the
respondent No.2 from making any payment to
respondent No.1 in any manner whatsoever including
handing over of a demand draft/pay order and
restraining the respondent No.1 from depositing/
encashing the draft issued by the respondent No.2 and
respondent No.2 be restrained from honouring the
demand draft/pay order issued to respondent No.1 in
any manner whatsoever and respondent No.2 be
directed to credit the amount to the account of
petitioner forthwith;
(c) If the amount has been received by respondent No.1
then respondent No.1 be directed to refund the
amount to respondent No.2 forthwith;
(d) Confirm the order passed in terms of prayers (a), (b)
and (c), after notice to the respondents.
2. The petitioner ISCO in OMP No.704/2013 has entered into
contract for supply of sleepers with respondent No.1, Delhi Airport
Metro Express Pvt. Ltd. (in short, called the "DAMEPL") under the
Contract dated 19th November, 2009. The petitioner was to submit a
Performance Bank Guarantee. The relevant clause of the contract
being Article 7 under which the respondent can invoke the bank
guarantee is reproduced as under:
Article 7 is reproduced herein below: -
"Article 7: PERFORMANCE BANK GUARANTEE
7.1 ISCO shall within fourteen (14) days of the signing
of the Contract provide an unconditional performance
bank guarantee for an amount equal to ten per cent (10%)
of the Contract Price ("Performance Bank Guarantee") for
performance of all its obligations under the Contract.
7.5 DAMEPL shall be entitled to call upon the
Performance Bank Guarantee in the following
circumstances:
(a) for recovery of liquidated damages payable under the
contract;
(b) for any payment due to DAMEPL on termination of the
Contract; and
(c) for any loss or damage caused to DAMEPL due to any
act or omission of ISCO under the Contract excluding
Article 11.7."
3. The word 'Contract' is defined in Article 1.14 to mean the
Contract comprising of the documents listed in Article 1.4. In Article
1.14, the Performance Bank Guarantee has been defined. The
Petitioner has to submit the Performance Bank Guarantee as per
Article 4.1(e) of contract.
4. 1.14: Definition
"Contract" means this contract comprising the
documents listed in Article 1.4 above.
Performance Bank Guarantee shall have the meaning
ascribed to it in Article 7.1
5. 4.1(e)
"ISCO shall furnish the necessary Performance Bank
Guarantee and Advance Payment Guarantee in terms of
the Contract."
Relevant Portion of Bank Guarantee
"By a Contract dated 11.01.2010....."
".......Pursuant to the terms of the Contract,......"
"Where applicable the words and expressions used
in this Performance Bank Guarantee shall have the
meaning assigned to them in the Contract, unless
otherwise defined herein."
6. The submission of the petitioner is that the Bank Guarantee is
integral part of the Contract (Article 1.4 of the Contract as the BG is
part of contracts comprising the documents listed in Article 1.4).
Performance Bank Guarantee has to be submitted as per Article
4.1(e) of the contract. The PBG states that the word and expression
used in BG have the meaning as per the Contract. The word PBG is
defined Contract to mean as described in article 7.1 of contract.
7. i) As per Clause 7.5 (a), the respondent No.1 is entitled to call
upon the PBG for recovery of liquidated damages. There is no notice
or claim made by the respondent No.1 of liquidated damages is
available on record.
ii) The clause 7.5 (b) relates to the payment due to respondent
No.1 on termination of the contract. In the present case, the contract
has not been terminated. The contract can be terminated under
Article 19, 19(2) and the contract can be terminated only if the
Respondent gives 15 days notice in writing to the Petitioner to rectify
such defects and if the defects are not rectified. No notice of
termination has been issued, therefore, this clause is not applicable.
iii) Clause 7.5 (c) relates to any loss or damage caused to
Respondent due to any act or omission of the Petitioner under the
contract. The Respondent has no where stated that it has suffered
any loss or damage because of the act or omission of the Petitioner
rather the case of the Respondent is "that due to the several
breaches committed by the Petitioner under the contract, the
Respondent invoked the bank guarantee in terms of the bank
guarantee vide its letter dated 17th July, 2013. If there is any breach
of the contract then the respondent should have issued the notice of
termination giving 15-days notice to rectify the defects and if the said
defects are not rectified within 15-days then the Respondent has a
right to terminate the contract which is not the case. Learned counsel
appearing on behalf of petitioner has referred Article19 of the
contract.
Relevant portion of the said clause Article is reproduced
below:-
"Article 19. TERMINATION
19.1 DAMEPL shall have the right to terminate the
Contract on occurrence of any of the following events, if:
(a) ISCO is in breach of a material obligation under the
Contract; or
(b) The Concession Agreement is terminated; or
(c) ISCO fails to furnish the Performance Bank
Guarantee in accordance with Article 27 or
renew or replenish the Performance Bank Guarantee
to the extent of 10% of the Contract Price within
seven (7) days of its expiry or invocation; or
(d) ISCO gives any warranty or has made any
representation under the Contract which is found to
be false or misleading; or
(e) ISCO's liability for liquidated damages under the
Contract exceeds ten per cent (10%) of the Contract
Price and the default or defect(committed by ISCO)
for which liquidated damages are / were charged
continues to exist; or
(f) A petition for the winding up of ISCO has been
admitted and a liquidator or provisional liquidator has
been appointed or an order of bankruptcy or an order
for the winding up or dissolution of ISCO has been
made by a court of competent jurisdiction; or
(g) ISCO fails to adhere to the Standards and approved
ISCO Documents; or changes in quantity in terms of
the Contract; or
(h) ISCO persistently disregards instructions of the
Representative or contravenes any provisions of the
Contract; or
(i) ISCO fails to afford the DAMEPL, Representative or
inspecting Authority proper facilities as per the
provisions of the Contract for inspecting the Works or
any part thereof; or
(j) ISCO commits default under any Applicable Law in
relation to this Contract; or
(k) ISCO fails to resume work in accordance with Article
20.5.
