Delhi High Court
Nrp Projects Private Limited vs Indian Oil Corporation Limited on 6 May, 2015
Author: Manmohan
#29
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* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ CS(OS) 1272/2015
NRP PROJECTS PRIVATE LIMITED ..... Plaintiff
Through Mr. K. Manoj Menon with Mr. Manu
Seshadri and Mr. R.V. Prabhat,
Advocates
versus
INDIAN OIL CORPORATION LIMITED ..... Defendant
Through None
% Date of Decision : 06th May, 2015
CORAM:
HON'BLE MR. JUSTICE MANMOHAN
JUDGMENT
MANMOHAN, J: (Oral)
I.A. 9534/2015 [Exemption from filing certified/typed/dim copies]
Allowed, subject to just exceptions.
CS(OS) 1272/2015
Let the plaint be registered as suit.
Issue summons in the suit to the defendant by registered post and
dasti, returnable for 4th August, 2015 before the Joint Registrar.
The summons to the defendant shall indicate that a written statement
to the plaint shall be positively filed within four weeks of the receipt of the
summons. Liberty is given to the plaintiff to file a replication within two
weeks of the receipt of the advance copy of the written statement.
The parties shall file all original documents in support of their
respective claims along with their respective pleadings. In case parties are
placing reliance on a document which is not in their power and possession,
its detail and source shall be mentioned in the list of reliance which shall be
also filed with the pleadings.
Admission/denial of documents shall be filed on affidavit by the
parties within two weeks of the completion of the pleadings. The affidavit
shall include the list of the documents of the other party. The deponents
shall indicate their position with regard to the documents against the
particulars of each document.
I.A. 9533/2015
Present application has been filed under Order 39 Rules 1 & 2 CPC.
It is pertinent to mention that present suit has been filed for
compensation, declaration and injunction.
Learned counsel for the plaintiff seeks stay of encashment of bank
guarantee amounting to Rs. 62,47,950/-. He states that the defendant had
filed a counter-claim before the Arbitrator only on account of alleged loss
due to delay and that too for an amount in excess of the amount stipulated in
the liquidated damages clause in the contract. He submits that such a
counter-claim is not maintainable in view of the Supreme Court's judgment
in Sir Chunilal V. Mehta and Sons, Ltd. Vs. Century Spinning and
Manufacturing Co., Ltd., 1962 Supp. (3) SCR 549.
Learned counsel for the plaintiff further states that the bank guarantee
was given only in view of the counter-claim raised by the defendant and as
the Arbitrator has now been terminated his mandate, the bank guarantee
cannot be invoked. In support of his submission, he relies upon the judgment
of the Supreme Court in Hindustan Construction Company Ltd. vs. State of
Bihar & Ors.,(1999) 8 SCC 436 wherein it has been held as under:-
"9. What is important, therefore, is that the bank guarantee
should be in unequivocal terms, unconditional and recite that
the amount would be paid without demur or objection and
irrespective of any dispute that might have cropped up or might
have been pending between the beneficiary under the bank
guarantee or the person on whose behalf the guarantee was
furnished. The terms of the bank guarantee are, therefore,
extremely material. Since the bank guarantee represents an
independent contract between the bank and the beneficiary,
both the parties would be bound by the terms thereof. The
invocation, therefore, will have to be in accordance with the
terms of the bank guarantee, or else, the invocation itself would
be bad.
xxx xxx xxx
14. This condition clearly refers to the original contract
between HCCL and the defendants and postulates that if the
obligations, expressed in the contract, are not fulfilled by
HCCL giving to the defendants the right to claim recovery of
the whole or part of the "advance mobilisation loan", then the
Bank would pay the amount due under the guarantee to the
Executive Engineer. By referring specifically to clause 9, the
Bank has qualified its liability to pay the amount covered by the
guarantee relating to "advance mobilisation loan" to the
Executive Engineer only if the obligations under the contract
were not fulfilled by HCCL or HCCL has misappropriated any
portion of the "advance mobilisation loan". It is in these
circumstances that the aforesaid clause would operate and the
whole of the amount covered by the "mobilisation advance"
would become payable on demand. The bank guarantee thus
could be invoked only in the circumstances referred to in clause
9 whereunder the amount would become payable only if the
obligations are not fulfilled or there is misappropriation. That
being so, the bank guarantee could not be said to be
unconditional or unequivocal in terms so that the defendants
could be said to have had an unfettered right to invoke that
guarantee and demand immediate payment thereof from the
Bank. This aspect of the matter was wholly ignored by the High
Court and it unnecessarily interfered with the order of
injunction, granted by the Single Judge, by which the
defendants were restrained from invoking the bank guarantee."
