G.S.Developers & Contractors ... vs Alpha G. Group Development ...
2016 Latest Caselaw 1308 Del

*       IN THE HIGH COURT OF DELHI AT NEW DELHI
                                      Date of decision: February 19, 2016
+       ARB. A. (COMM.) 7/2016, IA 2317/2016
        G.S.DEVELOPERS & CONTRACTORS PRIVATE
        LIMITED
                                                  ..... Petitioner
                       Through: Mr. A.S. Chandhiok, Sr. Adv.
                                   with Mr. Mohit Chaudhary
                                   and Ms.Damini Chawla,
                                   Advs.
                       versus

        ALPHA G. GROUP DEVELOPMENT PRIVATE LTD &
        ORS.
                                           ..... Respondents
                     Through: Mr. Sandeep Sethi, Sr. Adv.
                              with Mr.Rajshekhar Rao, Ms.
                              Amrita Panda, Mr. Debesh
                              Panda, Advs.

CORAM:
HON'BLE MR. JUSTICE V.KAMESWAR RAO
V.KAMESWAR RAO, J. (Oral)

IA 2317/2016

Exemption allowed subject to all just exceptions.

Application stands disposed of.

ARB. A (COMM) 07/2016

1. The challenge in this petition under Section 37 (2) (b) of the

Arbitration and Conciliation Act, 1996, is to the order dated February 15,

2016, whereby the learned Arbitrator inter-alia, has, allowed the

respondent No.1 and 2 herein, to encash the five bank guarantees, and

directed them to deposit the amount of bank guarantees in an escrow

account in a Public Sector Bank and to await the disbursement, subject to

the final Award.

2. According to Mr. A.S. Chandhiok, learned Senior Counsel for the

petitioner, the subject matter of the application under section 17 of the Act

was the following five bank guarantees:-

S.No. Date of Bank Guarantee No. Amount Due Date Purpose

Issue

1. 06.01.2012 JOIGOPG120060001 40000000/- 29.12.2015 Mobilisation Advance

2. 06.01.2012 JOIGOPG120060003 43672568/- 03.01.2016 Mobilisation Advance

3. 13.12.2012 JOIGOPG123480002 16100000/- 09.12.2015 Mobilisation Advance

4. 31.12.2013 JOIGPGE133650001 4,00,00,000/- 29.12.2015 Performance

5. 06.01.2012 JOIGPGE120060001 4,00,00,000/- 03.01.2016 Performance

3. He would state, that against the first four bank guarantees, an

amount of Rs.6,78,00,000/- has been adjusted towards the regular running

account bills. The balance, even though is Rs.5,86,00,000/- still in terms

of the statement made on behalf of the petitioner in the hearing on

December 12, 2015, an amount of Rs.7,19,00,000/- shall be deposited by

the petitioner with the respondent Nos.1 and 2. On the fifth bank

guarantee, which is a performance guarantee, it is his submission, by

drawing attention to page 255, which is the letter of invocation dated

November 23, 2015, to state that the same is not in accordance with the

terms of bank guarantee inasmuch as, the letter state, the contractor "has

neglected to refund and repay by bankers cheque or demand draft". He

would state, the bank guarantee for an amount of Rs.4,12,24,189/- which

is 5% of the contractual amount, the invocation being without mentioning

any default towards "due, punctual, satisfactory and faithful performance

of the work" and, there being special equities, the invocation is for

unjust enrichment, need to be set aside.

4. On the other hand, Mr. Sandeep Sethi, would submit that this case

does not pertain to five bank guarantees as pointed out by Mr. Chandhiok

but relates to nine bank guarantees, the details of which are as under:-

Mobilisation     Date               Amount     Status     Amendment Non obstante
Guarantees                                                              clause
JOIGOPG120060001 06.01.12           4 Crores   Invoked Yes              Yes

JOIGOPG120060003 06.01.12           4.36 Crores Invoked Yes             Yes

JOIGOPG12006002          06.01.12   4 Crores   Returned NA              NA

JOIGOPG123480002 13.12.12           1.61 Crores Reduced Yesto           Yes
                                                Rs.28.22
                                                lacs

Performance Guarantee
JOIGPGE120060001 06.01.12           4.12 Crores Invoked                 Yes

