Gmr Kishangarh Udaipur Ahmedabad ... vs National Highway Authority Of ...
2015 Latest Caselaw 4481 Del

*       IN THE HIGH COURT OF DELHI AT NEW DELHI
                                     Judgment reserved on March 25, 2015
                                     Judgment delivered on June 29, 2015
+                          O.M.P NO. 1234 /2012
GMR KISHANGARH UDAIPUR AHMEDABAD EXPRESSWAY
LTD                             ......Petitioner

                                  Through:      Mr. Gopal Jain & Mr. Parag
                                                Tripathi, Senior Advocates
                                                with Ms.Mrinalini,
                                                Mr.Chinmayee Chandra and
                                                Mr.R.S. Bobde, Advocates
                                    Versus

NATIONAL HIGHWAY AUTHORITY OF INDIA
                             .............Respondent

                                  Through:      Mr.Sudhir Nandrajog, Sr.
                                                Advocate with Mr.Mukesh
                                                Kumar, Advocate
CORAM:
HON'BLE MR. JUSTICE V.KAMESWAR RAO
V.KAMESWAR RAO, J.

1. This is a Petition filed under Section 9 of Arbitration &

Conciliation Act, 1996 ("Act" in short) seeking the following reliefs:-

i) Restrain the Respondent from invoking or encashing the Performance Guarantee bearing No. 120377IBGP00479 dated 23.5.2012 till the disposal of this petition.

(ii) Restrain the Respondent from making any demand or receiving any money under the, Performance Guarantee bearing No. 120377IBGP00479 dated 23.5.2012 till the disputes between the parties are finally decided.

PETITIONER'S CASE

2. It is the case of the petitioner that the respondent had called for

bids for design, engineering, finance, construction, operation and

maintenance of six-laning of Kishangarh - Udaipur - Ahmedabad section

of National Highway No. NH 79A, NH 79, NH 76 and NH 8. The

Petitioner was the successful bidder and was awarded the Contract. The

Concession Agreement was executed between the parties on November

30, 2011. Under the Concession Agreement, the respondent authority

had to fulfill mandatory Conditions Precedent under clause 4 and the

rights and obligations of the parties only come into effect after

fulfillment of the Conditions Precedent. It is the case of the petitioner,

that as per clause 4.1.2 of the Agreement, the respondent had to fulfill

the following obligations;

i) Issue a Fee Notification;

ii) Providing a Right Of Way to the Site to the Concessionaire;

iii) Procure approval of the Railway Authorities to enable the Concessionaire to construct road over-bridges/underbridges at crossings on the highway project;

iv) Procure all Applicable Permits relating to environmental protection and conservation of the Site.

3. According to the petitioner, a notice by the Concessionaire under

clause 4.1.2 is optional, while the satisfaction of Conditions Precedent

prior to the „Appointed Date‟ by the respondent is mandatory. Only,

upon the respondent authority fulfilling the Conditions Precedent, the

„Appointed Date‟ takes place and the rights and obligations under the

Concession Agreement come into effect. None of the Conditions

Precedent is capable of being waived by the parties. The petitioner

would state, that as per proviso to clause 4.1.2, the respondent authority

has an option to extend the time required for performance of the

Conditions Precedent relating to environmental clearances and approval

from railway authorities, provided that the commercial operation date

has taken place and the right of way has been handed over. Thus,

compliance of the Conditions Precedent for right of way and the Fee

Notification is a must before the „Appointed Date‟.

4. The petitioner‟s case is that, it had started to fulfill its obligations

under the Concession Agreement and notified the respondent authority

that it had appointed EPC contractors and sub-contractors and that

mobilization had commenced. It would state, that it made significant

investments and was ready to commence work. According to the

petitioner, it had notified, time and again to the respondent authority that

the respondent has an obligation to inter-alia publish the Fee Notification

and grant environmental and forest clearances, which are necessary for

the petitioner to commence operations. It had been submitting regularly,

its status report to the respondent. The petitioner has referred to letter

dated October 22, 2012 of the respondent whereby the respondent had

written to the petitioner stating that the User Fee Notification would be

issued shortly and the forest clearance proposal was still pending with

the Ministry of Environment & Forest. It is the case of the petitioner that

the said communication records a clear admission that the Fee

Notification and the forest clearance proposal had not been obtained and

thereby the Conditions Precedent had not been fulfilled. It is also

averred that till date i.e December 27, 2012, the respondent authority has

not complied with its obligations and has failed to satisfy the Conditions

Precedent, which would constitute material default of the conditions of

the Concession Agreement on the part of the respondent.

