Delhi High Court
Jyoti Structure Ltd vs Dakshinanchal Vidyut Vitran ... on 6 September, 2016
IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 06.09.2016
+ O.M.P.(I) 15/2016
JYOTI STRUCTURE LTD ..... Petitioner
versus
DAKSHINANCHAL VIDYUT VITRAN NIGAM
LTD & ORS. ..... Respondents
WITH
+ O.M.P.(I) 16/2016
JYOTI STRUCTURE LTD ..... Petitioner
versus
DAKSHINANCHAL VIDYUT VITRAN NIGAM
LTD & ORS. ..... Respondents
WITH
+ O.M.P.(I) 17/2016
M/S JYOTI STRUCTURES LTD. ..... Petitioner
versus
DAKSHINANCHAL VIDYUT VITRAN NIGAM
LTD & ORS ..... Respondents
WITH
+ O.M.P.(I) 18/2016
M/S JYOTI STRUCTURES LTD. ..... Petitioner
versus
DAKSHINANCHAL VIDYUT VITRAN NIGAM
LTD. & ORS. ..... Respondents
WITH
+ O.M.P.(I) 19/2016
O.M.P.(I) 15/2016 & Other Connected Matters Page 1 of 29
M/S JYOTI STRUCTURES LTD. ..... Petitioner
versus
DAKSHINANCHAL VIDYUT VITRAN NIGAM
LTD & ORS. ..... Respondents
WITH
+ O.M.P.(I) 20/2016
M/S JYOTI STRUCTURES LTD. ..... Petitioner
versus
DAKSHINANCHAL VIDYUT VITRAN NIGAM
LTD & ORS. ..... Respondents
WITH
+ O.M.P.(I) 21/2016
M/S JYOTI STRUCTURES LTD. ..... Petitioner
versus
DAKSHINANCHAL VIDYUT VITRAN NIGAM
LTD & ORS. ..... Respondents
AND
+ O.M.P.(I) 22/2016
M/S JYOTI STRUCTURES LTD. ..... Petitioner
versus
DAKSHINANCHAL VIDYUT VITRAN NIGAM
LTD & ORS. ..... Respondents
Advocates who appeared in these cases:
For the Petitioners : Mr P.V. Kapur, Senior Advocate with Mr V.K.
Nagrath, Mr Rajiv K. Garg, Mr Ashish Garg
and Mr Sanjay Gupta.
For the Respondents : Mr Pradeep Misra Mr Daleep Kumar Dhayani.
CORAM
HON'BLE MR JUSTICE VIBHU BAKHRU
O.M.P.(I) 15/2016 & Other Connected Matters Page 2 of 29
JUDGMENT
VIBHU BAKHRU, J
1. M/s Jyoti Structures Limited (hereafter 'JSL') - a public company
incorporated under the Companies Act, 1956 - has filed these petitions
under Section 9 of the Arbitration and Conciliation Act, 1996 (hereafter
'the Act'), inter alia, praying that Dakshinanchal Vidyut Vitran Nigam Ltd.
(hereafter 'DVVNL') be restrained from invoking and the issuing banks be
restrained from encashing the subject bank guarantees.
2. JSL is, inter alia, engaged in the business of Engineering,
Procurement and Construction in the power transmission and distribution
sector in India and abroad.
3. The Ministry of Power, Government of India has issued a scheme
known as Rajiv Gandhi Grameen Vidyutikaran Yojna (RGGVY-12th Plan)
for electrifying villages and habitations in the country. In 2015, DVVNL
invited applications for rural electrification work, inter alia, in various
districts of Uttar Pradesh (UP).
4. JSL participated in the aforesaid bidding process and was awarded
the aforesaid contracts for electrification of villages and inhabitants in the
Districts of Auraiya, Etawah, Farrukhabad and Chitrakoot in the State of
UP.
5. The above captioned petitions have been filed in relation to the
subject bank guarantees furnished by JSL in respect of the aforementioned
contracts. OMP(I) 15/2016 and OMP(I) 16/2016 relate to the contract
pertaining to Auraiya District; OMP(I) 17/2016 and OMP(I) 22/2016 relate
to the contract pertaining to the Etawah District, OMP(I) 19/2016 and
OMP(I) 21/2016 relate to the contract pertaining to the Farrukhhabad
District; and OMP(I) 18/2016 and OMP (I) 20/2016 relate to the contract
pertaining to the Chitrakoot District.