JOIGPGE13350001          31.12.13   4 Crores   Invoked

Retention Guarantees

JOIGOPG131160001 26.04.13                      Not
                                               invoked





 JOIGOPG141390004 19.05.14                 Not
                                          invoked

JOIGOPG150830002 24.03.15                 Not
                                          invoked

5. According to Mr. Sethi, mobilisation bank guarantees at serial

No.1,2 and 4, which have been amended on February 26, 2014 after, the

letter dated February 14, 2014 of the petitioner wherein, the petitioner had

pointed to the advances, made by the respondent No.1 and the financial

difficulties faced by the petitioner, had sought overdraft facilities of 4

Crores over and above Rs.2 Crores already granted. According to him,

the petitioner had, itself requested for securing the overdraft facility by

way of bank guarantees. He would also state, that the petitioner in the

said communication has undertaken to repay or refund the overdraft

facility availed by it. According to him, the representation was also, if the

petitioner is unable to pay, the amount can be recovered from the

payments due to the petitioner or by invoking the bank guarantees. He

states, after the letter dated February 14, 2014, the bank guarantees at 1, 2

were amended, in following manner:-

"1) Page No.l, paragraph 2 stands amended and to 0 be read as follows:

"AND WHEREAS your company paid to the said Contractor a sum of Rs.4,36,72,568/(Rupees Four Crore

Thirty Six Lacs Seventy Two Thousand Five Hundred Sixty Eight Only) as Mobilization Advance, being 15% (Fifteen percent) of the contract sum."

2) Page no.3, paragraph 1 stands amended, and to be read as follows:

"Notwithstanding anything contained hereinbefore, WE the Canara Bank, 5, Community Centre, Mayapuri, New Delhi hereby irrevocably and unconditionally undertake to pay your company by banker's cheque/demand draft favouring "GurgaonOne Expense Account" and payable at New Delhi on First Demand without protest or demur or proof of condition any and all amount demanded by your Company in writing, with reference to the guarantee and that the liability of the Canara Bank, 5, Community Centre, Mayapuri, New Delhi, under this guarantee is restricted to Rs.4,36,72,5681-(Rupees Four Crore Thirty Six Lacs Seventy Two Thousand Five Hundred Sixty Eight Only). Our guarantee shall remain in force until 04.01.2015. Unless a, claim in writing is presented to us during the validity period of this Guarantee, all your rights under this guarantee shall be forfeited and we shall be discharged of our liability hereunder."

6. He would lay stress on the amendments, to urge that, in view of the

non obstante clause, the invocation of bank guarantees being

unconditional, payable by bank on demand, the respondents were within

their rights to invoke the same. He states, the contract stands terminated

in 2014. The guarantee amounts are the advances made to the petitioner

over and above the contractual conditions, on its asking which is sought to

be invoked in terms of the bank guarantees. On performance bank

guarantees at serial No.4 and 5, the same being unconditional, the

respondents were within their rights to invoke, as there were no

restrictions as sought to be urged by the petitioner. He would rely on the

following judgments:-

(i) (2007) 6 SCC 470 Mahatma Gandhi Sahakra Sakkare Karkhane vs. National Heavy Engg. Coop. Ltd. and another;

(ii) 2008(4) R.A.J. 211(Del) National Highways Authority of India vs. Elsamex-TWS-SNC Joint Venture;

(iii) (1991) 4 SCC 230 General Electric Technical Services Company Inc. Vs. Punj Sons (P) Ltd. and another;

(iv) 1990 (Supp) SCC 727 Wander Ltd. and another vs. Antox India P. Ltd.

7. Mr. Chandhiok, in his rejoinder would draw my attention to clause

20 of the Special Conditions of Contract which refers to mobilisation

advance equal to 5% of the contract value. He would state, the concept of

mobilisation advance is to spend in the execution of the contract and to be

adjusted against the running bills. He would also state, the mobilisation

guarantees, could be invoked only on termination, if the complete advance

could not be recovered from the bills. According to him, the performance

bank guarantees could only be invoked only on being due by reasons of or

occasioned by arising out of or resulting out of directly or indirectly the

breach by the contractor of its obligation or failure of the contractor to

perform its obligation under the agreement. He would draw my attention

to the order passed by the Division Bench of this Court dated November

26, 2015, wherein a representation was made that the contract has been

cancelled. According to him, the said statement is incorrect, as

termination letter dated November 18, 2015 was actually booked only on

November 27, 2015 and received on November 28, 2015; and the

invocation on November 23, 2015 before termination is bad.