(l) DMRC instructs DAMEPL to use any alternate
trackform or sleepers in place of Rheda 2000 System
or the Rheda 2000 bi-block sleepers respectively
19.2 On occurrence of any of the events under Article
19.1, DAMEPL shall give notice in writing to ISCO to
rectify such default within a period of fifteen (15) days
from the date of receipt of such notice. If ISCO fails to
rectify the default within such period, or a period as
reasonably requested by ISCO by way of a reply to the
notice and accepted by DAMEPL, DAMEPL shall have the
right to terminate the Contract forthwith without giving any
further notice. However, in case of events specified in
Article 19.1 (b), (f) and (l), DAMEPL shall be entitled to
immediately terminate the Contract without giving any
notice.
19.4 Payments on termination due to ISCO's default
Upon termination of the Contract under Article 19.1 and
19.2, ISCO shall not be entitled to any compensation and
DAMEPL shall have the right to call the whole or such
portion of the Performance Bank Guarantee amount as
DAMEPL may deem fit. After termination of the Contract
under Article 19.1 and 19.2, DAMEPL shall also be
entitled to recover from ISCO the cost of carrying out the
balance Works in excess of the sum which ISCO would
have been paid. If the Works had been carried out and
completed by ISCO under the terms of the Contract. The
amount to be recovered may be deducted by DAMEPL
from any monies then due or which, at any time
thereafter, may become due to ISCO alone or jointly
under this or any other contract or otherwise. Any amount
outstanding to DAMEPL under this Article 19.4 shall be
recovered from ISCO as debt due."
8. It is argued by Mr.R.K.Sanghi, learned counsel appearing on
behalf of the petitioner that the contract in the present case has not
been terminated by either party. There is no occasion on the part of
the respondent to invoke the bank guarantee. By letter dated
17.07.2013 addressed by the respondent for invoking the Bank
Guarantee does not mention any reason. Letter plainly mentioned
that we hereby exercise our right to invoke the PBG on account of the
Petitioner. It is therefore submitted that the Respondent has no right
to invoke the bank guarantee under the contract and the bank
guarantee can only be invoked as per clause 7.5 of the Contract. The
Invocation letter does not show any cause as to why the Respondent
has invoked bank guarantee. Invocation without any cause is wholly
illegal.
The relevant extract of the letter dated 17.7.2013 referred by
the counsel is reproduced herein below: -
"We hereby exercise our right to invoke the referred
Performance Bank Guarantee issued by you on account
of M/s ISCO Track Sleepers Private Limited.
Please credit the proceeds of this Performance Bank
Guarantee in full to our bank account as per following
details immediately and inform us accordingly.
Account Name Delhi Airport Metro Express
Private Limited
Account Number 173010200018045
Bank Name Axis Bank Limited
Bank Branch Nariman Point, Mumbai
IFSC Code UTIB0000173"
There is no cause/claim reason given by the Respondent. No
amount has been quantified by the Respondent.
9. It is submitted by Mr. Sanghi that the invocation of Bank
Guarantee is contrary to the terms of contract and term of Bank
Guarantee. There is no cause/reason of claim is given in the
invocation letter, therefore, it amounts to a fraudulent invocation. By
invocation, the petitioner has committed fraud. In para-11 of the
petition, it is stated that the bank guarantee had outlived its purpose.
By invoking bank guarantee contrary to the terms of the contract by
the respondent No.1 is unconscionable and lacks bonafide and
respondent No.1 committed in invoking the bank guarantee. If the
Respondent is allowed to encash the bank guarantee, it would result
harm and injustice to the petitioner. It was further submitted that the
bank was aware of the fraudulent action of the Respondent.
10. On merit, it is the case of the petitioner as per petition that:
a. The petitioner has completed the work. It appears that
because of the disputes between the respondent No.1 and
DMRC, the Respondents are trying to recover the amount
from the various contractors on frivolous grounds. The
Respondent No.1 is also facing financial difficulties.
b. As per the Bank Guarantee, the guarantee shall cease on
10th September, 2012 or on completion of 100% supply of
Rheda 2000 Bi Block Sleepers. It is further submitted that
the Respondent No.1 has issued a completion certificate
stating that the work has been completed on 15th March,
2010. Copy of the Completion Certificate dated 27th July,
2011 is annexed herewith. It is submitted that in this view of
the matter, the Bank Guarantee has been ceased and the
Respondent No.1 has no power to invoke the Bank
Guarantee and the Respondent No.2 has no power to
encash the Bank Guarantee as per the request made by the
Respondent No.1. The petitioner has learnt that the
Respondent No.1 has requested the Respondent No.2 to
encash the Bank Guarantee. It is submitted that the action
of the Respondent No.1 and Respondent No.2 are contrary
to the terms of the Bank Guarantee. It is submitted that the
Respondent No.1 never made any claim for breach of the
contract against the Petitioner during the validity of the Bank
Guarantee and the said Bank Guarantee had outlived its
purpose. It is submitted that the Bank Guarantee is sought
to be invoked not in terms of the agreement but for
something which is alien to the agreement and the same is
unconscionable and lacks bonafides. It is submitted that the
invocation was made in bad faith and fraudulently. A fraud
has been committed by the Respondent No.1 invoking the
Bank Guarantee. The Respondent No.1 by committing such
a fraud is trying to take advantage. It is further submitted
that if the Respondents are allowed to encash the Bank
Guarantee it would result in irretrievable harm and injustice
to the Petitioner. It is submitted that the action of the
Respondents are contrary to the terms of the Bank
Guarantee. It is submitted that the Respondent No.2 is also
aware of the fraudulent action of the Respondent No.1.
c. The act of Respondent No.1 to call upon the Respondent
No.2 to make payments under the Performance Security
and to realise any of the demand drafts issued by the
Respondent No.2 pursuant to such encashment of the
Performance Security is not only fraud on the Petitioner, but
is also against the provisions of the Agreement/Bank
Guarantee.
d. The Petitioner has requested the Respondent No.1 to
comply with the terms and conditions of the arbitration
clause contained in the Supply Agreement but the
Respondent No.1 has failed to comply with the arbitration
clause and is proceeding to recover the amount under the
Bank Guarantee fraudulently. The action of the Respondent
No.1 in invoking and encashing the Bank Guarantee is
wholly illegal, contrary to the law and contrary to the terms
and conditions of the Bank Guarantee.