6. The issues and material facts involved in the aforementioned
petitions are similar and the learned counsel for the parties submitted that a
decision in OMP(I) 15/2016 and OMP(I) 16/2016 - which pertains to
contract for electrification of villages/habitations of Auraiya District, UP -
would be determinative of the other petitions as well. Thus, with the
consent of the parties OMP(I) 15/2016 and OMP(I) 16/2016 are taken as
lead matters.
7. DVVNL floated tender enquiries inviting applications for rural
electrification work of villages of Auraiya District on 21.02.2015. JSL
having submitted the lowest tender was issued a letter of intent dated
07.04.2015. The Notification of Award (NOA) was issued on 25.04.2015
and contract between the parties was executed on 22.06.2015. In terms of
the NOA, the electrification works were to be completed within a period of
24 months from the date of NOA, that is, on or before 24.04.2017. The
contract was in two parts. One part was for procurement of material,
inspection and testing, supply and storage of material; and the second part
was for transportation, insurance, installment services and training.
8. In terms of the contract, JSL submitted bank guarantees - 7 in
number - the details of which are as under:-
S. Details Amount (`) Bank
No.
1 BG No. 116215IGADP0018 9,81,29,041/- Dena Bank
dated 24.07.2015 against
advance mobilization (Supply
- 1st Installment) valid upto
31.07.2017
2 BG No. 116215IGADP0019 2,68,03,345/- Dena Bank
dated 24.07.2015 against
advance mobilization for
erection (1st Installment) valid
upto 31.07.2017
3 BG No. 00012IG150000049 11 ,89,45,000/- Indian Bank
dated 08.07.2015 against
Contract Performance
Guarantee (CPG) for Supply
valid upto 31.07.2018
4 BG No. 00012IG150000050 4,87,34,000/- Indian Bank
dated 08.07.2015 against
Contract Performance
Guarantee (CPG) for Erection
valid upto 31.07.2018
5 BG No. 00012IG150000051 3,20,75,000/- Indian Bank
dated 08.07.2015 against
Additional Bank Guarantee for
meter and distribution
transformers valid upto
31.07.2018
6 BG No. 00012IG150000076 9,81,29,041/- Indian Bank
dated 24.09.2015 against
advance mobilization (Supply -
2nd Installment) valid upto
31.07.2017
7 B.G. No. 00012IG150000077 2,68,03,345/- Indian Bank
dated 24.09.2015 against
advance mobilization (Erection
- 2nd Installment) valid upto
31.07.2017
9. BG No. 116215IGADP0018 dated 24.07.2015 for a sum of
`9,81,29,041/- against advance mobilization (Supply 1st Installment) and
BG No. 116215IGADP0019 dated 24.07.2015 for a sum of `2,68,03,345/-
against advance mobilization for erection (1st Installment) are subject
matter of OMP(I) 15/2016; B.G. No. 00012IG150000049 dated 08.07.2015
for a sum of `11,89,45,000/- against Contract Performance Guarantee
(CPG) for supply, BG No. 00012IG150000050 dated 08.07.2015 for a sum
of `4,87,34,000/- against Contract Performance Guarantee (CPG) for
erection, BG No. 00012IG150000051 dated 08.07.2015 for a sum of
`3,20,75,000/- against Additional Bank Guarantee for meter and
distribution transformers, BG No. 00012IG150000076 dated 24.09.2015
for a sum of `9,81,29,041/- against advance mobilization (Supply 2nd
Installment) and B.G. No. 00012IG150000077 dated 24.09.2015 for a sum
of `2,68,03,345/- against advance mobilization for erection (2nd
Installment) are subject matter of OMP(I) 16/2016.
10. According to DVVNL, the progress of the rural electrification work
being executed by JSL was poor and JSL had not achieved the requisite
milestones within the specified time. Therefore, DVVNL issued two
separate letters dated 16.05.2016, one letter pertaining to forfeiture of bank
guarantees issued by Dena Bank against mobilisation advance and the
second for forfeiture of the bank guarantees issued by Indian Bank. Copies
of the said letters was also marked to the concerned banks with the request
to encash the subject bank guarantees and remit the amount through RTGS
to the account of DVVNL, the details of which were also indicated in the
letters. Thereafter, formal letters of invocation of the bank guarantees
dated 14.06.2016 for invocation of the subject bank guarantees were
addressed to the concerned banks which led JSL to file the said petitions
(OMP(I) 15/2016 and OMP(I) 16/2016) in this Court.