5. It is the petitioner‟s case, that even the independent Engineer, in

its communication dated November 23, 2012, appointed by the

respondent authority has also recorded the default. The petitioner also

averred, that the respondent failed to fulfill and discharge its obligations

in a timely manner. The respondent did not approach the petitioner to

seek additional time to fulfill the Conditions Precedent nor did it fulfill

the Conditions Precedent within the time provided. It had issued a notice

of intention to terminate the agreement dated December 21, 2012, which

was to take effect after 15 days of serving a termination notice. It is the

case of the petitioner that in view of the respondent‟s failure to fulfill the

Conditions Precedent, the question of the petitioner‟s performance does

not arise at all. Therefore, there is no basis or justification for the

respondent to invoke the Performance Guarantee. It is averred that para

2 of the Performance Guarantee specifically stipulate that the respondent

must clearly mention that the petitioner has committed default in due and

faithful performance of all or any of its obligations during the

construction period under the Concession Agreement. It is also the

petitioner case, due to the acts of the respondent, the performance of

obligation of the petitioner was not possible. Allowing encashment of

Bank Guarantee would result in unjust enrichment of the respondent for

its own wrong.

6. In substance, it is the case of the petitioner that failure on the part

of the respondent to perform the Conditions Precedent; the petitioner has

given notice of termination of the agreement and the same having been

terminated, the respondent has no legal right to invoke Bank Guarantee.

Further, without fulfillment of Conditions Precedent by the respondent,

the question of performance of obligations by the petitioner does not

arise and invocation of Bank Guarantee would tantamount to fraud. The

petitioner averred, prima facie case, balance of convenience in its favour

apart from stating that irretrievable injury would be caused to the

petitioner, unless the respondent is restrained from invoking the Bank

Guarantee, which in fact must be returned to the petitioner upon

termination of the Concession Agreement.

RESPONDENT'S CASE

7. On the other hand, the respondent‟s case, in the reply is that, it had

awarded the Contract to the petitioner in terms of the Concession

Agreement executed on November 30, 2011. It is one of the biggest

project undertaken by the Government, and involves improvement and

development of 555.5 km of National Highway. The petitioner was

selected from amongst the seven bidders who participated in the

International Competitive Bidding undertaken by the respondent

authority. The petitioner was the successful bidder having committed to

pay a sum of Rs.636 crores per year with annual increment of 5% for a

period of 26 years commencing from the Appointed Date and as such,

the petitioner was to pay a sum of approximately Rs.32,500/- crores over

a period of 26 years. The petitioner was entitled to collect User Fee

(Toll) for the four laning from the Commercial Operation Date and for

the entire six lane upon date of completion of six laning besides carrying

out the improvement and construction of six lane and operation and

maintenance during the currency of the Agreement.

8. It is also the stand of the respondent that the respondent authority

was collecting toll for four laning of approximately 350 crores annually.

It is the case of the respondent that the petitioner has committed serious

breaches of the Concession Agreement entered into between the

petitioner and the respondent authority. The petitioner has failed to

fulfill the mandatory Conditions Precedent evidencing inter-alia, its lack

of readiness and willingness to perform its obligations under the

Concession Agreement. According to the respondent, the petitioner has

not even chosen to take possession of the land in question. More than

88% of land required for the project in question was available but the

petitioner has chosen not to avail it. According to the respondent, the

land to the said extent was available at the time of pre-bid meeting and

no protest whatsoever was raised at the relevant time. The plea that land

available is short is barred by waiver, acquiescence and estoppel and

cannot be countenance as a plea for grant of relief.

9. The respondent would submit that the Agreement lays down rights

and obligations of the parties, which inter-alia, required that certain

Conditions Precedent were required to be fulfilled by both the parties.

Unless, both the parties achieve/fulfill their respective Conditions

Precedent, the „Appointed Date‟ i.e the date of Commencement of work

cannot be declared. The Conditions Precedent required to be fulfilled by

the parties are listed in clause 4.1.2 and clause 4.1.3. The clauses 4.2

and 4.3 expressly empowers both the parties to claim damages for delay

by any other party in fulfilling its Conditions Precedent. According to

the respondent, the notice dated December 21, 2012 of the petitioner was

based on flimsy and factually erroneous plea that the Conditions

Precedent had not been met by the respondent. A reply to the notice was

sent by the respondent on January 1, 2013 wherein it was stated that the

notice is misconceived and contrary to the express terms of Concession

Agreement. The respondent, in its reply, had highlighted the status of

the three issues i.e issuance of Fee Notification, handing over of land and

environment clearance. The respondent had inter-alia stated, in so far as

Fee Notification is concerned, the same stands issued on January 1, 2013

itself.

10. On the aspect of handing over of land, it is the case of the

respondent that the requisite land required under the Concession

Agreement to fulfill the Conditions Precedent in that respect is available

not only on the date of letter but from the date, even prior to the award of

the Contract. The respondent‟s case is that 88% of the required land in

terms of a Concession Agreement was available with the respondent

authority for handing over to the petitioner, upon the petitioner fulfilling

its obligations and complying with the requirements of the Agreement.

