Delhi High Court
Unity Pratibha Consortium vs Airport Authority Of India & Anr. on 29 May, 2014
IN THE HIGH COURT OF DELHI AT NE W DELHI
Order Reserved on: 24 th March, 2014
Order Pronounced on: 29 th May, 2014
OMP 125 OF 2014
UNITY PRATIBHA CONSORTIUM ..... PETITIONER
Through: Mr.Kailash Vasdev, Sr. Advocate
with Mr. S. S. Ray, Mr. Vishal
Phal, Ms. Rakhi Ray and Mr.
Vaibhav Gulia, Advocates
versus
AIRPORT AUTHORITY OF INDIA & ANR . .... RESPONDENTS
Through: Mr. Abhinav Vashisht, Sr.
Advocate with Mr. Digvijay Rai,
Mr. Rishi Chadha and Mr. Anuj
Malhotra, Advocates along with
Mr.Sunil Sethi, AGM(C) for AAI
CORA M:
HON'BLE MR. JUSTICE SANJEEV SACHDEVA
SANJEEV SACHDEVA, J.
1. The Petitioner has filed the present petition under
Section 9 of the Arbitration and Conciliation Act, 1996.
By the present petition the Petitioner has sought stay of
the invocation of Bank Guarantee dated 16.03.2009 and
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a further restraint against the Respondents from
invoking Bank Guarantees at document No. 5 and 7
(i.e. Bank Guarantees both dated 04.08.2009 as
amended by Bank Guarantees dated 10.08.2010) .
2. As per the Petitioner, the Petitioner and Respondent
No. 1 entered into an agreement dated 02.12.2006 by
which the Petitioner was awarded a contract to carry
out construction work. Respondent No. 3 is the bank
that has issued the Bank Guarantee.
3. The start date of the contract was 19.12.2006 and the
stipulated date for completion was 18.10.2007,
however the actual date of completion was 30.06.2009.
As per the Petitioner the performance report dated
17.09.2009 issued by the Respondents rated the
performance of the Petitioner as „Good‟. As per the
Petitioner it was required under the contract to submit
Bank Guarantees including performance guarantees.
4. The Petitioner had provided a Bank Guarantee for a
sum of Rs.3,30,00,000/-. The Bank Guarantee was
subsequently reduced to 1,00,00,000/ -. As per the
Petitioner it was required to and submitted various
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other Bank Guarantees to the Respondent from time to
time.
5. As per the Petitioner the main contract was completed
on 30.06.2009. The Petitioner relies upon the
performance report dated 17.09.2009. As per the
Petitioner there were certain defects that were pointed
out at the time of issuance of the performance report
and the Petitioner was required to complete/replace the
defective works. The Petitioner thereafter claims to
have completed even the defective works. The
Petitioner by letter dated 20.09.2013 requested for the
release of the Bank Guarantee of Rupees O ne Crore.
6. As per the Petitioners the dispute arose when the
Petitioners demanded the release of the Bank Guarantee
and the Respondents instead of releasing the Bank
Guarantee stated that the same would be released only
symbolically but stated further that the same shall have
to be withheld in view of the directions received from
CHQ and that the Bank Guarantee was to be withheld
in view of expected recovery on account of insp ections.
No payment was to be released and any amount in the
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form of Bank Guarantee or otherwise was to be
retained.
7. As per the Petitioner the Respondents not only decided
to withhold the amounts due to the Petitioner but have
also sought to invoke the Bank Guarantee.
8. Learned Senior counsel for the Petitioner contended
that the obligations under the contract stood performed
and therefore the Petitioner was discharged of the
obligations under the contract. He further contended
that upon performance the Bank Guarantee cannot be
invoked and if it is so invoked it would be a dishonest
invocation. He further submitted that Bank Guarantees
are a consequence of the main contract and upon the
main contract been performed, calling upon the
promisee to extend the Bank Guarantee is contrary to
the contract.
9. Learned Senior counsel for the Petitioner contended
that on 17.09.2009 the provisional completion report
was prepared and on 30.03.2010 the completion
certificate was issued and even the full and final
payment was made in October 2010. After the full and
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final payment a sum of Rs. 93,00,000/ - was retained.
He contended that the defects that were pointed out
were duly rectified. He submitted that as per the
Respondents a sum of at least Rs. 30,00,000/ - was
being withheld for defective glass. He contended that
the Bank Guarantee was being invoked on the basis of
an internal report.
10. He submitted that since the entire contract was
completed and the obligations discharged, invocation of
the Bank Guarantee on complaint of a third-party was
dishonest invocation.