Submissions
11. At the outset, Mr Pradeep Misra, learned counsel appearing for
DVVNL raised a preliminary objection as to the maintainability of the
present petitions. He referred to clause 2.14 of the contract which provided
that the Courts at Allahabad shall have exclusive jurisdiction in all matters
arising under the contract in question. On the strength of the said clause,
he submitted that this court would not have the jurisdiction to entertain the
present petitions. He relied upon the decision of the Supreme Court in
B.E. Simoese Von Staraburg Niedenthal and Anr. v. Chhattisgarh
Investment Limited: (2015) 12 SCC 225 in support of the aforesaid
contention. He also referred to the decision of the Supreme Court in State
of West Bengal and Ors. v. Associated Contractors: (2015) 1 SCC 32 in
support of his contention that a petition under Section 9 of the Act would
not be maintainable before the Court which does not have jurisdiction over
the subject matter of dispute.
12. The aforesaid contentions were countered by Mr Kapur, learned
counsel appearing for JSL, who submitted that the Court having
jurisdiction over the venue of arbitration would also exercise jurisdiction
under Part-I of the Act and, thus, the present petitions are maintainable.
He relied on the decision of the Supreme Court in Bharat Aluminium
Company v. Kaiser Aluminium Technical Services Inc: (2012) 9 SCC
552 as well as the decision of the Division Bench of this Court in Ion
Exchange (India) Ltd. v. Panasonic Electric Works Co. Ltd.: 208 (2014)
DLT 597 (DB) in support of his contention. He further argued that Courts
at Allahabad would have no jurisdiction because neither any of the parties
have their principal office of business at Allahabad nor any part of the
cause of action arises within the territorial jurisdiction of the Courts at
Allahabad.
13. On merits, Mr Kapur advanced submissions on four fronts. First, he
contended that the bank guarantees in question were not unconditional
bank guarantees and the letters of invocation were not in terms of the said
bank guarantees. He referred to the bank guarantees issued by Dena Bank
- the subject matter of OMP(I) 15/2016 - and submitted that the said bank
guarantees could only be invoked if JSL failed to commence or fulfil its
obligations under the terms of the contract; and in the event of such failure,
refused to repay all or part of the advance payment to DVVNL. He
submitted that since there was no allegation in the letter of invocation that
JSL had failed to perform its obligations and had refused to repay the
amount advanced by DVVNL, the banks ought to be restrained from
making any payment pursuant to the letters of invocation. He strongly
relied on the decision of the Supreme Court in Hindustan Construction
Co. Ltd. v. State of Bihar and Ors: (1999) 8 SCC 436 as well as the
decision of a Coordinate Bench of this Court in Abir Infrastructure Pvt.
Ltd v. Teestavalley Power Transmission Limited & Ors.: 214 (2014) DLT
235 in support of his contention.
14. Secondly, Mr Kapur contended that invocation of the subject bank
guarantees was fraudulent and malafide. He contended that in terms of the
contract between the parties, JSL was to execute the works within a period
of 24 months from the date of NOA and the said period had not expired.
He submitted that in the circumstances, the question of alleging that JSL
had failed to perform its contract was ex facie untenable. He referred to a
letter dated 05.05.2016 issued by DVVNL to JSL wherein DVVNL had
indicated that the contract was to be completed by October 2016. He
submitted that the said demand to complete the works by October 2016
was contrary to the expressed terms of the contract in question;
nonetheless, JSL had responded to the letter dated 05.05.2016 by its letter
dated 09.05.2016 indicating its month-wise target for completion of the
works. He further submitted that insofar as the District of Auraiya is
concerned, JSL had also met the target for electrification set for the month
of May 2016. And, despite JSL meeting its target for the month of May
2016, DVVNL had still proceeded to invoke the subject bank guarantees.
He contended that the same indicated that the bank guarantees were
invoked for a collateral purpose.
15. He earnestly contended that time was not the essence of the contract
as the contract had also envisaged consequences of delayed performance.
He submitted that at best, DVVNL could have levied liquidated damages
for delayed performance of the contract and even so the maximum amount
of liquidated damages would be in the vicinity of `8.5 crores which is less
than the amount already recovered by DVVNL. He referred to the decision
of a Division Bench of this Court in State Trading Corporation of India
Ltd. v. State Bank of India & Ors. : 2013 (5) R.A.J. 158 (Del) and on the
strength of the said decision, contended that the scope of judicial
intervention in interdicting bank guarantees has been expanded and now
also includes cases of irretrievable injury, fraud, and extraordinary special
equities. He also argued that the scope of fraud was no longer restricted to
fraud affecting the underlying transaction but would also extend to fraud at
any other stage of the contract as well; and, that would include the stage of
invocation of bank guarantees.