e. It is submitted that the disputes and differences between the
parties shall be decided by the arbitral tribunal and till the
arbitral tribunal give the award, the Respondent No.1 cannot
be invoked the Bank Guarantee. The Petitioner is renewing
the Bank Guarantee from time to time and undertakes to
renew the same till the award was passed. Therefore in the
interest of justice, the Respondent No.1 should be
restrained from encashing the Bank Guarantee and
Respondent No.2 should be restrained from making any
payment to the Respondent No.1 under the Bank
Guarantee.
f. The petitioner has a strong prima facie case and the
balance of convenience is also in its favour. The grant of
injunction will not cause any irreparable injury or hardship to
the respondents inasmuch as the petitioner is ready and
willing to continue with the Performance Security until the
arbitration award. However, allowing the Respondents to
encash the Bank Guarantee will cause irretrievable injustice
and hardship to the Petitioner. Urgent interim orders also
necessary in order to prevent the Respondent No.1 from a
fraud being played on the Petitioner and the respondent
No.2.
11. The reason for invoking the Bank Guarantee in the reply filed
by the respondent No.1 is that the petitioner committed breach of
contract not intensified in the invocation letter and in breach of
contract notice has to be given to cure the defects. The petitioner has
supplied the entire goods and certificate has been issued, full
payment is made to the petitioner against the supply by the
Respondent. The Bank Guarantee has been invoked as per the reply
of the Respondent due to breaches committed by the Petitioner, in
case of breach of contract the notice is to be given to the Petitioner
to remedy the breach as per Clause 7.5 and if the said defects are
not cured then only the Respondent has a right to terminate the
contract.
12. Mr.Arvind Nigam, learned Senior counsel has made his
submissions on behalf of respondent No.1. His submissions are
outlined as under:
i) The bank guarantee in question is an unconditional bank
guarantee, a bank issuing a bank guarantee is not
concerned with the underlying contract between the parties.
Once the invocation is valid, it must be honoured. It is
nature of obligation of the bank. The only two exceptions
are; first exception is a case when there is a clear fraud
where it is proved that the bank knows. The fraud must be of
an egregious nature such as to vitiate the underling contract
and the second option is irretrievable injury by proof of
special equity otherwise the courts will not interfere directly
or indirectly to withhold payment, otherwise faith in
commercial transactions would be lost.
ii) The present case is fit case, which establishes that the bank
guarantee is invoked correctly. Thus, the interim orders
already passed are liable to be vacated. Learned Senior
counsel has relied upon the order passed on 17th January,
2014 in OMP No.695/2007. Mr. Nigam learned counsel for
the respondent No.1 has already referred the conduct of the
petitioner while obtaining the ad-interim orders. The
petitioners have cancelled various information given and
misled and misrepresented the court. Even information given
by the petitioner to the respondent No.2-bank are contrary to
the orders passed. He argues that the petitioners have with
malafide intentions not placed the complete information to
the Court, otherwise the interim orders ought not to have
been passed.
13. In reply to the argument addressed by respondent No.1, it is
admitted by the petitioner that on 17th July, 2013, the Respondent
issued the letter to the bank invoking the bank guarantee no reason
has been given. Copy of the said letter has not been sent to the
Petitioner. The Petitioner came to know that the Petitioner is likely to
invoke the bank guarantee, therefore, petitioner on 18th July, 2013
filed the petition under a hurriedly manner, mentioning the matter
before the court and the court has taken up the matter on that day
itself and passed the order of dated 18th July, 2013. On 18th July,
2013 itself the petitioner has informed the bank about the order. The
copy was made available to the petitioner later on. On 19th July,
2013 the petitioned informed the respondent also about the order and
forwarded a copy of the petition as well as the order passed by this
Court. In spite of the order passed by this Court, the Respondent
issued a letter dated 25th July, 2013 to the Bank. In the said letter, it
has been stated that the bare perusal of the order makes it clear that
there is no restrain against the bank to honour the guarantee. It is
further stated that in the order the respondent is to give a one week
notice to the Petitioner before encashment and there is no restrain or
direction against the Bank and the Bank continues to be liable to
honour the guarantee. The Respondent called upon the bank to
honour the guarantee immediately and in case the bank fails to pay
the amount, the Respondent will take appropriate action against the
bank before the RBI. The Respondent by writing a letter has
misconstrued the orders and has pressurized the bank to make the
payment. Since the Bank was about to make the payment, the
Petitioner immediately approached this Court on 26th July, 2013 and
status quo order was passed. Copy of the letter dated 25th July, 2013
and order dated 26th July, 2013 is enclosed.
14. It is now not disputed that the bank guarantee has been
extended till 10th September, 2014. The petitioner undertakes to
renew the same till further order of this Court. The BG has been
extended in view of the request made by the petitioner on 17th
September, 2013, 25th November, 2013 and 23rd April, 2014. Copy of
the relevant communication is filed on record.
15. Counsel has also referred the covering letter of the Bank
Guarantee and argues that the covering letter of Bank guarantee
states that the guarantee is to be returned to Bank within 15-days
from the date of its cease/in force. If the guarantee is not received
back by Bank than it shall be deemed to be automatically cancelled
and that the letter is an internal part of the guarantee.
16. It is also submitted by Mr. Sanghi that the petitioner has
received the entire payment from the Respondent and also the
Respondent has issued a certificate stating that the contract has
been completed and that the contractor has supplied the material.
The certificate was issued on 27th July, 2011.
It is the case of the petitioner that in view thereof the Bank
guarantee is ceased to be in operation on 27th July, 2011 when the
completion certificate has been issued by the Respondent. Without
prejudice, it is submitted that bank guarantee is ceased to be in
operation 10th September, 2012. This clause has not been amended
although Bank Guarantee has been extended. The bank guarantee
has been invoked by the Respondent on 17th July, 2013 without any
cause.