11. Learned Senior counsel contended that the Bank
Guarantee was given only in lieu of the security deposit
being deposited in cash. He further contended that
special equities flow in favour of the Petitioner and the
conduct of the Respondents is dishonest. He submitted
that even if the Petitioner was overpaid, the
overpayment can be examined and adjudicated but the
Bank Guarantee cannot be invoked. He submitted that
the invocation of Bank Guarantee was totally dishonest.
The contract was over and it was not a case of
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termination of contract Midway.
12. Learned Senior counsel relied on Section 17 of the
Contract Act, 1872 to contend that that any act fitted to
deceive would tantamount to fraud.
13. On the other hand learned Senior Counsel for the
Respondent contended that the invocation of the Bank
Guarantee was done as the Petitioner had overbilled the
work. He contended that the bank guaranty was
unconditional and the term of the Bank Guarantee
stipulated that it was being execute d as a
security/guarantee for due fulfilment by the contractor
of the terms and conditions of the agreement. The Bank
Guarantee stipulates that the bank is liable to pay
unconditionally the amount claimed by the Respondent
without any demur. Any such demand made on the
bank is conclusive as regards the amount due and
payable by the bank under the guarantee. He further
submitted that the bank had undertaken to pay any
money so demanded notwithstanding any dispute or
disputes raised by the Petitioner in any s uit of
proceedings before any court or tribunal.
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14. Learned senior counsel for the Respondent submitted
that the invocation was based on examination by Chief
Technical Examiner (CTE) of the Government of India
and CTE was under the Chief Vigilance Commissione r.
He submitted that the CTE found that the Petitioner
had overbilled and had been paid in excess and as such
recoveries were to be made from the Petitioner of the
amount overpaid.
15. He relied upon clause 29 (1) of the contract to contend
that whenever any claim arose against the contractor
for payment of money out of or under the contract the
Airport Authority of India was entitled to recover such
sum by appropriating in part or whole the security
deposit of the contractor and in case the security was
insufficient than the balance could be recovered or
deducted from any sum that may become due or that
may be due to the contractor under the contract or
under any other contract. He submitted that the Bank
Guarantee was furnished in lieu of the security deposit
and as such was liable to be invoked in case any sum
was found due from the contractor.
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16. Learned Senior counsel for the Respondent relied on
clause 29 (2) of the contract to submit that the
Respondent had the right to cause an audit and
technical examination of the works and the bills of the
contractor including all supporting vouchers and
abstract even after final payment of the bill and if as a
result of an audit any sum is found to have been
overpaid then the contractor was liable to refund the
amount and further that the authority was entitled to
recover the same in the manner provided under clause
29 (1).
17. Learned Senior counsel for the Respondent submitted
that on 30.01.2014 the Petitioners were duly informed
that they had to pay/deposit on the claim being made in
terms of the inquiry. He contended that the Petitioner
was duly informed about the pending inquiry and the
inquiry had revealed that the Petitioner had indulged in
overbilling and had been paid in excess on account of
the overbilling. As per the inquiry a substantial
amounts was found to have been overbilled and
overpaid under various heads.
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18. Learned Senior counsel for the Respondent submitted
that as the Petitioner had indulged in overbilling of
approximately Rs. 2.75 C rores and the Respondents
were entitled to seek recovery of the amount overpaid
and as such were further entitled to invoke the Bank
Guarantee. He submitted that the Petitioner was liable
to refund the amount that had been paid in excess on
account of such overbilling.
19. The principles with respect to grant of an injunction in
Bank Guarantee cases have been settled by the
Supreme Court of India.
20. The Supreme Court in the case of U.P. C OOP.
F EDERATION L TD. V. SINGH C ONSULTANTS AND
E NGINEERS (P) L TD. 1988 (1) SCC 174 has laid down
that in order to restrain the operation either of
irrevocable letter of credit or of confirmed letter of
credit or of Bank Guarantee, there should be serious
dispute and there should be good prima facie case of
fraud and special equities in the form of preven ting
irretrievable injustice between the parties. Otherwise
the very purpose of Bank Guarantees would be
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negatived and the fabric of trading operation will get
jeopardised. The court further held that commitments
of banks must be honoured free from interfe rence by
the courts. Otherwise, trust in commerce internal and
international would be irreparably damaged. It is only
in exceptional cases that is to say in case of fraud or in
case of irretrievable injustice be done, the court should
interfere.