In fact, a reference is made by the respondent that the independent

Engineer vide its letter dated September 22/26, 2012 requested the

petitioner to depute its team for inspecting the site and for preparing a

memorandum containing inventory of the site including the vacant and

unencumbered land, buildings, structures, road works, trees and any

other immovable property on or attached to the site as per the

requirement of clause 10.3.1 of the Concession Agreement. For the

reasons best known to the petitioner, it chose not to deploy its

representative, in the absence of which inspection of the site and the

Memorandum could not be prepared and the formal handing over of the

land could not be done.

11. In so far as environment clearance is concerned, it is the stand of

the respondent that the environment clearance for the project had already

been obtained by the respondent authority from the Ministry of

Environment & Forest, which is a matter of record, the progress made in

achieving or otherwise of Conditions Precedent was well known to each

other and the authority has also communicated the status of the same

through various letters. The respondent had also referred to the MOEF

circular letter dated January 7, 2013 that for linear Highway Projects

including the present Project, prior forest clearance is no longer required

and construction can be started in non-forest area. The respondent

would also state that in terms of clause 37.2.2, it is required that the

respondent be served with a "Cure Period" notice granting a minimum

90 days period to cure the default, if any. It is only after the failure of

the respondent authority to cure the said default within the "Cure

Period", that the „authority default‟ occurs upon which, the petitioner can

issue notice informing the respondent of its intention to issue the

termination notice. No such notice, much less the "Cure Period" notice

as envisaged under clause 37.2.1 was served by the petitioner on the

respondent. Respondent, would state, there was no occasion for the

petitioner to issue such notice and also the applicability of clause 37.2.2

of the Concession Agreement does not arise at all. Respondent had also

stated, that the petitioner is yet to fulfill its obligations under clause 4.1.3

of the Agreement prior to the "Appointed Date". It would state, the

obligations include procurement of all applicable permits specified in

schedule E like;-

a. Permission of State Government for Extraction of Boulders from Quarry;

b. Permission of Village Panchayat & Pollution Control Board for Installation of Crushers;

c. License for use of Explosives;

d. Permission of the State Government for drawing Water from River/Reservoir;

e. License from Inspector of Factories or other Competent Authority for setting up of Batching Plant; f. Clearance of Pollution Control Board for setting up of Batching Plant;

g. Clearance of Village Panchayat &Pollution Control Board for Asphalt Plant; and h. Permission of Village Panchayat & State Government for Borrow Earth.

12. The respondent would refer to various letters of the petitioner,

wherein the petitioner has admitted of not fulfilling the Conditions

Precedent by it. According to the respondent, since the petitioner has not

fulfilled its obligations, the event of "Appointed Date" could not have

occurred. Hence, no act of the respondent has caused any "Material

Adverse Effect" on the petitioner. It had called upon the petitioner to

withdraw its illegal and untenable notice dated December 21, 2012 and

co-operate with the respondent to achieve the „Appointed Date‟. The

interim order passed by this Court was on the petitioner misreading and

wrongly explaining to the Court, the letter dated December 21, 2012.

The respondent would also state, that the attempt of the petitioner has

been to wriggle out of the contractual obligations. The conduct of the

petitioner amounts to concessionaire default.

13. I note that in the written submissions filed by the respondent, a

reference has been made to letter dated March 5, 2013 wherein the

respondent has referred to fulfilling the Conditions Precedent which

included the environment clearance for the entire project. The

respondent has also referred to a letter dated February 25, 2013 of the

petitioner expressing its interest to revive the project and put forward

certain suggestions regarding rationalization of premium. According to

the respondent, even after the report of the Rangarajan Committee, the

petitioner has failed to submit its proposal. According to the respondent,

it appears, the petitioner was not willing to do the project work right

from the beginning for commercial reasons and its only purpose, was to

linger on the matter to protect its bid security as well as Performance

Bank Guarantee and to raise huge illegal claims on the respondent.

