Delhi High Court

Enfield Infrastructure Limited vs Ntpc Vidyut Vyapar Ltd. & Ors. on 15 January, 2015

Author: S. Muralidhar

       IN THE HIGH COURT OF DELHI AT NEW DELHI

                         O.M.P. 322/2013

       ENFIELD INFRASTRUCTURE LIMITED          ..... Petitioner
                     Through: Ms. Kavita Jha and Ms. Shraddha,
                     Advocates.

                         versus

       NTPC VIDYUT VYAPAR LTD. & ORS.        ..... Respondents
                    Through: Mr. Bharat Sangal with
                    Ms. Anasuya Choudhury and Ms. Saggar
                    Malhotra, Advocates for Respondent No.1.
                    Mr. Anuj Aggarwal, Advocate for Respondent
                    No.4.

         CORAM: JUSTICE S. MURALIDHAR

                           ORDER

15.01.2015

1. This petition under Section 9 of the Arbitration and Conciliation Act,

1996 ('Act') by Enfield Infrastructure Limited ('EIL') seeks interim

relief in respect of a bank guarantee for Rs.5,07,54,000 and two bank

guarantees for Rs.10,15,08,000 each against Respondent No.1 NTPC

Vidyut Vyapar Ltd. ('NVVL') furnished by EIL to NVVL.

2. EIL and NVVL entered into a power purchase agreement ('PPA') on

25th January 2012. Pursuant thereto the aforementioned three bank

guarantees were furnished by EIL to NVVL. In terms of the PPA, EIL

was required to commission the Solar PV Project of 10MW capacity at

village Mandali in Jodhpur district, Rajasthan. The Rajasthan

Renewable Energy Corporation Limited ('RRECL') was appointed as

the State nodal agency and was obligated to facilitate EIL in

constructing and commissioning the power plant. As per the PPA, EIL

was required to commission the project and inject power from the power

project to the delivery point within 13 months of signing the PPA. The

effective commissioning date was, therefore, 26th February 2013.

3. According to EIL, the land site assigned to it for the project was not

found suitable due to problems caused by the local villagers. The

alternative site identified by the Petitioner was not made available as

NVVL did not grant the requisite No Objection to the change of site.

The said No Objection was granted by NVVL on 24th July 2012.On 8th

October 2012 the necessary amendment to the PPA was carried out. EIL

states that it is only after the said amendment that it could initiate the

civil and other construction work at the site. According to EIL, RRECL

was to grant permission for constructing a project road to the project

site. This was granted by RRECL only on 29th January 2013. It is then

stated that in the same month, the local villagers encroached on the site

land and hindered the construction work.

4. As a result of delay in commissioning the project by the scheduled

commissioning date, EIL sent letters to NVVL on 28th January 2013 and

5th February 2013 seeking extension of time under clause 4.5 of the

PPA. According to EIL, the request for extension of time was due to

Force Majeure events. On 5th February 2013, NVVL wrote to EIL

rejecting its request for extension of time. It is stated that despite a

further letter sent by EIL to NVVL on 21st February 2013, NVVL

threatened to invoke the bank guarantees in question. It was in the above

circumstances that the Petitioner approached the Court to restrain

NVVL from invoking the bank guarantees.

5. On 3rd April 2013, the Court passed an order, the operative portion of

which reads as under:

"Learned Senior counsel for the petitioner has referred to earlier order dated 1st March, 2013 passed in O.M.P. No.205/2013. His submission is that since the respondent No.1 in its letter dated 5th February, 2013 did not agree to accept the justification given by the petitioner with regard to Force Majeure, it is an apprehension that the respondents may invoke the bank guarantees in question. After having considered the pleadings and material placed on record, till the next date of hearing, subject to keeping the bank guarantees in question alive, the status quo be maintained by the respondents in respect of the following Bank Guarantees:-

                Issuing Bank             Bank Guarantee details
                State Bank of Bikaner 1037612BG0000440
                and Jaipur            dated 21st January,
                                      2012, valid till 26th
                                      May, 2013
                Dena Bank             124712IGPER0002
                                      dated 24th January,
                                      2012, valid till 26th

                                         May, 2013
                Dena Bank               124712IGPER0001
                                        dated 24th January,
                                        2012, valid till 26th
                                        May, 2013

6. The said interim orders have continued till date. At one stage the

parties explored the possibility of a settlement but that did not

materialize.

7. The Court is informed today that the Arbitral Tribunal ('AT') has

since been constituted and its first sitting took place on 8th August 2014.