21. The Supreme Court in the case of U.P. STATE SUGAR
C ORPN. V. SUMAC INTERNATIONAL L TD., (1997) 1 SCC
568 further laid down that when in the course of
commercial dealings an unconditional Bank Guarantee
is given or accepted, the beneficiary is entitled to
realize such a Bank Guarantee in terms thereof
irrespective of any pending disputes. The bank giving
such a guarantee is bound to honour it as per its terms
irrespective of any dispute raised by its customer. The
very purpose of giving such a Bank Guarantee would
otherwise be defeated. The courts should, therefore, be
slow in granting an injunction to restrain the realization
of such a Bank Guarantee. The courts have carved out
only two exceptions. A fraud in connection with such a
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Bank Guarantee would vitiate the very foundation of
such a Bank Guarantee. Hence if there is such a fraud
of which the beneficiary seeks to take advantage, he
can be restrained from doing so. The second exception
relates to cases where allowing the encashment of an
unconditional Bank Guarantee would result in
irretrievable harm or injustice to one of the parties
concerned. Since in most cases payment of money
under such a Bank Guarantee would adversely affect
the bank and its customer at whose instance the
guarantee is given, the harm or injust ice contemplated
under this head must be of such an exceptional and
irretrievable nature as would override the terms of the
guarantee and the adverse effect of such an injunction
on commercial dealings in the country. The two
grounds are not necessarily connected, though both
may coexist in some cases.
22. The Supreme Court further in the case of U.P. STATE
SUGAR C ORPN. (SUPRA) held that there are only two
exceptions to this rule. The first exception is a case
when there is a clear fraud of which the bank has
notice. The fraud must be of an egregious nature such
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as to vitiate the entire underlying transaction.
Explaining the kind of fraud that may absolve a bank
from honouring its guarantee. The wholly exceptional
case where an injunction may be granted is whe re it is
proved that the bank knows that any demand for
payment already made or which may thereafter be
made will clearly be fraudulent. But the evidence must
be clear both as to the fact of fraud and as to the bank's
knowledge. It would certainly not normally be
sufficient that this rests on the uncorroborated
statement of the customer, for irreparable damage can
be done to a bank's credit in the relatively brief time
which must elapse between the granting of such an
injunction and an application by the ba nk to have it
charged.
23. On the question of irretrievable injury which is the
second exception to the rule against granting of
injunctions when unconditional Bank Guarantees are
sought to be realised the Supreme Court held that to
avail of this exception, therefore, exceptional
circumstances which make it impossible for the
guarantor to reimburse himself if he ultimately
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succeeds, will have to be decisively established.
Clearly, a mere apprehension that the other party will
not be able to pay, is not enough. The existence of any
dispute between the parties to the contract is not a
ground for issuing an injunction to restrain the
enforcement of Bank Guarantees. There must be a
fraud in connection with the Bank Guarantee.
24. The Supreme Court in the case of I.T.C. L TD. V. D EBTS
R ECOVERY A PPELLATE T RIBUNAL, (1998) 2 SCC 70
has laid dow n as under:
22. What is necessary for the Bank to refuse
payment is a case of clear "fraud" and the
Bank's knowledge as to such fraud
(Bolivinter Oil S.A. v. Chase Manhattan
Bank N.A.) [(1984) 1 LLR 392] . As pointed
by Lord Denning and Lord Lane in Edward
Owen [(1978) 1 All ER 976 : 1978 QB 159 :
(1977) 3 WLR 764, CA], the Bank cannot
refuse payment merely because according to
it the claim was "dishonest" or "suspicious"
or it appeared to be a sharp practice but it
must be established as "fraud". Lord Ackner
in United Trading Corpn. S.A. & Murray
Clayton Ltd. v. Allied Arab Bank Ltd.
[(1985) 2 LLR 554, CA] held that the Bank
could object to pay not because the demand
was not "honestly" made but was made
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fraudulently. Waller, J. in Turkiye v. Bank
of China [(1996) 2 LLR 611] [LLR pp.
(617-618)] said that the question was
whether the demand for payment was
"fraudulent". Mere allegations and counter -
allegations between the parties as to br each
of contract, non-payment of advances or
non-supply of machinery did not amount to
fraud.
25. The Supreme Court further in the case of H IMADRI
C HEMICALS INDUSTRIES L TD. V. C OAL T AR R EFINING
C O., (2007) 8 SCC 110 after considering the law as laid
down by the Supreme Court in various decisions laid
down the following principles for grant or refusal to
grant of injunction to restrain enforcement of a Bank
Guarantee or a letter of credit:
(i) While dealing with an application for
injunction in the course of commercial
dealings, and when an unconditional Bank
Guarantee or letter of credit is given or
accepted, the beneficiary is entitled to
realise such a Bank Guarantee or a letter of
credit in terms thereof irrespective of any
pending disputes relating to the t erms of the
contract.