14. Mr. Gopal Jain and Mr. Parag Tripathi, learned Senior Counsel

appearing for the petitioners have drawn my attention to various

provisions of the Contract to submit that the respondent has failed to

fulfill its Conditions Precedent and as such there was no conclusive

Contract between the parties. According to them, the Conditions

Precedent under Article 4.1 included handing over of

land/unencumbered right of way to the petitioner, issuance of Fee

Notification by the authority and obtaining approval from the relevant

authorities. Even after, one year of the execution of the Agreement, the

respondent had failed to fulfill the Conditions Precedent. A reference is

made to letter of the petitioner dated May 23, 2012 whereby the

petitioner had sought the status of the Conditions Precedent and

requested for a joint inspection to ascertain the right of way but the same

could not be carried out. It was contended that the respondent vide its

letter dated May 29, 2012, had stated that only 77.39% land was

available. The subsequent communication from the petitioner for

fulfillment of the Conditions Precedent bore no result. Even the

independent Engineer‟s letter shows that the respondent was yet to hand

over the right of way; failure to issue the Fee Notification and obtain the

Forest & Environment clearance. In reply to the letter of the independent

Engineer, the petitioner had reiterated that the land is not available as

mentioned by the independent Engineer as no further land was acquired

after May 28, 2012. These Conditions Precedent constitute a

fundamental term of the Contract. The authority is in material breach of

the terms of the Agreement which had a "Material Adverse Effect" on

the petitioner, who mobilized resources and infused equity of Rs.700/-

Crores in the project and the petitioner had carried out almost 50% of

design, set up all site offices and base camp for construction activities

apart from installing crushers and batching plants etc. It was under these

circumstances, the notice of intention to terminate dated December 21,

2012 was issued by the petitioner under Article 37.2.2 and sought for

return of the Performance Security. Since the respondent had failed to

cure the breaches and defaults, the petitioner terminated the Agreement

vide letter dated January 7, 2013. The petitioner has also referred to, its

proposal dated February 25, 2013 and a modified proposal dated

November 7, 2014 in which staggered payment of premium was

suggested. A further revised proposal was submitted on January 7, 2015

with some modifications for revival of the project which has not been

responded to by the respondent. A reference is also made to an

Application filed by the respondent before the Supreme Court for

directions in Writ Petition (Civil) No. 202/1995 relevant paras of which

are reproduced as under:-

"7. ...There are more than 22 awarded projects where "Appointed Date" has not been declared as the formal environment clearance is still pending. All these widening projects have been duly recommended by the Environmental Appraisal Committee of MoEF, howver the formal Environment clearance has not been issued yet as now it is mandatory to obtain the Forest Clearance before Environment Clearance can be granted.

8. ...Besides the incompensable loss of the timely execution of the Project, the Applicant Authority is already facing huge claims on account of delay in grant of environmental clearance.....the Applicant Authority has already received claims running into hundreds of crores on account of idling of resources, increase in construction cost etc., where construction has not started on account of the pending environmental clearance".

15. The petitioner has prayed that it has invoked the Arbitration

Clause and during the pendency of the Arbitration, the subject-matter of

the dispute need to be preserved and no prejudice is going to be caused

to the respondent. Learned counsel for the petitioners relied upon AIR

2006 Delhi 98 D.S. Construction Ltd. Vs. Rites Ltd and Anr.; Union of

India Vs. Uttam Singh Duggal & Co. (P) Ltd, AIR 1972 Delhi 110 to

contend, there is no concluded Contract as there is a failure to fulfill the

Conditions Precedent and the petitioner is entitled to the refund of the

Performance Bank Guarantee and the invocation would be fraudulent

and illegal; 2006 (1) Arbitration Law Reporter 321 Delhi Continental

Construction Ltd and Anr Vs. Satluj Jal Vidyut Nigam to contend that

the injunction against invocation of Bank Guarantee must be granted

where there is a fraud or special equities or where non-grant of an

injunction would lead to irretrievable injustice to the party seeking

injunction; JG Engineers (P) Ltd Vs. Union of India 2011 5 SCC 758,

1987 (2) SCC 160 State of Karnataka Vs. Shri Rameshwara Rice Mills

to contend that the respondent, as a Contracting Party cannot decide the

issue by itself or a party to the Agreement cannot be an Arbiter in its

own cause.

16. On the other hand, Mr. Sudhir Nandrajog, learned Senior Counsel

for the respondent would reiterate the stand taken by the respondent in

its reply by drawing my attention to the various documents annexed with

the pleadings. According to him, the dispute is primarily related to the

main Contract and the same is irrelevant for the purpose of invocation of

Bank Guarantee. He has drawn my attention to the terms of the Bank

Guarantee, which, according to him, are unequivocal, unconditional. He

states, in view of clause 2 of the terms of the Bank Guarantee, even if

there are disputes, the same can be invoked. He would urge that there is

no pleading of fraud in the execution of the main Contract or even in the

execution of the Contract of Bank Guarantee. Even the averments in

para 11 of the petition would not constitute fraud. He states, fraud cannot

be even pleaded, when Bank is not a party. It is not a case of irretrievable

injury as the respondent herein, is one hundred percent owned by the

Central Government, having been constituted under the Act of the

Parliament. According to him, the petitioners have portrayed that the

respondent has not complied with any of its obligations. Rather, it is a

case where the petitioner has not discharged its Conditions Precedent.