A perusal of the file reveals that the bank guarantee in question is an
irrevocable, unconditional and unequivocal guarantee. In fact, the guarantee
stipulates that the amounts stated by the defendant-Corporation in any
demand, claim or notice shall be treated by the bank as conclusive of the
amount payable. Some of the relevant terms of the bank guarantee are
reproduced hereinbelow:-
"3. The obligations of the Bank to the Corporation
hereunder shall be as principal to principal and shall be wholly
independent of the Contract and it shall not be necessary for
the Corporation to proceed against the Contractor before
proceeding against the Bank and the Guarantee/Undertaking
herein contained shall be enforceable against the Bank
notwithstanding the existence of any other
Guarantee/Undertaking or security for any indebtedness of the
Contractor to the Corporation (including relative to the said
Security Deposit) and notwithstanding that any such
undertaking or Security shall at the time when claim is made
against the Bank or proceedings taken against the Bank
hereunder, be outstanding or unrealized.
4. The amount stated by the Corporation in any demand,
claim or notice made with reference to this Guarantee shall as
between the Bank and the Corporation for the purpose of these
presents be conclusive of the amount payable by the bank to the
Corporation hereunder.
5. The liability of the Bank to the Corporation under this
Guarantee/Undertaking shall remain in full force and effect
notwithstanding the existence of any difference or dispute
between the Contractor and the Corporation, the Contractor
and the Bank and/or the Bank and the Corporation or
otherwise howsoever touching or affecting these presents for
the liability of the Contractor to the Corporation, and
notwithstanding the existence of any instructions or purported
instructions by the Contractor or any other person to the Bank
not to pay for any cause withhold or defer payment to the
Corporation under these presents, with the intent that
notwithstanding the existence of such difference, dispute or
instruction, the Bank shall be and remain liable to make
payment to the Corporation in terms hereof.
In any event, it is settled law that a bank guarantee is an independent
contract and the bank at the behest of the contractor cannot look at the terms
of the underlying contract entered into between the contractor and the
beneficiary.
The Supreme Court in locus classicus U.P. Cooperative Federation
Ltd. vs. Singh Consultants and Engineers (P) Ltd. , (1988) 1 SCC 174 has
held that where a bank has given a guarantee, it is required to honour the
same according to its terms and is not concerned whether either party of the
contract which underlay the guarantee was in default. It was further held that
in order to restrain the operation either of irrevocable letter of credit or of
confirmed letter of credit or of a bank guarantee, there should be serious
dispute and there should be good prima facie case of fraud and special
equities in the form of preventing irretrievable injustice between the parties.
It was further held that the nature of the fraud should be that of an egregious
nature as to vitiate the entire underlying transaction. The relevant portion of
the said judgment is reproduced hereinbelow:-
"19. .............The plaintiffs appealed to the Court of Appeal in
England. It was held by a Bench consisting of Lord Denning,
M.R., Browne and Geoffrey Lane, L.J. that a performance
guarantee was similar to a confirmed letter of credit. Where,
therefore, a bank had given a performance guarantee it was
required to honour the guarantee according to its terms and
was not concerned whether either party to the contract which
underlay the guarantee was in default. The only exception to
that rule was where fraud by one of the parties to the
underlying contract had been established and the bank had
notice of the fraud. Accordingly, as the defendants' guarantee
provided for payment on demand without proof or conditions,
and was in the nature of a promissory note payable on demand,
and the plaintiffs had not established fraud on the part of the
buyers, the defendants were required to honour their guarantee
on the demand made by the Libyan bank. It followed that the
judge had been right to discharge the injunction and that the
appeal would be dismissed.
xxx xxx xxx
28. I am, however, of the opinion that these observations must
be strictly considered in the light of the principle enunciated. It
is not the decision that there should be a prima facie case. 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
preventing irretrievable injustice between the parties.