As per the end of BG last clause-4 of the bank guarantee, the
Bank Guarantee is to be returned for cancellation once purpose of
the bank guarantee was fulfilled. The purpose of the bank guarantee
has been fulfilled immediately on issue of the completion certificate.
17. There is a specific plea raised by the petitioner that bank
guarantee furnished by them stood discharged after the prescribed
period. The invoking of bank guarantee by the respondent No.1 are
acts of threat and coercion on the part of respondent No.1 and
respondent No.2 is aware about it. Such actions are impermissible in
law.
18. Mr.Nigam has not disputed the fact that contract has not been
terminated between the parties. There is a specific provision
prescribed in clause 7 of the contract which mandates under which
the respondent No.1 shall be entitled to call upon the performance of
bank guarantee. The same are i) recovery of liquidated damages; ii)
on termination of contract; and iii) loss of damages due to any act of
the petitioner.
It is not denied that no notice of termination was issued on the
date of invocation. No specific notice was issued to the petitioner for
a recovery of liquidated damages. With regard to loss of damages
the Respondent has filed certain documents on the last date of
hearing without any affidavit. The first document is a letter dated 21st
January, 2012 from the Respondent to Patil Rail Infrastructure. The
petitioner in OMP No.702/2013. But the said letter does not
constitute any breach or termination of the contract. Demand is
made for certain clips. The second letter is from Canara Bank to
Respondent dated 1st July, 2013. The Delhi Metro has invoked the
bank guarantee. It cannot be a ground for invoking the bank
guarantee furnished by the petitioner as rightly submitted by Mr.
Sanghi the third letter is with regard to amendment application before
the Arbitral Tribunal by the Delhi Metro mentioning in case of dispute
between the respondent and the Delhi Metro. The matter is still
pending before the tribunal. No order has been passed and it is not
relevant in the present case.
19. It is the admitted position that in Para 16 and 17 of the petition,
it has been stated that the Petitioner is renewing the bank guarantee
and undertakes to renew the same till the award was passed. It is
relevant to point out in the reply and has raised an issue that "if the
petitioner aggrieved to the invocation by the said bank guarantee,
appropriate remedy available to the petitioner is to approach the
arbitral tribunal". The petitioner submits that till arbitral tribunal decide
the application under Section 17 of the Act and till the order is
passed, the bank guarantee should not be encashed.
20. The Bank Guarantee in the present case was issued in
pursuant of the contract:
"Pursuant to the terms of the Contract, ISCO has agreed
to provide a performance bank guarantee ("Performance
Bank Guarantee") to "DAMEPL" for the due performance
of its obligations under the Contract".
Under this, the clause of the guarantee is Clause-5 which reads
as under:-
"The liability of the bank under this Performance Bank
Guarantee shall cease on whichever of the following events
first occurs:
"i........
ii........
iii. On completion of 100% supply of Rheda 2000 Block
Sleepers; or
iv. 10th Day of September, 2012"
OMP No.702/2013
21. Most of the facts in OMP No.702/2013 are common and it is not
necessary to discuss the entire gamut again. Only the relevant facts
are mentioned. I may also point out that in this case by order dated
2nd August, 2013 it was directed by the Court to respondent No.2 to
make out a cheque in favour of Registrar General of this Court who
will deposit the money in an FDR. The said order has been
complied with by respondent No.2.
22. In the present case the Performance Bank Guarantee is a
schedule annexed to the Contract. The relevant clauses are
reproduced hereinbelow:
"1.2 (g)
The Schedule shall form an integral part of the Contract
and shall be in full force and effect as though they were
expressly set out in the body of the Contract."
23. As per Article 27, the Bank Guarantee can only be invoked on
certain eventuality. The said Clause is reproduced below: -
Article 27 is reproduced herein below: -
"27. PERFORMANCE BANK GUARANTEE
27.1 Within fourteen (14) days of signing of the Contract
PRIL shall furnish the Performance Bank Guarantee in
favour of the Employer from a scheduled commercial bank
in India acceptable to the Employer payable in Delhi for an
amount equivalent to ten per cent (10%) of the Contract
Price. PRIL shall procure the Performance Bank Guarantee
in the form set out in Schedule I. PRIL shall maintain the
Performance Bank Guarantee at its own expense, and shall
ensure that the same shall remain valid at all times during
the term of the Contract and for a period of two (2) years
and six (6) months thereafter, in the event of a revision of
the Contract Price in excess of ten percent (10%) during the
term of the Contract for any reason whatsoever, the value of
the Performance Bank Guarantee shall be revised
proportionately by PRIL within ten (10) business days.
27.2 The Employer shall be entitled to call upon the
Performance Bank Guarantee in the following
circumstances:
(a) for recovery of liquidated damages payable under the
Contract;
(b) for any payments due to the Employer on termination
of the Contract; and
(c) for any loss or damage caused to the Employer due to
any act or omission of PRIL under the Contract
excluding Article 24.7."
24. Petitioner's Submissions:
(a) As per Clause 27(a) the respondent is entitled to call upon the
PBG for recovery of liquidated damages. There is no claim of
liquidated damages and this clause is not applicable in the facts of
the case.
(b) The clause 27 (b) relates to the payment due to Respondent on
termination of the contract. In the present case, the contract has not
been terminated. However the contract can be terminated under
Article 13 & 13.1A and the contract can be terminated only if the
Respondent gives 15 days notice in writing to the Petitioner to rectify
such defects and if the defects are not rectified. Admittedly no notice
of termination has been issued, therefore, this clause is not
applicable.
(c) Clause 27(c) relates to any loss or damage caused to
Respondent due to any act or omission of the Petitioner under the
contract. The Respondent has no where stated that it has suffered
any loss or damage because of the act or omission of the Petitioner
rather the case of the Respondent is "that due to the several
breaches committed by the Petitioner under the contract, the
Respondent invoked the bank guarantee in terms of the bank
guarantee vide its letter dated 17th July, 2013. If there is any breach
of the contract then the respondent should have issued the notice of
termination giving 15-days notice to rectify the defects and if the said
defects are not rectified within 15-days then the Respondent has a
right to terminate the contract which is not the case.