He would refer to the letter dated January 2, 2013 intimating the issue of

Fee Notification on January 1, 2013. He would also state, that 88.92%

of the area was available and the same is clear from the letter dated

December 21, 2012 of the independent Engineer. He states, that the

petitioner has intentionally not brought to the notice of the Court on

December 28, 2012 when this Court had passed the interim order, clause

(d) at page 233 which reflects the Conditions Precedent required to be

fulfilled by the petitioner but not fulfilled. According to him, the

respondent, in its reply dated January 1, 2013 had highlighted the status

of the various Conditions Precedent required to be fulfilled by the

respondent and in that regard, he pointed out to para 13 of its reply at

running page 34 of the paper book. He would further submit, that

despite the request by the independent Engineer, the petitioner had not

come forward for joint verification of the site. He also states, the

petitioner can take the project now, start and complete the work. He

would refer to clause 44.2 of the Agreement, which details the manner in

which the dispute resolution has to take place which includes the process

of Conciliation, which has not been invoked. It is, his endeavor to stress

on the fact that the notice of termination dated December 21, 2012 issued

by the petitioner is not as per Article 37.2, which contemplates a "Cure

Period" of 90 days. Even in terms of notice dated January 7, 2013, the 90

days was to expire on March 21, 2015; the clearance had come from the

Ministry of Environment & Forest, giving clearance to the project, which

aspect has been communicated to the petitioner vide letter dated March

5, 2013, much before March 21, 2013. It is only in the eventuality of

failure to cure the defects the termination could have been effected. In

other words, it is his endeavour to submit that the agreement has not

been terminated, the case set up by the petitioner.

17. He would also refer to the respondent‟s letter dated January 17,

2013 written to the petitioner, wherein the respondent had stated that the

termination notice got issued by the petitioner is invalid and the conduct

of the concessionaire to walk out of the project would cause huge loss to

NHAI beside causing irreparable loss and injury to the general public

depriving them from using the much essential project facilities. The

learned counsel for the respondent has stated that even the present

petition filed by the petitioner was before the expiry of the 15 days of the

notice dated December 21, 2012 of the petitioner whereby it had issued

notice of intention to terminate the Agreement in terms of clause of

37.2.2 as the petition was filed immediately thereafter on December 26,

2012. Mr.Nandrajog would also submit that no advance petition was

served on the respondent. He also states, that in page 9 of the plaint, it is

highlighted that 88.4 % of the land was available for construction. He

states, that independent Engineer had never said that the petitioner has

complied with the Conditions Precedent. The Arbitration was only

invoked in the month of February 2015. He would also state, that the

judgments relied upon by the petitioner are not applicable to the facts of

this case.

18. Mr. Gopal Jain, in rejoinder, would submit that the rights and

obligations of the parties under the Agreement shall be subject to the

satisfaction in full, of the Conditions Precedent specified in clause 4.1.

Once the Performance Security is taken, the precedents need to be

fulfilled in terms of clause 4.1.2. It is his case, that the termination has

been accepted by the respondent by conduct. He would state, that once

the termination has been effected, the Performance Security must come

back to the petitioner.

19. Having heard the learned counsel for the parties, the only issue

which arises for consideration is that the petitioner is entitled to the relief

as prayed for, in the petition i.e seeking an injunction against the

respondent from invoking/encashing the Performance Bank Guarantee.

The law on bank guarantees is quite well settled. The exhaustive

submissions made by learned counsel for the parties, relates to the

Concession Agreement executed between the parties and the rights and

obligations and the violation of those rights and obligations under the

said Agreement. The submissions, as noted above, would highlight that

the parties herein are blaming each other for the violation/non fulfilment

of Conditions Precedent, which has also effected the project as it could

not take off, despite the fact that the Agreement was executed way back

in 2012. Be that as it may, the issues raised in the petition primarily

relates to the merit of the disputes. This Court in a petition under

Section 9 of the Act, for the purpose of the relief, as prayed for, need to

take into consideration the position of law with regard to the bank

guarantees. As rightly pointed out by Mr. Sudhir Nandrajog, a perusal of

the petition would not show that fraud in relation to execution of Bank

Guarantee has been pleaded by the petitioner. The only paragraph

wherein fraud has been averred is in para 11 wherein the petitioner has

inter-alia stated that without fulfilment of the Conditions Precedent by

the respondent, the question of performance of obligations would not

arise and in such circumstance allowing enforcement of Performance

Guarantee would tantamount to fraud. Surely, such an averment is not

an allegation of fraud in the execution of Contract of Bank Guarantee.

Further, there is no averment in the petition, wherein the petitioner has

pleaded irreparable injustice. In fact, such a case can‟t be set up by the

petitioner for the simple reason, the respondent herein, has been

established by the Central Government under the Act of Parliament and

even if the petitioner succeeds, before the Arbitrator, the Award can be

satisfied. Further, the Bank has not been made a party. To obtain an

injunction, it is necessary to prove, the bank has the knowledge of fraud.