(ii) The bank giving such guarantee is bound to
honour it as per its terms irrespective of any
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dispute raised by its customer.
(iii) The courts should be slow in granting an
order of injunction to restrain the realisation
of a Bank Guarantee or a letter of credit.
(iv) Since a Bank Guarantee or a letter of credit
is an independent and a separate contract
and is absolute in nature, the existence of
any dispute between the parties to the
contract is not a ground for issuing an order
of injunction to restrain enforcement of
Bank Guarantees or letters of credit.
(v) Fraud of an egregious nature which would
vitiate the very foundation of such a Bank
Guarantee or letter of credit and the
beneficiary seeks to take advantage of the
situation.
(vi) Allowing encashment of an unconditional
Bank Guarantee or a letter of credit would
result in irretrievable harm or injustice to
one of the parties concerned.
26. Keeping these principles in mind and applying the same
on the facts of this case, the conc lusion that can be
drawn in that no good ground has been made out by the
Petitioner for grant of an order of injunction.
27. As per the Respondents, the invocation was based on
examination by Chief Technical Examiner (CTE) of the
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Government of India and CTE w as under the Chief
Vigilance Commissioner. The CTE is claimed to have
found that the Petitioner had overbilled and had been
paid in excess and as such recoveries were sought to be
made from the Petitioner of the amount overpaid. As
per the Respondents, the petitioners were aware from
time to time of the pending inquiry and the consequent
recovery to be made. As per the Respondents on
30.01.2014 the Petitioners were informed that they had
to pay/deposit on the claim being made in terms of the
inquiry. The inquiry is stated to have revealed that the
Petitioner had indulged in overbilling and had been
paid in excess on account of the overbilling. The
inquiry is stated to have found that the Petitioner has
indulged in overbilling of approximately Rs. 2.75
Crores.
28. Clauses 29(1) and 29(2) of the Contract between the
parties stipulates as under:
29(1) Whenever any claim, against the contractor
for the payment of a sum or money arises
out of or under the contract, Airports
Authority of India (International Airport
Division) shall be entitled to recover s uch
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sum by appropriating, in part or whole, the
security deposit of the contractor, and sell
any Government promissory notes, etc.,
forming the whole or part of such security.
In the event of the security being
insufficient or if no security has been taken
from the contractor, then the balance or the
total sum recoverable, as the case may be,
shall be deducted from any sum then due or
which at any time thereafter may become
due to the contractor under this or any othe r
contract with Authority. Should this sum be
not sufficient to cover the full amount
recoverable, the contractor shall pay to
Airports Authority of India (International
Airports Division) on demand the balance
remaining due.
29.2 Airports Authority of India (International
Airports Division) shall have the right to
cause an audit and technical examination of
the works and the final bills of the
contractor including all supporting
vouchers, abstract etc. to be made after
payment of final bill and if as a re sult of
such audit and technical examination any
sum is found to have been overpaid in
respect of any work done by the contractor
under the contract or any work claimed by
him to have been done by him under the
contract and found not have been executed
the contractor shall be liable to refund the
amount of overpayment and it shall be
lawful for Airports Authority of India
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(International Airport Division) to recover
the same from him in the manner prescribed
in sub clause (i) of this clause or in any
other manner legally permissible and if it is
found that contractor was paid less than
what was due to him under the contract in
respect of any work executed by him under
it, the amount of such under payment shall
be duly paid by Airports Authority of India
(International Airports Division) to the
contractor.
Provided that Airports Authority of India
(International Airports Division) shall not
be entitled to recover any sum overpaid, nor
the contractor shall be entitled to payment
of any sum paid short where such payment
has been agreed upon between the
Executive Director Engineering/Gen.
Manager Engg/Dy. Or Addl. Gen. Manager
Engg/Asstt Gen. Manager Engg or the Sr.
Manager Engg on the one hand and the
contractor on the other under any term of
the contract permitting payment for work
after assessment by the Executive Director
Engineering/Gen. Manager Engg/Dy, Or
Addl. Gen. Manager Engg/Asstt Gen.
Manager Engg or the Senior Manager
Engineering.
29. Clause 29 (2) of the contract gives a right to the
Respondent Airports Authority of India to cause an
audit and technical examination of the works and the
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final bills of the contractor including all supporting
vouchers, abstract etc. This right has been granted even
after payment of final bill. The clause further stipulates
that if as a result of such audit and technical
examination any sum is found to have been overpaid
the contractor shall be liable to refund the amount of
overpayment and it shall be lawful for Airports
Authority of India to recover the same from him in the
manner prescribed in clause 29(1).