8. Mr. Raj Shekhar Rao, learned counsel for the respondent No.2,

would state that, the petitioner is not entitled to any relief having

approached this Court in earlier round of litigation by concealing the letter

dated February 10, 2014, which is an important communication, revealing

the stand of the petitioner not to oppose the invocation of bank guarantees.

He states, even the statement made by the parties before the Court to

deposit Rs.7.19 Crores has not been honoured. He states, it is a fit case

where this Court while dismissing the petition need to impose exemplary

cost.

9. Having heard and considered the submissions made by the learned

counsel for the parties, there is no dispute on the position of law with

regard to bank guarantees. In U.P Cooperative Federation vs. Singh

Consultants & Engineers Pvt. Ltd (1988) 1 SCC 174, the respondent

therein entered into an agreement with the appellant for constructing a

vanaspati manufacturing plant for the latter. The contract required the

respondent to furnish two bank guarantees for proper construction and

successful completion of the plant. Bank of India executed two bank

guarantees in favour of the appellant. Under the terms of guarantee the

bank undertook to make unconditional payments on demand without

reference to the respondent. The guarantees also provided that the

appellant would be the sole judge for deciding whether the respondent had

fulfilled the terms of the contract or not. Disputes arose between the

parties as to the erection and performance of the plant. The seller

approached the civil court seeking injunction restraining the purchaser

from invoking the bank guarantee. The High Court, proceeding on the

basis that the injunction was sought not against the bank but against the

appellant, restrained the appellant from invoking the bank guarantee. The

Supreme Court after elaborate consideration of the matter held:

"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."

10. In General Electric Technical Services Company Agency (supra),

the Supreme Court held as under:-

"If the documentary credits are irrevocable and independent, the Bank must pay when demands it 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 party, that is, the party 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.............. The Bank cannot be interdicted by the court at the instance of [purchaser] in the absence of fraud or special equities in the form of preventing irretrievable injustice between the parties".

11. In Mahatma Gandhi Sahkara Sakare Karkhane (supra), in para 22

the Supreme Court held as under:-

"In our considered opinion if the bank guarantee furnished is an unconditional and irrevocable one, it is not open to the bank to raise any objection whatsoever to pay the amounts under the guarantee. The person in whose favour the guarantee is furnished by the bank cannot be prevented by way of an injunction in enforcing the guarantee on the pretext that the condition for enforcing the bank guarantee in terms of the agreement entered between the parties has not been fulfilled. Such a course is impressible. The seller cannot raise the dispute of whatsoever nature and prevent the purchaser from enforcing the bank guarantee by way of injunction except on the ground of fraud and irretrievable injury."

12. The aforesaid position of law remains undisturbed as on date,

inasmuch as the Supreme Court in its opinion reported as (2008) 1 SCC

544, Vinitec Electronics Pvt. Ltd vs. HCL Infosystems Ltd. has in para 12

to 14 held as under:-

"12. It is equally well settled in law that bank guarantee is an independent contract between bank and the beneficiary thereof. The bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance the bank has given the guarantee is immaterial and of no consequence. In BSES Limited (Now Reliance Energy Ltd.) vs. Fenner India Ltd. And anr. this court held :

"10. There are, however, two exceptions to this Rule. The first is when there is a clear fraud of which the Bank has notice and a fraud of the beneficiary from which it seeks to benefit. The fraud must be of an egregious nature as to vitiate the entire underlying transaction. The second exception to the general rule of non- intervention is when there are special equities in favour of injunction, such as when irretrievable injury or irretrievable injustice would occur if such an injunction were not granted. The general rule and its exceptions has been reiterated in so many judgments of this court, that in U.P. State Sugar Corpn. V. Sumac International Ltd. (1997) 1 SCC 568 (hereinafter U.P. State Sugar Corpn) this Court, correctly declare that the law was settled.