In this case, there is no averment that bank has the knowledge of fraud.

Rather, I find an averment in para 17 of the petition, wherein the

petitioner has stated that it had notified the bank on December 24, 2012.

The petitioner has also stated that despite notifying the bank, the bank

cannot resist/refuse paying the secured amount upon its invocation by

the respondent. This is, primarily because the bank, in its letter dated

December 26, 2012, has conveyed to the petitioner, if the Bank

Guarantee is invoked, it is bound to honour it unless there is an order of

the Court. In other words, it is the Bank‟s view that there is no fraud.

Further, the submission of Mr. Nandrajog that for effecting termination,

there has to be a notice of 90 days is appealing as there is nothing on

record to suggest, even after March 05, 2013 there are Conditions

Precedent, which were yet to be fulfilled by the respondent.

20. In Federal Bank Ltd. Vs. V.M.Jog Engineering Ltd. and Ors.,

(2001) 1 SCC 663 wherein, the Supreme Court observed that the Court

ought not to grant injunction, to restrain invocation of bank guarantees or

letters of credit. The Supreme Court carved out two exceptions to this

rule, viz. fraud and irretrievable damage. It further observed that the

Contract of Bank Guarantee or letter of credit is independent of the main

contract between the seller and the buyer. In case of an irrevocable bank

guarantee or letter of credit, the buyer cannot obtain injunction against

the final payment on the ground that there was a breach of the contract

by the seller. The bank is to honour the demand for encashment if the

seller, prima facie, complies with the terms of the Bank Guarantee or the

letter of credit namely, if the seller produces the documents enumerated

in the Bank Guarantee or the Letter of Credit. If the bank is satisfied on

the basis of the documents that they are in conformity with the list of

documents mentioned in the Bank Guarantee or the Letter of Credit and

there is no discrepancy, it is bound to honour the demand of the seller for

encashment. It is not permissible for the bank to refuse the demand on

the ground that the buyer is claiming that there is a breach of contract.

The obligation of the bank under the documents has nothing to do with

any dispute as to breach of contract between the seller and the buyer. The

Supreme Court also observed that in order to obtain injunction against

the issuing bank that it is necessary to prove that the bank had

knowledge of fraud. The Supreme Court relied on the observations of

Kerr, J. in R.D. Harbottle (mercantile) Ltd. Vs. National Westminster

Bank Ltd. (1978) QB 146:(1977) 2 All England Reporter 862 to state

that irrevocable Letters of Credit are "lifeblood of international

commerce" and also observed as under:

"Except possibly in clear cases of fraud of which the banks have notice, the Courts will leave the merchants to settle their disputes under the contracts by litigation or

arbitration........Otherwise, trust in international commerce could be irreparably damaged."

Denning M.R, stated In Edward and Owen Engineering Ltd. v. Barclays Sank International Lid. (1978) Q.B. 159 that 'the only exception is where there is a clear fraud of which the bank had notice": Browne, LJ. said in the same case : "but it is certainly not enough to alleged fraud, it must be established" and in such circumstances, I should say, very clearly established", in Bolvinter Oil S.A.v. Chase Manhattan Bank, (1984) 1 All E.R, 351 at P. 352, it was said '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. It would certainly not be sufficient that this rests Upon the uncorroborated statement of the customer,, for irreparable damage can be done to a bank's credit in the relatively brief time "before the injunction is vacated". Thus, not only must 'fraud' be clearly proved but so far as the Bank is concerned, it must prove that it had knowledge of the fraud. In United Trading Corp. S.A. v. Allied Ards Bank, (1985) 2 Lloyds Rep, 554, it was stated that there must be proof of knowledge of fraud on the part of the Bank at any time before payment".

21. In Himadri Chemicals Industries Ltd Vs Coal Tar Refining

Company [2007 (8) SCC 110], the Supreme Court has held as under:

"10. The law relating to grant or refusal to grant injunction in the matter of invocation of a Bank Guarantee or a Letter of Credit is now well settled by a plethora of decisions not only of this court but also of the different High Courts in India. In U.P. State Sugar Corporation Vs. Sumac International Ltd. [(1997) 1 SCC 568], this court considered its various earlier decisions. In this decision, the principle that has been laid down clearly on the enforcement of a Bank guarantee or a Letter of Credit is that in respect of a Bank Guarantee or a Letter of Credit which is sought to be encashed by a beneficiary, the bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. Accordingly this Court held that the courts should be slow in granting an order of injunction to restrain the realization of such a Bank Guarantee. It has also been held by this court in that decision that the existence of any dispute between the parties to the contract is not a ground to restrain the enforcement of Bank guarantees or Letters of Credit. However this court made two exceptions for grant of an order of injunction to restrain the enforcement of a Bank Guarantee or a Letter of Credit. (i) Fraud committed in the notice of the bank which would vitiate the very foundation of guarantee; (ii) injustice of the kind which would make it impossible for the guarantor to reimburse himself.