16. Thirdly, Mr Kapur contended that in addition to an order restraining
encashment of the subject bank guarantees, JSL had also prayed for stay of
DVVNL's letter terminating the contract in question. He submitted that
contract in question related to electrification of villages/habitations and the
execution of the contract entailed delivery of electric poles as well as their
erection on sites. He submitted that after the poles are erected on land,
they would assume the nature of immovable property. Therefore, the
contract in question must also be construed as contract relating to
immovable property which squarely falls within the exceptions to Section
10 of the Specific Relief Act, 1963. He further submitted that by virtue of
Section 14(3)(c) of the Specific Relief Act, 1963, the contract in question
falls within the exception to Section 14(1) of the said Act. Consequently,
even though the contract in question is a determinable contract, it would,
nonetheless, be specifically enforceable. Lastly, he contended that the
letter of termination dated 26.05.2016 also debarred JSL from participating
in other tenders for a year and this amounted to blacklisting. He
emphasised that the said order would also effectively prevent JSL from
bidding pursuant to tenders invited by other public sector enterprises as
well. He contended that the said decision to debar JSL from participating
in tenders was malafide and unsustainable.
17. Mr Misra countered the submissions advanced by Mr Kapur. He
referred to the project completion schedule as provided under the contract
and submitted that the contract provided specific milestones in terms of
which 25% of the work was required to be completed within the first nine
months; further 25% of the works was required to be completed in five
months thereafter; 25% of the works was to be completed in the next five
months; and the balance 25% of the works were required to be completed
within the following five months. He also drew the attention of this Court
to a bar chart submitted by JSL immediately after being awarded the
contract which indicated that JSL would commence works from August,
2015. After receiving the bar chart, DVVNL informed JSL that the
schedule provided was not acceptable and that JSL was to adhere to the
completion schedule as provided under the contract and start the work in
the month of May 2015. He stated that JSL‟s progress in execution of the
works was slow and this had been repeatedly pointed out by DVVNL as
well as by Rural Electrification Corporation Ltd. (REC) - a public sector
undertaking through which the Central Government had launched the rural
electrification scheme.
18. Mr Misra referred to various letters issued by DVVNL/REC to show
that JSL had been falling short in its performance. He contended that in
the circumstances, it was not necessary for DVVNL to wait till the expiry
of the period of 24 months and DVVNL was well within its right to
terminate the contract as JSL had failed to perform the same. Insofar as
debarring JSL from participating in other tenders for a period of one year is
concerned, Mr Misra contended that the same did not amount to
blacklisting and did not debar JSL from participating in tenders launched
by other agencies.
19. In response to the contention that the letters invoking the bank
guarantees was not in terms thereof, Mr Misra contended that the letters
dated 16.05.2016 invoking the bank guarantees had also been marked to
the respective banks. He submitted that the said letters clearly mention that
JSL‟s progress of the works was „poor‟ and this clearly indicated that JSL
had failed to perform the contract in question; thus, according to him, the
letters of invocation were in terms of the bank guarantees.
Reasoning and conclusion
20. The preliminary objection raised by DVVNL that this Court does not
have the jurisdiction to entertain the present petitions is not sustainable. In
terms of the arbitration agreement (clause) between the parties, the venue
of arbitration is Delhi. Thus, indisputably, the seat of arbitration is located
within the jurisdiction of this Court. The question whether the Court
having jurisdiction over the seat of arbitration would fall within the
meaning of Court under section 2(1)(e) of the Act and have jurisdiction to
entertain petitions/applications under Part-I of the Act and is no longer res
integra. The Supreme Court in Bharat Aluminium (supra) held as under:-
"We are of the opinion, the term "subject matter of the
arbitration" cannot be confused with "subject matter of the
suit". The term "subject matter" in Section 2(1)(e) is confined
to Part I. It has a reference and connection with the process of
dispute resolution. Its purpose is to identify the courts having
supervisory control over the arbitration proceedings. Hence, it
refers to a court which would essentially be a court of the seat
of the arbitration process. In our opinion, the provision in
Section 2(1)(e) has to be construed keeping in view the
provisions in Section 20 which give recognition to party
autonomy. Accepting the narrow construction as projected by
the Learned Counsel for the Appellants would, in fact, render
Section 20 nugatory. In our view, the legislature has
intentionally given jurisdiction to two courts i.e. the court
which would have jurisdiction where the cause of action is
located and the courts where the arbitration takes place. This
was necessary as on many occasions the agreement may
provide for a seat of arbitration at a place which would be
neutral to both the parties. Therefore, the courts where the
arbitration takes place would be required to exercise
supervisory control over the arbitral process. For example, if
the arbitration is held in Delhi, where neither of the parties are
from Delhi, (Delhi having been chosen as a neutral place as
between a party from Mumbai and the other from Kolkata) and
the tribunal sitting in Delhi passes an interim order Under
Section 17 of the Arbitration Act, 1996, the appeal against
such an interim order under Section 37 must lie to the Courts
of Delhi being the Courts having supervisory jurisdiction over
the arbitration proceedings and the tribunal. This would be
irrespective of the fact that the obligations to be performed
under the contract were to be performed either at Mumbai or at
Kolkata, and only arbitration is to take place in Delhi. In such
circumstances, both the Courts would have jurisdiction, i.e.,
the Court within whose jurisdiction the subject matter of the
suit is situated and the courts within the jurisdiction of which
the dispute resolution, i.e., arbitration is located."