13. In Himadri Chemicals Industries Ltd. V. Coal Tar Refining Company , this court summarized the principles for grant of refusal to grant of injunction to restrain the enforcement of a bank guarantee or a letter of credit in the following manner : "14.. . . . .(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.

14. In Mahatama Gandhi Sahakra Sakkare Karkhane vs. National Heavy Engg. Coop. Ltd and anr. , this court observed :

" If the bank guarantee furnished is an unconditional and irrevocable one, it is not open to the bank to raise any objection whatsoever to pay the amounts under the guarantee. The person in whose favour the guarantee is furnished by the bank cannot be prevented by way of an injunction from enforcing the guarantee on the pretext that the condition for enforcing the bank guarantee in terms of the agreement entered between the parties has not been fulfilled. Such a course is impermissible. The seller cannot raise the dispute of whatsoever nature and prevent the purchaser from enforcing the bank guarantee by way of injunction except on the ground of fraud and irretrievable injury.

What is relevant are the terms incorporated in the guarantee executed by the bank. On careful analysis of the terms and conditions of the guarantee in the present case, it is found that the guarantee is an unconditional one. The respondent, therefore, cannot be allowed to raise any dispute and prevent the appellant from encashing the bank guarantee. The mere fact that the bank guarantee refers to the principle agreement without referring to any specific clause in the preamble of the deed of guarantee does not make the guarantee furnished by the bank to be a conditional one. [Emphasis supplied]"

13. Keeping in view, the aforesaid position of law, I proceed to apply

the same to the facts of this case. The submission of Mr. Chandhiok,

primarily revolved round, insofar as mobilisation bank guarantees are

concerned, could be invoked only on termination if the complete advance

could not be recovered from the bills; and guarantees towards

performance, without mentioning any default towards „due punctual,

satisfactory and faithful performance of the work order. I may only state

here from the perusal of the aforesaid chart, it is clear that the three

mobilisation bank guarantees at 1 to 3 above invoked by the respondents

were dated 6.1.2012 and 13.12.2012. The amendments therein, to the

aforesaid three mobilisation bank guarantees are, as under:-

"1) Page No.l, paragraph 2 stands amended and to 0 be read as follows:

"AND WHEREAS your company paid to the said Contractor a sum of Rs.4,36,72,568/(Rupees Four Crore

Thirty Six Lacs Seventy Two Thousand Five Hundred Sixty Eight Only) as Mobilization Advance, being 15% (Fifteen percent) of the contract sum."

2) Page no.3, paragraph 1 stands amended, and to be read as follows:

"Notwithstanding anything contained hereinbefore, WE the Canara Bank, 5, Community Centre, Mayapuri, New Delhi hereby irrevocably and unconditionally undertake to pay your company by banker's cheque/demand draft favouring "GurgaonOne Expense Account" and payable at New Delhi on First Demand without protest or demur or proof of condition any and all amount demanded by your Company in writing, with reference to the guarantee and that the liability of the Canara Bank, 5, Community Centre, Mayapuri, New Delhi, under this guarantee is restricted to Rs.4,36,72,5681-(Rupees Four Crore Thirty Six Lacs Seventy Two Thousand Five Hundred Sixty Eight Only). Our guarantee shall remain in force until 04.01.2015. Unless a, claim in writing is presented to us during the validity period of this Guarantee, all your rights under this guarantee shall be forfeited and we shall be discharged of our liability hereunder."

14. The amendment to paragraph 1 clearly reveals that notwithstanding

anything contained herein before, the bank had irrevocably and

unconditionally undertook to pay the respondents, the amount under the

bank guarantees without protest or demur or proof of condition any and

all amount demanded by the respondents with reference to the guarantee.

The said stipulation, makes it clear that the bank guarantee being

irrevocable and unconditional without any protest or demur, was

necessarily to be honoured by the bank. The submission of Mr.

Chandhiok, that the bank guarantees could be invoked only on termination

and that too, if the amount being due would not be tenable. The

amendments to the bank guarantees have not been controverted. If that

being the factual position, the position of law would be applicable to the

facts of this case. The petitioner, therefore cannot be allowed to raise any

dispute and prevent the respondent from encashing the bank guarantees.