Otherwise the very purpose of bank guarantees would be
negatived and the fabric of trading operation will get
jeopardised.
xxx xxx xxx
34. On the basis of these principles I reiterate that commitments
of banks must be honoured free from interference 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.
xxx xxx xxx
44. The modern documentary credit had its origin from letters
of credit. We may, therefore, begin the discussion with the
traditional letter of credit. Paul R. Verkuil in an article
explains the salient features of a letter of credit in these terms:
"The letter of credit is a contract. The issuing party
-- usually a bank -- promises to pay the „beneficiary‟
-- traditionally a seller of goods -- on demand if the
beneficiary presents whatever documents may be
required by the letter. They are normally the only two
parties involved in the contract. The bank which
issues a letter of credit acts as a principal, not as
agent for its customer, and engages its own credit.
The letter of credit thus evidences -- irrevocable
obligation to honour the draft presented by the
beneficiary upon compliance with the terms of the
credit."
45. ..........The bank must pay if the documents are in order
and the terms of credit are satisfied. The bank, however, was
not allowed to determine whether the seller had actually
shipped the goods or whether the goods conformed to the
requirements of the contract. Any dispute between the buyer
and the seller must be settled between themselves. The courts,
however, carved out an exception to this rule of absolute
independence. The courts held that if there has been "fraud in
the transaction" the bank could dishonour beneficiary's
demand for payment. The courts have generally permitted
dishonour only on the fraud of the beneficiary, not the fraud of
somebody else.
xxx xxx xxx
49. This was also the view taken by this Court in United
Commercial Bank case. There A.P. Sen. J. speaking for the
Court, said (pages 323 and 324): (SCC pp. 783-84, paras 40-
42)
". . .the rule is well established that a bank issuing or
confirming a letter of credit is not concerned with the
underlying contract between the buyer and seller.
Duties of a bank under a letter of credit are created by
the document itself, but in any case it has the power and
is subject to the limitations which are given or imposed
by it, in the absence of the appropriate provisions in the
letter of credit......
xxx xxx xxx
53. Whether it is a traditional letter of credit or a new device
like performance bond or performance guarantee, the
obligation of banks appears to be the same. If the documentary
credits are irrevocable and independent, the banks must pay
when demand is made. Since the bank pledges its own credit
involving its reputation, it has no defence except in the case of
fraud. The bank's obligations of course should not be extended
to protect the unscrupulous seller, that is, the seller who is
responsible for the fraud. But, the banker must be sure of his
ground before declining to pay. The nature of the fraud that the
courts talk about is fraud of an "egregious nature as to vitiate
the entire underlying transaction". It is fraud of the beneficiary,
not the fraud of somebody else. If the bank detects with a
minimal investigation the fraudulent action of the seller, the
payment could be refused. The bank cannot be compelled to
honour the credit in such cases. But it may be very difficult for
the bank to take a decision on the alleged fraudulent action. In
such cases, it would be proper for the bank to ask the buyer to
approach the court for an injunction."
(emphasis supplied)
The Supreme court in Dwarikesh Sugar Industries ltd. vs. Prem
heavy Engineering Works (P) Ltd. & Anr., (1997) 6 SCC 450 has
extensively dealt with the concept of irretrievable injustice. The relevant
portion of the said judgment is reproduced hereinbelow:-
"22. The second exception to the rule of granting injunction,
i.e. the resulting of irretrievable injury, has to be such a
circumstance which would make it impossible for the guarantor
to reimburse himself, if he ultimately succeeds. This will have
to be decisively established and it must be proved to the
satisfaction of the court that there would be no possibility
whatsoever of the recovery of the amount from the beneficiary,
by way of restitution."
(emphasis supplied)
Further, the Division Bench of this Court in M/s. Indu Pojects Ltd. vs.
Union of India, 204 (2013) DLT 600 has pointed out that the judgment of
Hindustan Construction Company Ltd. (supra) was based purely on the
terms of that guarantee. The relevant portion of the said judgment is
reproduced hereinbelow:-
"9. Mr. Dave also referred to the decision of the Supreme
Court in the case of Hindustan Construction Co. Ltd. v. State of
Bihar And Others (1999) 8 SCC 436 to demonstrate that the
Supreme Court, does at times, refer to the underlying contract
as also to the facts relating to the underlying contact while
considering the question of injuncting a bank guarantee.