21. Mr Misra‟s contention that this Court would not have jurisdiction by
virtue of clause 2.14 of the contract is also without merit. Admittedly,
Courts at Allahabad did not have any jurisdiction either over the subject
matter of dispute or on the seat of the arbitration. It is now well settled that
parties by contract can neither confer jurisdiction nor denude the
jurisdiction of Courts which is otherwise vested in law (See Harshad
Chiman Lal Modi v. DLF Universal Ltd. and Anr.: (2005)7 SCC 791 ).
22. However, it is also well established that if two Courts have
concurrent jurisdiction, the parties can agree that one of the Courts would
have exclusive jurisdiction over the subject matter of dispute. This has
been authoritatively held by the Supreme Court in the recent decision given
in Swastik Gases P. Ltd v. Indian Oil Corporation Ltd.: (2013) 9 SCC 32.
In that case, the Supreme Court referring to its earlier decisions held that
where agreement between the parties restricts jurisdiction to only one
particular place, the Courts at that place alone would have jurisdiction.
Thus, whilst it is correct that in cases where more than one Court exercises
concurrent jurisdiction, the parties by an agreement can specify the Court
which would exercise the jurisdiction over the subject matter, however,
that does not mean that the parties by agreement can confer jurisdiction on
a Court that cannot exercise any jurisdiction over the disputes. As stated
earlier, in the present case, the Courts at Allahabad do not have the
jurisdiction to entertain the present petitions and thus the jurisdiction of
this Court cannot be ousted on the ground that parties have agreed that
Courts at Allahabad would have exclusive jurisdiction in matters relating
to the contract in question.
23. The next question to consider is whether the letters of invocation
were in terms of the bank guarantees. In order to address the controversy, it
would be necessary to refer to the language of the subject bank guarantees.
It is seen that the bank guarantees furnished by Indian Bank/Dena Bank -
which are provided as security for advance - are, except for the value,
similarly worded. The performance guarantees issued by Indian Bank are
also similarly worded. The relevant extract of the said bank guarantees is
reproduced below:-
"ADVANCE (1st INSTALLMENT) PAYMENT
SECURITY - SUPPLY CONTRACT
xxxx xxxxx xxxxx
By this letter we, the undersigned, Dena Bank, Corporate
Business Branch, C-10, G-Block, Bandra-Kurla Complex,
Bandra (East), Mumbal-400051, a Bank (which expression
shall Include Its successors, administrators, executors and
assigns) organized under the laws of Banking Regulation Act,
1949, and having its Corporate Office at C-10, G-Block,
Bandra-Kurla Complex, Bandra (East), Mumbai-400051 do
hereby Irrevocably guarantee repayment of the said amounts
upon the first demand of the Employer without cavil or
argument In the event that the Contractor falls to commence or
fulfill Its obligations under the terms of the said Contract, and
In the event of such failure, refuses to repay all or part (as the
case may be) of the said advance payment to the Employer.
Provided always that the Bank's obligation shall be limited to
an amount equal to the outstanding balance of the advance
payment, taking Into account such amounts, which have been
repaid by the Contract or from time to time in accordance with
the terms of payment of the said Contract as evidenced by
appropriate payment certificates.
xxxx xxxxx xxxxx"
"PERFORMANCE SECURITY - SUPPLY CONTRACT
xxxx xxxxx xxxxx
By this letter we, the undersigned, Indian Bank, Mumbai Fort
Branch, United India Building, Sir P.M. Raod, Fort, Mumbai-
400001, a Bank (which expression shall Include Its successors,
administrators, executors and assigns) a body corporate
constituted under the Banking Companies (Acquisition and
Transfer of Undertakings) Act 1970, and having its
Registered/Head Office at 254-260, Avvaishannugam Saslai,
Royapettah, Chennal-600014 do hereby irrevocably guarantee
payment to the Employer up to Rs.11,89,45,000/- (Rupees
Eleven Crores Eighty Nine Lacs Forty Five Thousand Only)
i.e. Ten percent, (10%) of the Contract price until ninety (90)
days beyond the Defect Liability Period i.e., upto and
Inclusive of 31.07.2018.