(d) The relevant clause of contract is Termination which is
reproduced below:-
"Article 13. TERMINATION
"13.1 The Employer shall have the right to terminate the
Contract on occurrence of any of the following events:
(a) PRIL is in breach of a material obligation under the
Contract; or
(b) The Concession Agreement is terminated; or
(c) PRIL fails to furnish the Performance Bank
Guarantee in accordance with Clause 27 or
renew or replenish the Performance Bank
Guarantee to the extent of 10% of the Contract
Price within seven (7) days of its expiry or
invocation; or
(d) PRIL gives any warranty or has made any
representation under the Contract which is found to
be false or misleading; or
(e) PRIL's liability for liquidated damages under the
Contract exceeds ten per cent (10%) of the Contract
Price and the default or defect(committed by PRIL)
for which liquidated damages are / were charged
continues to exist; or
(f) A petition for the winding up of PRIL has been
admitted and a liquidator or provisional liquidator
has been appointed or an order of bankruptcy or an
order for the winding up or dissolution of PRIL has
been made by a court of competent jurisdiction; or
(g) PRIL fails to adhere to the Requirements; or
(h) PRIL persistently disregards instructions of the
Employer's Representative in relation to contractual
obligations or contravenes any provisions of the
Contract; or
(i) PRIL fails to afford the Employer, Employer's
Representative or inspecting Authority proper
facilities as per the provisions of the Contract for
inspecting the Services or any part thereof; or
(j) PRIL commits default under any Applicable Law in
relation to the Contract; or
(k) PRIL fails to resume work in accordance with
Clause 12.
(l) DMRC instructs DAMEPL to use any alternate
trackform or sleepers in place of Rheda 2000
System or the Rheda 2000 bi-block sleepers
respectively.
13.1A On occurrence of any of the events under Clause
13.1, the Employer shall give notice in writing to PRIL to
rectify such default within a period of fifteen (15) days
from the date of receipt of such notice. If PRIL fails to
rectify such default within such period or a period as
reasonably requested by PRIL, the Employer shall have
the right to terminate the Contract forthwith without giving
any further notice. However, in case of events specified
in Clause 13.1 (b), (f) and (l), the Employer shall be
entitled to immediately terminate the Contract without
giving any notice.
13.2 Upon termination of the Contract, PRIL shall
immediately cease performance of the service and deliver
to the employer all designs and drawings prepared by
PRIL upto the date of termination of the Contract.
13.3 PRIL shall have the right to terminate the Contract
on occurrence of any of the following events:
(a) the Employer suspends the Services as per Clause
12 which continues for a period beyond 45 days; or
(b) the Employer fails to open a confirmed, irrevocable
LC acceptable to PRIL within 45 days from the effective
date as provided under Clause 2.1; or
(c) the Employer fails to pay Advance Payment within
21 days from receipt of Advance Bank Guarantee.
On occurrence of any of the events under Clause 13.3,
PRIL shall give notice in writing to the Employer to rectify
such default within a period of thirty (30) days from the
date of receipt of such notice. If the Employer fails to
rectify the default within such period, or in a period as
reasonably requested by the Employer by way of a reply
to the notice and accepted by PRIL, PRIL shall have the
right to terminate the Contract forthwith without giving any
further notice.
13.4 Payments on termination due to PRIL's default
Upon termination of the Contract under Clause 13.1 and
13.1A, PRIL shall not be entitled to any compensation and
the Employer shall have the right to call the whole or such
portion of the Performance Bank Guarantee amount as
the Employer may deem fit. After termination of the
Contract under Clause 13.1 and 13.1A, the Employer
shall also be entitled to recover from PRIL the cost of
carrying out the balance Services in excess of the sum
which PRIL would have been paid, if the Service had
been carried out and completed by PRIL under the terms
of the Contract. The amount to be recovered may be
deducted by the Employer from any monies then due or
which, at any time thereafter, may become due to PRIL
alone or jointly under this or any other contract or
otherwise. Any amount outstanding to the Employer
under this Clause 13.4 shall be recovered from PRIL as
debt due."
25. The petitioner has made the following averments in the petition
which are reproduced herein below:-
"10. The Petitioner has completed the work. It appears that
because of the disputes between the respondent No.1
and DMRC, the respondents are trying to recover the
amount from the various contractors on frivolous
grounds. The respondent No.1 is also facing financial
difficulties.
11. As per the Bank Guarantee clause 5, the guarantee
shall cease on 10.09.2012. It is further submitted that
the Respondent No.1 has issued a completion
certificate stating that the work of submission of
detailed design approved by Systra has been
completed on 28.02.2010. Copy of the Completion
Certificate dated 12.02.2010 is annexed herewith the
petition. It is submitted that in this view of the matter,
the Bank Guarantee has been ceased and the
Respondent No.1 has no power to invoke the Bank
Guarantee and the Respondent No.2 has no power to
encash the Bank Guarantee as per the request made
by the Respondent No.1. The Petitioner has learnt that
the Respondent No.1 has requested the Respondent
No.2 to encash the Bank Guarantee. It is submitted
that the action of the Respondent No.1 and
Respondent No.2 are contrary to the terms of the Bank
Guarantee. It is submitted that the Respondent No.1
never made any claim for breach of the contract
against the Petitioner during the validity of the Bank
Guarantee and the said Bank Guarantee had outlived
its purpose. It is submitted that the Bank Guarantee is
sought to be invoked not in terms of the agreement but
for something which is alien to the agreement and the
same is unconscionable and lacks bonafides. It is
submitted that the invocation was made in bad faith
and fraudulently. A fraud has been committed by the
Respondent No.1 invoking the Bank Guarantee. The
Respondent No.2 by committing such a fraud is trying
to take advantage. It is further submitted that if the
Respondents are allowed to encash the Bank
Guarantee it would result in irretrievably harm and
injustice to the Petitioner. It is submitted that the
action of the Respondents are contrary to the terms of
the Bank Guarantee. It is submitted that the
Respondent No.2 is also aware of the fraudulent
action of the Respondent No.1.