However, we are of the view that the bank guarantee itself in
that case made a reference to the underlying contract and this
would be apparent from paragraph 14 of the said decision
which is to the following effect:-
14. This condition clearly refers to the original contract
between HCCL and the defendants and postulates that if
the obligations, expressed in the contract, are not fulfilled
by HCCL giving to the defendants the right to claim
recovery of the whole or part of the "advance mobilization
loan", then the Bank would pay the amount due under the
guarantee to the Executive Engineer. By referring
specifically to clause 9, the Bank has qualified its liability
to pay the amount covered by the guarantee relating to
"advance mobilization loan" to the Executive Engineer
only if the obligations under the contract were not
fulfilled by HCCL or HCCL has misappropriated any
portion of the "advance mobilization loan". It is in these
circumstances that the aforesaid clause would operate
and the whole of the amount covered by the "mobilization
advance" would become payable on demand. The bank
guarantee thus could be invoked only in the circumstances
referred to in clause 9 whereunder the amount would
become payable only if the obligations are not fulfilled or
there is misappropriation. That being so, the bank
guarantee could not be said to be unconditional or
unequivocal in terms so that the defendants could be said
to have had an unfettered right to invoke that guarantee
and demand immediate payment thereof from the Bank.
This aspect of the matter was wholly ignored by the High
Court and it unnecessarily interfered with the order of
injunction granted by the Single Judge, by which the
defendants were restrained from invoking the bank
guarantee.
From the above extract it is apparent that the condition clearly
referred to the original contract between the parties. It is also
evident that by a specific reference to clause (9) in the bank
guarantee, the bank had qualified its liability to pay the amount
covered by the guarantee relating to "advance mobilisation
loan" to the Executive Engineer only if the obligations under
the contract were not fulfilled by HCCL or that HCCL had
misappropriated any portion of the "advance mobilisation
loan". It was in these circumstances that the Supreme Court
held that the said clause would operate and that the whole of
the amount covered by the "mobilisation advance" would
become payable on demand. The Supreme Court observed that
the bank guarantee could thus be invoked only in the
circumstances referred to in clause (9) where under the amount
would become payable only if the obligations were not fulfilled
or there was misappropriation. In other words, the bank
guarantee was injuncted from being encashed on the terms of
the bank guarantee itself since the bank guarantee referred to
the underlying contract. It is only because of this special
circumstance that the Supreme Court went into the issue of
examining the underlying contract. In the present case, we do
not find any reference to the underlying contract which would
enable the bank to examine the facts and circumstances relating
to the underlying contract.
Furthermore, from the extract referred to above, the Supreme
Court was of the view that the bank guarantee in that case was
not unconditional or unequivocal in terms so that the
beneficiary could be said to have had an unfettered right to
invoke the guarantee and demand payment from the bank. The
facts of present case are entirely different as the bank
guarantee is unconditional and unequivocal. We also note that
in Hindustan Construction Co. Ltd. (supra) in paragraph 10
thereof the Supreme Court has clearly noted that in that case,
the whole matter could be disposed of purely on the basis of the
"terms of the bank guarantee". We also note that the invocation
itself was also bad because it was invoked by a wrong person
as observed by the Supreme Court in paragraph 21 of the said
decision which reads as under:-
21. As pointed out above, bank guarantee constitutes a
separate, distinct and independent contract. This
contract is between the Bank and the defendants. It is
independent of the main contract between HCCL and the
defendants. Since the bank guarantee was furnished to
the Chief Engineer and there is no definition of "Chief
Engineer" in the bank guarantee nor is it provided
therein that "Chief Engineer" would also include
Executive Engineer, the bank guarantee could be invoked
by none except the Chief Engineer. The invocation was
thus wholly wrong and the Bank was under no obligation
to pay the amount covered by the "performance
guarantee" to the Executive Engineer.
In view of the foregoing discussion we do not see any reason to
interfere with the impugned orders except to delete the order of
costs and observations made with regard to the counsel."
(emphasis supplied)
In fact, this Court in R.S. Infraprojects Pvt. Ltd. Vs. Zamil Infra Pvt.
Ltd. and Anr., CS (OS) 809/2015 decided on 23rd March, 2015 has held that
a Court while dealing with stay of encashment of bank guarantee cannot
hold a mini trial with regard to the exact quantum of liquidated damages that
is to be recovered by the Principal Contractor against the defendant.
The plaintiff's argument that the defendant's claim is beyond the
liquidated damages or that the Arbitrator has terminated the contract are
contractual disputes which are irrelevant to the issue at hand namely,
encashment of an unconditional, unequivocal and irrevocable bank
guarantee. This Court is further of the view that the termination of the
mandate of an arbitrator does not constitute a restraint upon the defendant
from seeking encashment of bank guarantee.
Consequently, present application being bereft of merits is dismissed.
MANMOHAN, J
MAY 06, 2015
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