We undertake to make payment under this Letter of Guarantee
upon receipt by us of your first written demand signed by the
Employer duly authorized officer or the authorised officer or
Owner declaring the Contractor to be in default under the
Contract and without cavil or argument any sum or sums
within the above named limits, without your need to prove or
show grounds or reasons for your demand and without the
right of the Contractor to dispute or question such demand.
Our liability under this Letter of Guarantee shall be to pay to
the Employer whichever is the lesser of the sum so requested
or the amount then guaranteed hereunder In respect of any
demand duly made hereunder prior to expiry of the Letter of
Guarantee, without being entitled to Inquire whether or not
this payment is lawfully demanded.
xxxx xxxxx xxxxx"
[Italics for emphasis]
24. In so far as the invocation of the bank guarantees provided for
securing the advance payment is concerned, the same can be invoked only
in the event that the contractor fails to commence or fulfil its obligation
under the terms of the contract and in the event of such failure, refuses to
repay all or part of the advance payment. It is necessary that the aforesaid
condition be met before the said bank guarantees can be invoked.
Similarly, insofar as performance bank guarantees are concerned, the same
can be invoked in the event JSL is in default under the contract. It is well
settled that a bank guarantee is an independent contract between the bank
and the beneficiary. Banks are not concerned with the disputes between the
beneficiary and person at whose instance, the guarantees have been
furnished; in this case, JSL and DVVNL. A bank has also no means to
ascertain whether the conditions as specified in the bank guarantee have
been met and is obliged to make payments against the bank guarantee on a
demand being made. However, the demands must be in terms of the bank
guarantee.
25. The decision of the Supreme Court in United Commercial Bank v.
Bank of India and Ors.: AIR 1981 SC 1426, underscores the importance
of claims being made in the terms of the letter of credit/bank guarantee. In
that decision, the Court referred to the following passage from the Paget's
Law of Banking, 8th Edition:-
"Unless documents tendered under a credit are in
accordance with those for which the credit calls and which
are embodied in the promise of the intermediary or issuing
banker, the beneficiary cannot claim against him; and it is
the banker's duty to refuse payment. The documents must
be those called for and not documents which are almost the
same or which seem to do just as well."
The Court also quoted the following passage from the decision in English
Scottish and Australian Bank Ltd. v. Bank of South Africa: 1922 13 LI L
Rep 21, 24 given as under :-
"It is elementary to say that a person who ships in reliance
on a letter of credit must do so in exact compliance with its
terms. It is also elementary to say that a bank is not bound
or indeed entitled to honour drafts presented to it under a
letter of credit unless those drafts with the accompanying
documents are in strict accord with the credit as opened. "
After referring to the law as applicable to a letter of credit, the Court held
that the said principles were applicable to a bank guarantee as well.
26. In M/s Ansal Properties & Industries P Ltd v. Engineering Projects
(India) Ltd: 1997 (41) DRJ 618, the letter of invocation issued did not
specifically state that any loss was caused and, therefore, this Court held
that the invocation letter did not fulfil the requirements for invoking the
bank guarantee. A similar view was also held by this Court in
Punj Sons (P) Ltd. v. Hong Kong & Shanghai Banking Corporation and
Anr.: 1991 (20) DRJ 154., Puri International Ltd. v National Building
Construction Co. Ltd.: (1997) 41 DRJ 592 and Basic Tele Services Ltd.v.
Union of India (UOI) and Anr: (2009) 112 DRJ 688.
27. Thus, it is now well established that the letter invoking the bank
guarantee must be strictly in terms thereof.
28. In the present case, the letters dated 16.05.2016 and 14.06.2016 sent
by DVVNL clearly do not satisfy the conditions as stated in the bank
guarantees. In its letter to the Dena/Indian Bank, DVVNL has simply
alleged that the performance of JSL was poor; this is not the condition as
mentioned in the bank guarantees. In order to invoke the bank guarantees
for advance payment security, DVVNL would have to assert in clear terms
that JSL has failed to commence or fulfil its obligations under the contract
and has further refused to repay all or part of the advance payment to the
employer. Therefore, plainly two conditions have to be met. First, that JSL
has failed to commence or fulfil its obligations; and second, that JSL has
refused to repay all or part of the advance payment to DVVNL. In the
absence of DVVNL alleging the same in its letters of invocation, the banks
cannot pay the amount guaranteed.