The question needs to be considered, whether the present case falls under

any of or both the exceptions, whether there is a fraud of which bank had

notice and whether there are any special equities in granting injunction.

The Supreme Court has repeatedly held that fraud, if any must be of an

egregious nature so as to vitiate the underlying transaction. A perusal of

the pleadings, would note, the petitioner had summed up the challenge to

the invocation of the bank guarantees in the following manner:-

I. Overreaching the adjudicative process (i.e. to frustrate the result of

invocation of CI. 52.1).

II. Invocation being contrary to the terms of the Bank Guarantee. Thus,

invocation being in breach of express terms of Bank Guarantee(s).

III. That there are special equities in favour of the Appellants, so as to

justify grant of injunction.

IV. It is Appellant who would suffer irretrievable injury in event of Bank

Guarantees being permitted to be encashed.

v. Invocation is an act of arm twisting by Respondent NO.1 intending to

its unjust enrichment.

vi. Invocation of Bank guarantees is an abuse of authority by Respondent

No.1.

VII. Present is a case of egregious fraud by the Respondent No.1 where

despite taking and getting the amounts set-off, illegal invocation is done.

VIII. Conduct of Respondent NO.1 amounts to complete breach of trust.

15. The aforesaid grounds of challenge, are primarily based on the

statement of the petitioner that from the perusal of the language of the

bank guarantees and the letter of invoking bank guarantees, it is a case of

egregious fraud and of special equities. I am afraid, that the language of

the bank guarantees and the letter invoking bank guarantees surely, does

not make out a case of special equities or egregious fraud. On a perusal of

the pleadings, no case of fraud has been made out. The only ground

being, the bank guarantees could only be invoked upon termination or

when an amount is due, or the amounts being set off, would not make a

case of fraud of egregious nature as to vitiate the underlying transaction.

The ground that encashment of bank guarantees would cause irreparable

injury, suffice to state, that the parties are before the Arbitral Tribunal and

the amount has been directed to be deposited in an escrow account. So

the said ground is unsustainable. I note for benefit, the reliance placed by

Mr. Sethi on the judgment of this Court in National Highways Authority

of India (supra), wherein this Court has held plea of lack of good faith

and/or enforcing the guarantee with an oblique purpose or that the bank

guarantee is being invoked as a bargaining chip, a deterrent or in an

abusive manner are all irrelevant, hence have to be ignored.

16. I also note, for benefit, the judgment relied by Mr. Sethi, in the case

of Wander Ltd and another(supra), wherein the Supreme Court has held

the appellate court will not interfere with the exercise of discretionary

jurisdiction and substitute its own discretion except where discretion has

been exercised arbitrarily, capriciously or perversely. Suffice to state, it is

not such a case.

17. Insofar as the judgments relied upon by Mr. Chandhiok, are

concerned, insofar as the judgment in Hindustan Construction Co. Ltd

vs. State of Bihar(supra), the same is in the peculiar facts of that case

keeping in view the terms of guarantee as noted by the Supreme Court in

paras 12 and 13 of the judgment and would be of no help to the petitioner.

That apart, in State Trading Corporation of India Ltd.(supra), there is a

clear finding wherein this Court has held that invocation of bank

guarantee was an abuse of power, primarily on a finding that there was no

breach of contract by the sellers and the quality of the grain which has

been supplied by the respondent No.3 to the petitioner was as per

contractual obligation, it was incumbent upon the petitioner to have first

entered into a negotiation with the respondent no.3 before it could have

invoked the bank guarantee. This Court had, on a finding that the

petitioner in that case was well within the knowledge, but still it insisted

upon invoking the bank guarantee, which is a concealment and

suppression of the facts and has dismissed the petition holding invocation

as bad. The judgment of U.P. State Sugar Corporation (supra), would

not help the petitioner.

18. In the end, I note the learned Arbitrator, has, in the impugned order

directed the respondents herein to deposit the amount of the bank

guarantees in an escrow account in a Public Sector Bank to await

disbursement subject to the final award, which in my view has protected

the interest of the petitioner herein.

19. I do not see any merit in the petition. The same is dismissed.

(V.KAMESWAR RAO) JUDGE

FEBRUARY 19, 2016 ak