12. The act of Respondent No.1 to call upon the
Respondent No.2 to make payments under the
Performance Security and to realise any of the
demand drafts issued by the Respondent No.2
pursuant to such encashment of the Performance
Security is not only fraud on the Petitioner, but is also
against the provisions of the Agreement/Bank
Guarantee.
15. The Petitioner has requested the Respondent No.1 to
comply with the terms and conditions of the arbitration
clause contained in the Supply Agreement but the
Respondent No.1 has failed to comply with the
arbitration clause and is proceeding to recover the
amount under the Bank Guarantee fraudulently. The
action of the Respondent No.1 in invoking and
encashing the Bank Guarantee is wholly illegal,
contrary to the law and contrary to the terms and
conditions of the Bank Guarantee.
16. It is submitted that the disputes and differences
between the parties shall be decided by the arbitral
tribunal and till the arbitral tribunal give the award, the
Respondent No.1 cannot be invoked the Bank
Guarantee. The Petitioner is renewing the Bank
Guarantee from time to time and undertakes to renew
the same till the award was passed. Therefore in the
interest of justice, the Respondent No.1 should be
restrained from encashing the Bank Guarantee and
Respondent No.2 should be restrained from making
any payment to the Respondent No.1 under the Bank
Guarantee.
17. The Petitioner has a strong prima facie case and the
balance of convenience is also in its favour. The grant
of injunction will not cause any irreparable injury or
hardship to the Respondents inasmuch as the
Petitioner is ready and willing to continue with the
Performance Security until the arbitration award.
However, allowing the Respondents to encash the
Bank Guarantee will cause irretrievable injustice and
hardship to the Petitioner. Urgent interim orders are
also necessary in order to prevent the Respondent
No.1 from a fraud being played on the Petitioner and
the Respondent No.2."
26. In the reply, it is specifically mentioned that the petitioner is
aggrieved by the invocation of the subject bank guarantee, the
appropriate remedy available to the petitioner is to approach the
arbitral tribunal.
27. In Para-11 of the petition, it has been stated that the bank
guarantee had outlived its purpose. The Bank guarantee is sought to
be invoked not in terms of the agreement for something which is alien
agreement and the same is unconscionable and lacks bonafide.
Fraud has been committed by the Respondent in invoking the bank
guarantee. However, if the Respondent is allowed to encash the bank
guarantee, it would result harm and injustice to the petitioner. It was
further submitted that the bank was aware of the fraudulent action of
the Respondent.
In Para 16 and 17 of the petition, it has been stated that the
Petitioner is renewing the bank guarantee and undertakes to renew
the same till the award is passed. It is relevant to point out in the
reply and has raised an issue that "if the petitioner aggrieved by the
invocation of the subject Bank Guarantee, the appropriate remedy
available to the petitioner is to approach the arbitral tribunal. The
Petitioner submits that till arbitral tribunal decide the application under
Section 17 of Arbitration Act and till the order is passed, the bank
guarantee should not be encashed.
28. The respondent No.1 has filed certain documents on the last
date of hearing without any affidavit.
i) The said letter dated 21st January, 2012 does not constitute any
breach or termination of the contract. Demand is made for certain
clips.
ii) The second letter is from Canara Bank to Respondent dated 1st
July, 2013. The Delhi Metro has invoked the bank guarantee. It
cannot be a ground for invoking the bank guarantee furnished by the
petitioner.
iii) The third letter is with regard to amendment application before
the Arbitral Tribunal by the Delhi Metro in case of dispute between
the respondent and the Delhi Metro. It is stated that the claimant has
not filed all the relevant papers of the arbitration case. Matter is still
pending before the tribunal. No order has been passed and it is not
relevant in the present case. The Tribunal has no found default on
the part of the petitioner nor petitioner name has been mentioned.
29. Let me now deal with the abovementioned case in view of the
facts and circumstances and settled law in the issue of exceptions
were judicial intervention may be called for or not in relation to
invocation of bank guarantee by the respondent in view of
unequivocal terms, unconditional and recite that the amount would be
paid without demur. In case, the petitioner's matter falls within the
exceptions i.e. fraud or irretrievable harm or injustice, then the case
of interim order may be made out otherwise not.
30. It is a settled law of the land that in case of an unconditional
bank guarantee, the nature of obligation of the bank is absolute and
not dependent upon any dispute or proceeding between the party at
whose instance the bank guarantee is given and the beneficiary. The
only two exceptions were fraud, which was not pleaded in that case,
and the other was special equities. Special equities were claimed on
the basis as to who had committed breach of the contract.
Determination of disputes was stated to be not a factor which would
be sufficient to make the case as exceptional case justifying
interference by the court restraining invocation of the bank guarantee.
31. A fraud in connection with such a bank guarantee would vitiate
the very foundation of such a bank guarantee. Hence if there is such
a fraud of which the beneficiary seeks to take the advantage, he can
be restrained from doing so. The second exception relates to cases
where allowing the encashment of an unconditional bank guarantee
would result in irretrievable harm or injustice to one of the parties
concerned. Since in most cases payment of money under such a
bank guarantee would adversely affect the bank and its customer at
whose instance the guarantee is given, the harm or injustice
contemplated under this head must be such an exceptional and
irretrievable nature as would override the terms of the guarantee and
the adverse effect of such an injunction on commercial dealings in
the country.
32. In view of law laid down by the Supreme Court in its different
judgments, it is clear that injunction against encashment of bank
guarantee is an exception and not the rule. Cases of such exceptions
would have to be evidenced by documents and pleadings on record
and compulsorily should fall within any of the following limited
categories:-
i) If there is a fraud in connection with the bank
guarantee which would vitiate the very foundation of such
guarantee and the beneficiary seeks to take advantage of
such fraud.
ii) The applicant, in the facts and circumstance of the
case, clearly establishes a case of irretrievable injustice or
irreparable damage.
iii) The applicant is able to establish exceptional or
special equities of the kind which would prick the judicial
conscience of the court.
iv) When the bank guarantee is not invoked strictly in
its terms and by the person empowered to invoke under
the terms of the guarantee. In other words, the letter of
invocation is in apparent violation to the specific terms of
the bank guarantee.