11. Except under these circumstances, the courts should not readily issue injunction to restrain the realization of a Bank Guarantee or a Letter of Credit. So far as the first exception is concerned, i.e. of fraud, one has to satisfy the court that the fraud in connection with the Bank Guarantee or Letter of Credit would vitiate the very foundation of such a Bank Guarantee or Letter of Credit. So far as the second exception is concerned, this court has held in that decision that it relates to cases where allowing encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. While dealing with the case of fraud, this court in the case of U.P. Coop. Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd. 1988 (1) SCC 174 held as follows:

The fraud must be of an egregious nature such as to vitiate the entire underlying transaction.(emphasis supplied)

While coming to a conclusion as to what constitutes fraud, this court in the above case quoted with approval the observations of Sir John Donaldson, M.R. in Bolivinter Oil SA V/s. Chase Manhattan Bank (1984) 1 All ER 351 at p. 352 which is as follows:

"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. 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 bank to have it discharged."(Emphasis supplied)

12. In Svenska Handelsbanken Vs. Indian Charge Chrome [(1994) SCC (2) 155], it has also been held that a confirmed Bank Guarantee/irrevocable Letter of Credit cannot be interfered with unless there is established fraud or irretrievable injustice involved in the case. In fact, on the question of fraud, this decision approved the observations made by this court in the case of U.P. Coop. Federation Ltd Vs. Singh Consultants and Engineers (P) Ltd. 1988 (1) SCC 174.

13. So far as the second exception is concerned, this court in U.P. State Sugar Corporation Vs. Sumac International Ltd. [(1997) 1 SCC 568 as considered herein earlier, at para 14 on pp. 575-76 observed as follows :

"14.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 realized the court said in the above case that the irretrievable injury must be of the kind which was the subject matter of the decision in the Itek Corpn. Case (566 Fed Supp

1210). In that case an exporter in USA entered into an agreement with the Imperial government of Iran and sought an order terminating its liability on stand by letter of credit issued by an American Bank in favour of an Iranian Bank as part of the contract. The relief was sought on account of the situation created after the Iranian revolution when the American Government cancelled the export licences in relation to Iran and the Iranian government had forcibly taken 52 American citizens as hostages. The US Government had blocked all Iranian assets under the jurisdiction of United States and had cancelled the export contract. The court upheld the contention of the exporter that any claim for damages against the purchaser if decreed by the American courts would not be executable in Iran under these circumstances and realization of the bank guarantee/letters of credit would cause irreparable harm to the Plaintiff. This contention was upheld. To avail of this exception, therefore, exceptional circumstances which make it impossible for the guarantor to reimburse himself it he ultimately succeeds, will have to be decisively established. Clearly, a mere apprehension that the other party will not be able to pay, is not enough. In Itek case, there was certainty on this issue. Secondly, there

was good reason, in that case for the Court to be prima facie satisfied that the guarantors i.e. the bank and its customer would be found entitled to receive the amount paid under the guarantee."

14. From the discussions made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement of a Bank Guarantee or a Letter of Credit, we find that the following principles should be noted in the matter of injunction to restrain the encashment 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 realize such a Bank Guarantee or a Letter of Credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.

(ii) The Bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.

(iii) The Courts should be slow in granting an order of injunction to restrain the realization of a Bank Guarantee or a Letter of Credit.

(iv) Since a Bank Guarantee or a Letter of Credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to

the contract is not a ground for issuing an order of injunction to restrain enforcement of Bank Guarantees or Letters of Credit.

(v) Fraud of an egregious nature which would vitiate the very foundation of such a Bank Guarantee or Letter of Credit and the beneficiary seeks to take advantage of the situation.

(vi) Allowing encashment of an unconditional Bank Guarantee or a Letter of Credit would result in irretrievable harm or injustice to one of the parties concerned.

"The aforesaid has further been reiterated and reaffirmed by the Apex Court in Appeal (civil) 5121 of 2007 titled Vinitec Electronics Private limited Vs HCL Infosystems Limited. In the present case neither a case of fraud or irretrievable harm and injury has been alleged and as such the only two grounds upon which a court of law can interfere with the right of the Respondent herein are not satisfied in the present case. In this regard, it is respectfully submitted that there is not even a whisper by the Petitioner much less any allegation of fraud having being committed by the Respondents. Even otherwise, mere allegation of fraud alone is not enough, the said allegation has to be substantiated as also the fraud has to be of an egregious nature, which would vitiate the very foundation of the Bank

Guarantee. On this ground alone the prayer for restraining the Respondent from encashing the bank guarantee is not maintainable and liable to be dismissed."