8. It is submitted at the outset by Mrs. Kavita Jha, learned counsel for

the Petitioner, that the interim order passed by the Court on 3rd April

2013 should be continued till such time the AT decides an application

that may be filed by either party under Section 17 of the Act. She

submits that a question whether the stay on the invocation of the bank

guarantees in question should be continued can be decided by the AT.

9. On merits Ms. Jha submits that under clause 4.5 of the PPA, NVVL

was obliged to grant extension of time since the Force Majeure events

continued. She refers to the averments in para 22 of the petition which

lists out the Force Majeure events. She points out that in para 31 of the

petition it has been averred that "fraud of an egregious nature has been

played by Respondent No.1 on the Petitioner" and, therefore, there was

a prima facie case in favour of the Petitioner for continuing the interim

orders in its favour during the pendency of the arbitral proceedings.

10. Mr. Bharat Sangal, learned counsel for NVVL has opposed the

above submissions. He submits that there is no justification for staying

the invocation of the bank guarantees. He submitted that the law in this

regard has been consistently explained by the Supreme Court in several

decisions. He relied on the decisions in U.P. State Sugar Corporation v.

Sumac International Ltd. (1997) 1 SCC 568 and Vinitec Electronics

Private Ltd. v. HCL Infosystems Ltd. (2008) 1 SCC 544. Mr. Sangal

submitted that apart from a bald plea of fraud, there is nothing in the

petition to show that the Petitioner would be subjected to any

irretrievable injury or irretrievable injustice warranting continuance of

the interim order against the invocation of the bank guarantees. He

pointed out that none of the Force Majeure events cited by the Petitioner

were attributable to any act of NVVL and, therefore, there was no

justification in preventing NVVL from enforcing the bank guarantees.

11. The above submissions have been considered. The law concerning

interference by the Court with the enforcement of bank guarantees is

fairly well settled. In U.P. State Sugar Corporation (supra), the

Supreme Court explained in para 12 as under:

"12. The law relating to invocation of such bank guarantees is by now well settled. When in the course

of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The Courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The Courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may co-exist in some cases. In the case of U.P. Co- operative Federation Ltd. v. Singh Consultants and Engineers (P.) Ltd. (1998) 1 SCC 174 which was the

case of a works contract where the performance guarantee given under the contract was sought to be invoked, this Court, after referring extensively to English and Indian cases on the subject, said that the guarantee must be honoured in accordance with its terms. The bank which gives the guarantee is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not. The bank must pay according to the tenor of its guarantee on demand without proof or condition. 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 as to vitiate the entire underlying transaction."

12. The Court further explained with reference to the decisions in

United State District Court in Itek Corporation v. First National Bank

of Boston 566 Fed Supp 1210 that an irretrievable injury has to be of

such a kind that realisation of the bank guarantee would "make it

impossible for the guarantor to reimburse himself if he ultimately

succeeds." Recently in Vinitec Electronics Private Ltd. (supra) the

above legal position was reiterated. It was explained that with the bank

guarantees being unconditional and irrevocable, the bank was bound to

honour it and pay the amounts "at once upon receipt of written demand

of the Respondent." The Court rejected the plea of fraud in that case as

being vague and indefinite and not satisfying the requirement of law.

Even the plea of irretrievable injustice was "again vague and not

supported by any evidence."

13. Turning to the present case the Court finds that the plea of fraud

raised in para 31, is indeed vague and unsubstantiated and does not

satisfy the requirement of law as explained by the Supreme Court in the

above decisions. In Svenska Handelsbanken v. Indian Charge Chrome

AIR 1994 SC 626 it was stressed by the Supreme Court as under:

"We have already held that the contracts between the lenders and the borrower are not vitiated by any fraud much less established fraud and there is no question of irretrievable injury, therefore, there was no reason for the High Court to set aside the order of the trial court. Against there is no case of any irretrievable injury either of the type as held in the case of Itek Corporation (supra) as there is no difficulty in the judgment of this country being executable in the courts in Sweden.

The High Court was not right in working on mere suspicion of fraud or merely going by the allegations in the plaint without prima facie case of fraud being spelt out from the material on record."

14. The second exception spelt out in the above decisions to the general

rule that Courts will normally not grant stay of an enforcement of bank

guarantee, requires the Petitioner to establish that the encashment of the

bank guarantee will cause irretrievable injustice or irretrievable injury.

Apart from setting out the Force Majeure events in terms of clause 4.5

of the PPA, which according to the NVVL has nothing to do with, there

is no averment in the petition that the Petitioner would be subject to

irretrievable injustice. The usual grounds of irreparable loss and injury

which cannot be compensated in terms of the money is pleaded. That

does not, however, satisfy the requirement of the Petitioner having to

establish the exceptional conditions repeatedly stressed by the Supreme

Court in the aforementioned decisions.