30. Proviso to clause 29(2) stipulates that the Airports
Authority of India shall not be entitled to recover any
sum overpaid, nor the contractor shall be entitled to
payment of any sum paid short where such payment has
been agreed upon between the Executive Director
Engineering/Gen. Manager Engg/Dy. Or Addl. Gen.
Manager Engg/Asstt Gen. Manager Engg or the Sr.
Manager Engg on the one hand and the contractor on
the other under any term of the contract permitting
payment for work after assessment by the Executive
Director Engineering/Gen. Manager Engg/Dy, Or Addl.
Gen. Manager Engg/Asstt Gen. Manager Engg or the
Senior Manager Engineering. However the said proviso
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is not applicable to the facts of the present case as the
Petitioners have not contended that their case is
covered by the proviso.
31. Clause 29(1) grants the Airports Authority of India the
right to recover any claim, against the contractor for the
payment of a sum or money arising out of or under the
contract. The Airports Authority of India is entitled to
recover such sum by appropriating, in part or whole,
the security deposit of the contractor, and sell any
Government promissory notes, etc., forming the whole
or part of such security. If the security deposit is
insufficient or if no security has been taken from the
contractor, then the balance or the total sum
recoverable can be deducted from any sum then due or
which at any time thereafter may become due to the
contractor under the said contract or any other contract
with Authority. If even that amount is not sufficient to
cover the full amount recoverable, the contractor has to
pay to Airports Authority of India on demand the
balance remaining due.
32. The Bank Guarantee is unconditional and the term of
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the Bank Guarantee stipulates that it was being
executed as a security/guarantee for due fulfilment by
the contractor of the terms and conditions of the
agreement. The Bank Guarantee stipulates that the bank
is liable to pay unconditionally the amount claimed by
the Respondent without any demur. Any such demand
made on the bank is conclusive as regards the amount
due and payable by the bank under the guarantee. The
bank has undertaken to pay any money so demanded
notwithstanding any dispute or disputes raised by the
Petitioner in any suit of proceedings before any court or
tribunal.
33. Admittedly the Bank Guarantee has been furnished in
lieu of the security deposit and has been executed as a
security/guarantee for due fulfilment of the terms and
conditions of the agreement. If the security deposit was
liable to be appropriated under Clause 29 (1) and (2) in
case of any excess payment, then the Bank Guarantee
can certainly be invoked for any such recovery.
34. Coming to the ground of fraud, it is seen that fraud has
not even been pleaded. What has been pleaded is
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dishonesty. It is contended that dishonest invocation
tantamounts to fraud. Even if it were to be presumed
that the dishonest invocation would amount to fraud,
from a close scrutiny of the facts pleaded in the petition
it cannot be held that such facts have constituted fraud
for which an order of injunction in the matter of
encashment of Bank Guarantee could be passed.
35. The fraud must be of an egregious nature such as to
vitiate the entire underlying transaction. The wholly
exceptional case where an injunction may be granted is
where it is proved that the bank knows that any demand
for payment already made or which may thereafter be
made will clearly be fraudulent. But the evidence must
be clear both as to the fact of fraud and as to the bank's
knowledge 1 .
36. The Bank cannot refuse payment merely because
according to it the claim was "dishonest" or
"suspicious" or it appeared to be a sharp practice but it
must be established as "fraud". Further The Bank could
object to pay not because the demand was not
U.P. S TATE S UGAR C ORPN .(S UPRA )
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"honestly" made but was made fraudulently. 2
37. On the question of irretrievable injury which is the
second exception to the rule against granting of
injunctions when unconditional Bank Guarantees are
sought to be realised the Supreme Court has laid down
that to avail of this exception, exceptional
circumstances which make it impossible for the
guarantor to reimburse himself if he ultimately
succeeds, will have to be decisively established.
Clearly, a mere apprehension that the other party will
not be able to pay, is not enough 3 .
38. The Petitioner has failed to sufficiently plead or
establish the plea of irretrievable injury. Existence of
exceptional circumstances is not even pleaded by the
Petitioner, that make it impossible for the petitioner to
reimburse himself if he ultimately succeeds , leave
alone decisively establishing them.
39. In view of the above, I find no merit in the Petition.
The Petition is accordingly dismissed. Interim orders
I.T.C. LTD. V. D EBTS R ECOVERY A PPELLATE TRIBUNAL (S UPRA )
U.P. S TATE S UGAR C ORPN .(S UPRA )
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dated 31.01.2014 and 06.02.2014 are vacated.
40. Nothing stated herein would amount to an expression of
opinion on the merits of the case of either party.
SANJEEV SACHDEVA, J
May 29, 2014
HJ
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