29. In order to invoke the performance bank guarantees, it is expressly
provided that the bank shall pay on receipt of a letter from the authorised
officer of the Owner declaring the Contractor to be in default under the
Contract. Thus, a letter of invocation, which does not unequivocally
declares that JSL is in default of the contract, will not meet the necessary
requirement for invocation of the performance bank guarantees.
30. It is also important to mention that the bank guarantees furnished
for securing the advances provided by DVVNL can only be invoked after
the unadjusted/recovered amount of advances is quantified and only to that
extent.
31. In view of the above, there is much merit in Mr Kapur‟s contention
that the bank guarantees cannot be encashed on the letters of invocation
sent by DVVNL.
32. The next issue to be addressed is whether the encashment of the
bank guarantees can be interdicted on the ground of fraud.
33. The facts of the present case prima facie indicate that JSL has not
been able to perform the contract to achieve the milestones as required
under the contract. Much emphasis was laid by Mr Kapur on the letter
dated 05.05.2016 which mentions that the work of rural electrification was
to be completed by October 2016 and that JSL had failed to complete the
works as per target. According to JSL, the same was fraudulent as the
contract was to be performed within 24 months and thus the date of
completion was April 2017 and not October 2016. However, it is relevant
to note that in the letter dated 09.05.2016 sent by JSL in response to the
aforesaid letter, it did not object, dispute or counter the assertion that the
works were to be completed by October 2016; on the contrary JSL
accepted that it had not met the targets as required and also provided
several reasons for falling short in meeting the targets. JSL also assured
that it would cover the gap in the coming months. It is thus apparent, that
although there may be a dispute as to the quantum of work done, there is
no dispute that JSL had fallen short of the targets. And, this is the only
reason indicated by DVVNL for terminating the contract and invoking the
bank guarantees. Although JSL has pleaded that the invocation of bank
guarantees is fraudulent, it is difficult to accept the same. In order to seek
an injunction against encashment of a bank guarantee, JSL has to establish
a prima facie case of fraud. In U.P. Cooperative Federation Ltd v. Singh
Consultants and Engineers (P) Ltd.: (1988) 1 SCC 174, the Supreme
Court had further clarified that:
"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."
34. In Larsen & Toubro Limited v Maharashtra State Electricity
Board and Others: (1995) 6 SCC 68, the Supreme Court referred to the
earlier decision in Svenska Handelsbanken v. M/s. Indian Charge
Chrome and others: (1994) 1 SCC 502 and held as under:-
"5. Before we adjudicate the rival pleas urged before us by
counsel for the parties, it will be useful to bear in mind the
salient principles to be borne in mind by the court in the matter
of grant of injunction against the enforcement of a bank
guarantee / irrevocable letter of credit. After survey of the
earlier decisions of this Court in United Commercial Bank v
Bank of India, U.P. Coop. Federation Ltd. v Singh Consultants
& Engineers (P) Ltd., General Electric Technical Services Co.
Inc v Punj Sons (P) Ltd. and the decision of the Court of Appeal
in England in Elian and Rabbath v Matsas and Matsas and a
few American decisions, this Court in Svenska Handelsbanken
v. Indian Charge Chrome AIR 1994 SC 626, laid down the law
thus:
"...in case of confirmed bank guarantees/irrevocable
letters of credit, it cannot be interfered with unless
there is fraud and irretrievable injustice involved in
the case and fraud has to be an established fraud...
....irretrievable injustice which was made the basis
for grant of injunction really was on the ground that
the guarantee was not encashable on its terms...
...there should be prima facie case of fraud and special
equities in the form of preventing irretrievable
injustice between the parties. Mere irretrievable
injustice without prima facie case of established fraud
is of no consequence in restraining the encashment of
bank guarantee.""
35. The contention that the above position of law has been diluted and
the scope of interference has been expanded is not merited. The contention
that fraud need not necessarily be one that is perpetuated at the initial stage
but could also be fraud at a later stage is merited but this does not mean
that fraud on which invocation of bank guarantees can be interdicted is
fraud other than one affecting the underlying transaction. The grounds on
which invocation of bank guarantees can be restrained essentially remain
the same as summarised in Larsen and Toubro (supra) and Svenska
Handelsbanken (supra).
36. It is also well settled that merely alleging fraud would not meet the
standard of pleading required to sustain such allegation and the person
alleging fraud must plead full particulars of the same. In the present case,
neither the pleadings nor the facts as indicated even remotely establish that
any fraud has been perpetuated; on the contrary, it prima facie appears that
JSL is in breach of the contract as it had admitted that its progress had not
measured up to the milestones as specified in the contract.