22. Insofar as the judgment relied upon by the learned Senior Counsel

for the petitioner are concerned, in D.S. Construction Ltd (supra) this

Court was dealing with facts wherein the defendant No.1 issued a letter

inviting tender on February 17, 2003 in respect of a power plant in

Jharkhand. The bids were to be accompanied by earnest money deposit

of Rs.15 Lakhs, which was to be, by way of crossed Bank Draft or Pay

Order or in the alternative, Bank Guarantee for the amount. The plaintiff

submitted tender on March 24, 2003. The bids were opened on the same

day. The tender was to remain valid for six months from March 24,

2003 to September 23, 2003. On September 9, 2003, the plaintiff sought

extension of the validity of its bid till November 30, 2003. On

September 9, 2003, the defendant No. 1 sent a letter to the plaintiff

informing the plaintiff that the finalization of the said tender would take

some more time and therefore, requested the plaintiff to extend the

validity of the same unconditionally upto November 30, 2003. The

plaintiff, by letter dated September 22, 2003, responded to the aforesaid

request of the defendant No. 1 by indicating that in the quotation

submitted by it on March 24, 2003, the plaintiff had offered a rebate of

18% but in the intervening period, the price of Steel had seen a steep rise

and therefore the rates quoted in the original bid were no longer

workable. However, the plaintiff extended the validity of the bid till

November 30, 2003 with a condition that the rebate is reduced from 18%

offered on March 24, 2003 to 5%. It is noted, that by letter dated

October 28, 2003, the defendant informed the plaintiff that the offer of

extension of validity has been accepted unconditionally. The defendant

No.1 also issued the letter of award accepting the plaintiffs‟ bid and the

defendant No. 1 informed the plaintiff that the earnest money submitted

by it in the form of Bank Guarantee for Rs.15 Lakhs, would be retained

as part of the total security deposit and would be adjusted against the

security deposit as per Clause 16.1 of the General Conditions of

Contract. Since the plaintiff did not respond to the letter awarding the

Contract, the defendant No.1 sent another letter dated November 18,

2003 asking the plaintiff to expedite the return of two copies of the letter

of award sent by it as a token of its unconditional acceptance. The

defendant No. 1, by the same letter, also communicated that failure to do

so, would constitute breach of the Agreement effected by the

acceptance/award of the tender and that the earnest money

accompanying the tender would be forfeited by the defendant No.1 as

liquidated damages for such default. The plaintiff instituted the suit. It

was the case of the plaintiff that there was no enforceable Contract

between the plaintiff and the defendant and therefore, the defendant No.1

was not entitled to invoke the Bank Guarantee and thereby, forfeit the

earnest money. This submission of the plaintiff was accepted by the

Court on the ground, there was no underlying Contract between the

plaintiff and defendant No.1 in as much as when the plaintiff‟s offer

lapsed on September 23, 2003, it became entitled to the return of the

earnest money amount and the defendant No.1 could not in law forfeit

the same. The case relied upon by the learned Senior Counsel is clearly

distinguishable on facts. In the case in hand, the parties have advanced

much further and executed a Concession Agreement. The relationship

has to be governed by the said Agreement. It is the petitioner‟s own

case, that it had terminated the Agreement. The termination pre-supposes

a concluded Contract. The plea of the petitioner is contradictory. It can‟t

plead that there is no concluded Contract; when its case is that the

Agreement stands terminated. The judgment is not applicable to the

facts of this case. Insofar as the judgment in Continental Construction

Ltd and Anr (supra) is concerned, there is no dispute on the proposition

advanced by learned counsel for the petitioner. As held above, there is

no plea of fraud in the execution of Contract of Bank Guarantee nor

there is any plea of Special Equities. Even the ground of irretrievable

injustice would not be available to the petitioner in this case. In

Continental Construction Ltd and Anr. (supra), there is a finding of

fact that the Bank Guarantee has not been invoked strictly in terms

thereof, which is not the case here. The judgment has no application.

23. Insofar as JG Engineers (P) Ltd (supra) and Shri Rameshwara

Rice Mills (supra) are concerned, there is no dispute on the proposition

as advanced by learned counsel for the petitioner that the party cannot be

Arbitrator in its own cause. Surely, the disputes, inter-se would be

decided by the Arbitral Tribunal and I do not see the applicability of the

judgments in the facts of this case.

24. In view of the detailed discussion above, this Court is of the view

that the petitioner has not been able to establish a prima facie case in its

favour. The balance of convenience is also not in favour of the petitioner

for this Court to injunct the respondent from invoking the Bank

Guarantee. I do not see any merit in the petition, the same is dismissed.

25. No costs.

(V.KAMESWAR RAO) JUDGE JUNE 29, 2015 ak