33. At the midst of hearing in both the matters, respondent No.1
has filed three documents in OMP No.702/2013. One of them is a
copy of letter dated 21st January, 2012 issued by respondent No.1 to
the petitioner. Learned counsel appearing on behalf of respondent
No.1 has tried to explain that the said letter is sent in view of Clause
7.5 of the Contract which discloses the breaches and defects to cure.
In view of the order dated 17th January, 2014 passed by Hon'ble Mr.
Justice Vipin Sanghi in OMP No.695/2013, the interim orders passed
in the present petition are liable to be vacated.
34. The contention of the learned counsel for respondent No.1 is
refuted by the learned counsel for the petitioner who states that the
alleged letter is not disclosing the specific breaches and the defects
to cure under Clause 7.5 of the Contract and no advantage can be
derived by respondent No.1 in order to invoke the bank guarantee.
35. After having gone through the said letter, I am of the view that
the submission of the petitioner, to some extent, is correct. In case,
the said letter is read carefully, it is stated in the said letter that
respondent No.1 inspected over 1,30,000 rail clips of which around
2600 are detected as having failed and they need to be replaced. In
the said letter, respondent No.1 has asked the petitioner to send at
least 5000 more rail clips and make available experts for inspection.
The said letter is not a notice strictly under Clause 7.5 of the Contract
rather the petitioner was requested to supply certain clips etc. As far
as the order referred by the learned counsel for respondent No.1
passed in OMP No.695/2013 is concerned, in that case, it was the
admitted position that respondent No.1 gave a 30 days' notice to the
petitioner to cure the defect who failed to comply the requirements of
the said notice. Therefore, the Court has recorded in the order that
the petitioner has waived its right after the expiry of 30 days. The
situation in the present case is, therefore, different. Para 10 of the
said order reads as under:-
"10. On the other hand, learned senior counsel for the
respondent submits that the respondent has complied
with clause 7.5.1 by issuing it notice dated 26.09.2012 to
the petitioner with copy to the respondent bank. In this
communication, respondent No.1 had communicated the
several failures on the part of the plaintiff in respect of its
obligations under the Contract and given a 30 days cure
period to the petitioner."
36. In the present case, no notice of termination was issued. No
specific notice was issued by the respondent No.1 to the petitioner of
liquidated damages with regard to loss of damages. The main claim
in the notice was for the demand of certain clips.
37. The following decisions were referred by the petitioners in
support of their submissions:-
(i) In the case of Syndicate Bank vs. Vijay Kumar and Ors.,
(1992) 2 SCC 330, the Supreme Court indicated the importance of an
automatic discharge clause in the contract and its effects on the
bank guarantee, as under:
"From the above discussion it can be gathered that the
bank guarantee are on different level and they must be
allowed to be honoured free from interference by the
courts and a bank which gives a guarantee must honour
the same according to its terms and it is only in
exceptional cases that the court will interfere with the
machinery of irrevocable obligations assumed by the
banks. A fortiori the same principle applies in respect of
bank guarantees which are discharged. When once the
bank guarantee is discharged the obligation of the bank
ends and there is no question of going behind such
discharged bank guarantee. The courts should refrain
from probing into the nature of the transactions between
the bank and the customer which led to the furnishing of
the bank guarantee."
(ii) In the case of Larsen & Toubro Ltd. vs. Maharashtra State
Electricity Board and Ors., AIR 1996 SC 334 while allowing the
relief of injunction in relation to the bank guarantee, the court held as
under:
"The appellant wrote to the first respondent on 21.2.1994
that the plant was completed and so all bank guarantees
have served their contractual requirements. On a perusal
of the relevant clauses in the contract, executed between
the appellant and the first respondent and the
communication of the first respondent dated 10.6.1994, it
is fairly clear that the stipulations or conditions
mentioned as per clauses 70.2, 70.3 and 70.4 have been
successfully fulfilled and the plant was admittedly taken
over by the first respondent. The guarantee given by
the Citibank, N.A. dated 10.5.1989 appearing in Vol. II at
pp. 122 to 126 will ensure only till successful completion
of the trial operations and the plant is taken over. That
event having ensued, the invocation of the guarantee
given by the Citibank dated 10.5.1985 in the sum of
Rs.2.72 crores is not encashable on its terms and in
order to prevent irretrievable injustice, an injunction as
prayed for, to respondents 1 to 4 deserves to be issued
on that score. The court below was in error in not doing
so. We hereby restrain respondents 1 and 4 from
invoking the bank guarantee aforesaid."
(iii) Admittedly, no such notice was received by the petitioner at the
time of invoking of bank guarantee. However, it appears that in the
letter of invocation, it was mentioned that due to several breaches
committed by the petitioner under the contract, the respondent No.1
is invoking the bank guarantee issued by the respondent. Clause
7.1 mandates that the respondent No.1 is entitled to call upon the
performance bank guarantee in terms of Clause 7.5 (a) to (c). There
is no cogent evidence produced by the respondent No.1 in this
regard strictly as per Clause 7.5.
(iv) The Calcutta High Court in the case of GIS Limited Vs.
Indiana Conveyors Limited 1999 Law Suit (Cal) 63 has held as
under: -
"The two broad principles, rather two broad parameters
which the courts have to consider in favour of granting
injunctions against encashment of Bank Guarantees
relate to question of 'fraud' and irretrievable injustice', or,
as some call it 'special equities'.
"....... The case of the petitioner ( in the present case)
can be said to be covered by both the aforesaid
parameters of 'fraud' and 'irretrievable injustice'
bordering on 'special equities'.
"When a party to a contract admittedly has no claim
against the other, its act of invoking or encashing a Bank
Guarantee..... may amount to practising fraud..... and if
the party practising fraud is allowed to encash the Bank
Guarantee, the other party does not suffer irretrievable
injustice".
"When the very claim................ Has already been
satisfied or stands extinguished.............invocation of
Bank Guarantee in respect of such a claim cannot be
permitted because special equities created in the mean
time would immediately come in the way of allowing the
party to encash the Bank Guarantee."