37. The contention that the liquidated damages for delay in performance
of the contract were less than the amount already recovered and therefore
the invocation of subject bank guarantees is fraudulent is also without
merit. The contract has been terminated and it is apparent that DVVNL is
claiming damages for breach of the contract. In the circumstances, prima
facie, DVVNL's claims cannot be restricted to liquidated damages for
delay in performance of the contract. Further, the subject bank guarantees
also include guarantees for securing the advances provided to JSL; and
DVVNL would be entitled to invoke those bank guarantees to recover the
unadjusted advances.
38. The next issue to be considered is regarding stay of letter of
termination dated 26.05.2016 issued by DVVNL. In addition, to seeking
stay of invocation of the bank guarantees, JSL has also prayed for stay of
the letter of termination. The aforesaid prayer cannot be granted; first of
all, for the reason that JSL has failed to prima facie establish that the
termination is wrongful. The contention that since liquidated damages for
delay in performance have been provided under the contract, the same
cannot be terminated for non performance cannot be accepted. The
communications issued by REC and DVVNL have amply underscored the
necessity to complete the contract within time and, prima facie, failure to
maintain the requisite progress would entitle DVVNL to terminate the
contract in question. Secondly, the contract in question is determinable and
therefore by virtue of Section 14(1) (d) of the Specific Relief Act, 1963,
the contract cannot be specifically enforced. The contention that the
contract in question falls within the explanation to Section 10 of the
Specific Relief Act, 1963 is also bereft of any merit. The said explanation
reads as under:
"Explanation: Unless and until the contrary is proved, the
court shall presume-
(i) that the breach of a contract to transfer immovable property
cannot be adequately relieved by compensation in money; and
(ii) that the breach of a contract to transfer movable property
can be so relieved except in the following cases:
(a) where the property is not an ordinary article of commerce,
or is of special value or interest to the plaintiff, or consists of
goods which are not easily obtainable in the market;
(b) where the property is held by the defendant as the agent or
trustee of the plaintiff."
39. The contract in question is not a contract to transfer immovable
property and the reliance placed by Mr Kapur on Clause (i) of Explanation
to Section 10 of the Specific Relief Act, 1963 is misplaced; so as his
reliance on clause (ii) of the Explanation. By virtue of the aforesaid
Explanation, it is to be presumed that a breach of contract for transfer of
movable property can be relieved. The exception to the aforesaid rule is
where the property is not an ordinary article of commerce, or is of special
value or interest to the plaintiff. The explanation under clause (ii)(a) of
Section 10 of the Specific Relief Act, 1963 contemplates a case where the
party requires specific performance of a contract to transfer movable
property which is of interest to the plaintiff. In other words, it is applicable
where the plaintiff is seeking to acquire a movable asset which is of a
special value and not an ordinary article of commerce; in other words, is
not readily available. In the present case, the contract is an ordinary
contract, in the usual course of commerce; the electrification work can be
performed by all entities engaged in the said business. There is no special
value or special interest that can be imputed to the electric poles or other
articles used in electrification works and required to be transferred under
the contract in question.
40. The contention that the contract in question falls within the scope of
Section 14 (3)(c) of the Specific Relief Act, 1963 is also without merit as
none of the provisions are applicable. Thus, the termination of the contract
in question cannot be stayed.
41. Before concluding it would also be necessary to consider the
contention that by virtue of the letter of termination, JSL has been
effectively blacklisted. Although Mr Misra contended that debarring JSL
from participating in future tenders for a period of one year did not amount
to blacklisting, I am unable to accept the same. Clearly the direction to
debar JSL from participating in future tenders is a punitive measure and
would amount to blacklisting. It is well settled that such punitive measures
cannot be taken without issuing a show cause notice and without affording
the concerned party an opportunity to be heard (See Erusian Equipment &
Chemicals Ltd. v. State of West Bengal.: (1975) 2 SCR 674 and Grosons
Pharmaceuticals (P) Ltd. and Anr v. The State of Uttar Pradesh and
Ors.: (2001) 8 SCC 604).
42. In view of the aforesaid, the letter of termination dated 26.05.2016 to
the extent that it debars JSL from participating in future tenders for a
period of one year is set aside. Further, Dena Bank and Indian Bank are
restrained from encashing the bank guarantees on the basis of the letters of
invocation issued by DVVNL. However, it is clarified that this would not
preclude DVVNL to issue fresh letters of invocation in accordance with the
terms of the bank guarantees. DVVNL is also not precluded from taking
any action for blacklisting the petitioner, but after following the due
procedure and in accordance with law.
43. The petitions are disposed of in the above terms.
VIBHU BAKHRU, J
SEPTEMBER 06, 2016
RK/pkv