(v) In the matter of Satluj Jal Vidyut Nigam Ltd. Vs. Jai Prakash
Hyundai Corsortium, AIR 2006 DELHI 239: 129 (2006) DLT 453,
this Court held as under;
"25. While quoting Samwoh Asphalt Premix PTE Ltd. v.
Sum Cheong Piling PTE Ltd. [2002] Build LR 459, the
Court held:-
"... a demand under the performance guarantee can
only be made when "the seller has failed or refused
to fulfill his obligation under the contract". The
seller's demand or refusal is a condition precedent
to the buyer making a demand. An assertion to
that effect is implied in a demand made by the
buyer. In circumstances where it can be said that
the buyer has no honest belief that the seller has
failed or refused to perform its obligation, a demand
by the buyer in my view is a dishonest act which
would justify a restraint order".
26. In our considered opinion, a performance guarantee
which was to be invoked in terms of the contract of
guarantee but the same is being sought to be invoked
not in terms of the agreement but for something which is
alien to the agreement would be unconscionable and
would lack in bona fides. The sum and substance of the
agreement of the learned counsel for the respondent
was that the call was made in bad faith. We agree with
the submission. Hence, we uphold the impugned order
to the extent it relates to passing of the injunction order
in favour of contractor and against the department of
bank guarantee in question."
(vi) In the Matter of GIS Limited Vs. Indiana Conveyors Limited,
(1999 Law Suit (Cal) 63) Calcutta High Court held as under:
"[16]. If the arbitrator has to decide the dispute with
regard to the respondent's obligation to return the bank
guarantees, this court cannot remain oblivious or shirk its
responsibility of looking to the prima facie nature of the
petitioner's case to find out whether the merits of the
case warrant the grant of any interim Injunction under
section 9 of the Act or not.
[17] From what I have narrated the inescapable
conclusion which emerges is that the petitioner has a
strong prima facie case in its favour and that the situation
warrants that this court should, while exercising its
Jurisdiction under section 9 of the Act restrain the
respondent from invoking/encashing the aforesaid bank
guarantees, to enable the parties to have the
adjudication of this dispute through arbitration.
[18] The petitions accordingly are allowed. It is directed
that pending the adjudication of disputes by arbitration
and until the award is finally passed by the arbitral
Tribunal, the respondent shall not Invoke/encash the two
bank guarantees in question."
(vii) In the case of Continental Construction Ltd. and Anr. Vs.
Satluj Jal Vidyut Nigam Ltd., 2006(1) ARBLR321 (Delhi), it was
held as under:
"22. In the opinion of the court, the petitioners have
prima facie established on record the case of extra-
ordinary special equities apparently causing irreparable
prejudice to the petitioners. In fact, they have also been
able to show that the bank guarantee has not been
invoked strictly in terms of the bank guarantee which in
turn refers to discharge of right and obligation under the
contract. The judgment of the court in the case of M/s.
Hindustan Construction Ltd. and anr. (supra) is certainly
of relevance and is applicable to the facts of the present
case as spelled. Any observations made in this order
would be of no consequence in regard to pendency of
proceedings before the arbitral tribunal as the court has
not, in any way directly or indirectly, touched upon the
merits of the disputes arising between the parties from
the main contract".
38. On 30th April, 2014 the Arbitral Tribunal comprising of Dr.
Justice Arijit Pasayat (Retd.) as Presiding Arbitrator, Mr. Justice B.P.
Singh (Retd.) as Arbitrator - Respondent and Mr. Justice K.
Ramamoorthy (Retd.) as Arbitrator - Claimant have fixed the
preliminary hearing on 2nd June, 2014.
39. From the entire gamut of the matter and settled law on the
aspect, these cases are not a case of keeping the bank guarantee
alive but these cases are of wrong invocation by the respondent.
Therefore, this Court at this stage is not inclined to dismiss the
petitions and vacate the interim orders. Even in reply, the following
statement was made by respondent No.1: "If the petitioner aggrieved
to the invocation by the said bank guarantee, appropriate remedy
available to the petitioner is to approach the arbitral tribunal".
The interim order shall continue during the arbitration
proceedings unless it is modified and vacated by the Arbitral Tribunal
on the petition filed by the respondent either on the basis of facts
available or change of circumstances.
40. As matters are being decided on merit, still as far as the
submissions of Mr. Nigam, learned Senior Counsel appearing on
behalf of respondent No.1, the court agrees with his argument that
the entire picture has not been disclosed by the petitioners when the
interim orders were obtained. The petitioners have also not
communicated the correct orders passed by the Court. The reply of
the respondent No.2-bank to the respondent No.1 was contrary to
order passed when the respondent No.1 tried to give correct
information. It is duty of the bank to interpret the Court order
correctly. Similar is the duty cast upon petitioners to give correct
information of order to the bank. For the said error, the petitioners are
burdened with costs of Rs.30,000/-, which shall be deposited by the
petitioners in equal proportion with the Prime Minister's Relief Fund
within two weeks. Similarly, the respondent No.2 is also directed to
deposit the cost of Rs.15,000/- for misinterpreting the orders of the
Court. The respondent No.2 shall deposit the cost in the similar
manner.
41. Accordingly, the OMP Nos.702/2013 and 704/2013 under
Section 9 of the Arbitration & Conciliation Act, 1996 are disposed of
with an order of restraint against the respondent-bank not to encash
bank guarantees and not to receive the payment in terms of order
passed by this Court on 2nd August, 2013 in OMP No.702/2013
subject to the condition that the bank guarantees would be kept alive
by the petitioners during the pendency of arbitral proceedings and
until the award is finally passed or subject to such orders as may be
passed by the arbitral tribunal even during the pendency of the
proceedings.
42. Liberty is also granted to the respondent to move an
appropriate application for modification/vacation of orders, if
necessary, on the basis of material available on record or due to
change of circumstances. The said petition would be determined as
per its own merit.
43. Both petitions are accordingly disposed of.
(MANMOHAN SINGH)
JUDGE
JUNE 04, 2014
