M/S. Power Mech Projects Limited. vs M/S. Tpl Kipl Joint Venture

Telangana High Court

M/S. Power Mech Projects Limited. vs M/S. Tpl Kipl Joint Venture on 22 January, 2024

  THE HON'BLE THE CHIEF JUSTICE ALOK ARADHE
                     AND
 THE HON'BLE SHRI JUSTICE ANIL KUMAR JUKANTI

                      COMCA No. 30 of 2022

JUDGMENT:

(per the Hon'ble the Chief Justice Alok Aradhe)

Mr. G. Kalyan Chakravarthy, learned counsel appears

for the appellant.

Ms. Aahana Madhyala, learned counsel appears for

respondent No.1.

2. With the consent of the parties, the matter is heard

finally.

3. This appeal under Section 13 of the Commercial Courts

Act, 2015 has been filed against an order dated 28.09.2022 by

which the Principal Special Court in the Cadre of District

Judge for Trial and Disposal of Commercial Disputes, City

Civil Court at Hyderabad (hereinafter referred to as 'the

Commercial Court') has rejected C.O.P.No.30 of 2022

preferred by the appellant under Section 9 of the Arbitration

and Conciliation Act, 1996 (hereinafter referred to as 'the

1996 Act').

2 CJ & JAK, J COMCA.No.30 of 2022

4. Facts giving rise to filing of this appeal briefly stated are

that sometime in July, 2017, the Municipal Corporation of

Karnal had floated a tender for construction and maintenance

of 20 & 8 MLD Sewerage Treatment Plant (STP) for sewerage

systems. Respondent No.1, a joint venture company,

participated in the bidding process and was awarded the

tender. Letter of Acceptance was communicated to respondent

No.1 on 24.10.2017. As per the work order, respondent No.1

was required to furnish security deposit and performance bank

guarantee to the Municipal Corporation, Karnal.

5. Respondent No.1, a joint venture company, in turn

sub-contracted the work by work order dated 30.01.2018 to

respondent No.3, namely, M/s Hydro Magus Private Limited.

The scope of the work was design, engineering,

manufacturing, inspection, transportation, erection,

installation, testing and commissioning of 20 & 8 MLD STP

for sewerage systems. The aforesaid work was to be completed

within a period of 22 months. A fresh work order dated

10.07.2020 was issued by respondent No.1 to the appellant.

3 CJ & JAK, J COMCA.No.30 of 2022

6. As per the terms and conditions of the aforesaid work

order, the appellant was required to furnish an unconditional

bank guarantee. Thereupon, an unconditional bank guarantee

was furnished on 23.12.2021 which was valid up to

30.03.2023. A dispute between the parties arose on account of

delay in execution of the project.

7. Respondent No.1, a joint venture company, filed

Commercial Suit No.2 of 2022 under Section 9 of the 1996

Act before the District and Sessions Court, Karnal, in which,

an injunction was sought against the principal employer,

namely, Municipal Corporation of Karnal, restraining them

from invoking and encashment of the bank guarantee. The

learned Additional District and Sessions Judge by an order

dated 31.03.2022 directed the parties to maintain status quo

with regard to invocation of the bank guarantee. Respondent

No.1 thereafter on 09.04.2022 issued a letter to the appellant

pointing out various defects in execution of the work and

however a period of 20 days was granted to the appellant to

complete the work. Thereafter, on 12.04.2022, the appellant 4 CJ & JAK, J COMCA.No.30 of 2022

submitted an explanation. Respondent No.1, a joint venture

company, by an order dated 22.04.2022 suspended the work

awarded to the appellant.

8. The appellant thereupon filed C.O.P.No.30 of 2022

under Section 9 of the 1996 Act restraining respondent Nos.1

and 2 from invoking the bank guarantee. The Commercial

Court by an order dated 28.09.2022 dismissed the aforesaid

C.O.P. In the aforesaid factual background, this appeal has

been filed.

9. Learned counsel for the appellant submitted that the

contract awarded to the appellant was terminated in an illegal

manner. It is further submitted that 90% of the work has been

completed by the appellant and the vouchers are pending for

payment. It is further submitted that the trial Court grossly

erred in rejecting C.O.P.No.30 of 2022 preferred by the

appellant on the ground that the appellant has failed to make

out the case of fraud or irretrievable prejudice.

5 CJ & JAK, J COMCA.No.30 of 2022

10. On the other hand, learned counsel for respondent No.1

has supported the order passed by the learned Commercial

Court and has placed reliance on the decision of the Supreme

Court in Himadri Chemicals Industries Limited v. Coal Tar

Refining Co.1.

11. We have considered the submissions made on both sides

and have perused the record.

12. It is trite law that the bank guarantee is an independent

and distinct contract between the bank and the beneficiary and

is not qualified by the underlying transaction and the primary

contract between the person at whose instance, the bank

guarantee is furnished and the beneficiary. The scope of

interference of the Courts against invocation of bank guarantee

is well delineated by a catena of decisions of the Supreme

Court. In Hindustan Steel Works Construction Limited v.

Tarapore & Co. and another2, the Supreme Court has held that

an injunction restraining the encashment of bank guarantee has

1 (2007) 8 SCC 110 2 (1996) 5 SCC 34 6 CJ & JAK, J COMCA.No.30 of 2022

to be granted only in exceptional cases of fraud or irretrievable

prejudice. It has further been held that the encashment of

unconditional bank guarantee is independent to the

adjudication of the lis between the parties to the primary

contract. Similar view has been taken in U.P. State Sugar

Corporation v. Sumac International Ltd 3 and the relevant

extract of para 12 is extracted below for the facility of

reference.

"12. The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or

3 (1997) 1 SCC 568

7 CJ & JAK, J COMCA.No.30 of 2022

injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may coexist in some cases. In the case of U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. ((1988)1 SCC 174) which was the case of a works contract where the performance guarantee given under the contract was sought to be invoked, this Court, after referring extensively to English and Indian cases on the subject, said that the guarantee must be honoured in accordance with its terms. The bank which gives the guarantee is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not. The bank must a pay according to the tenor of its guarantee on demand without proof or condition. There are only two exceptions to this rule. The first exception is a case when there is a clear fraud of which the bank has notice. The fraud must be of an egregious nature such as to vitiate the entire underlying transaction. Explaining the kind of fraud that may absolve a bank from honouring its guarantee, this Court in the above case quoted with approval the observations of Sir John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank ((1984) 1 All ER 351) (All ER at p. 352): (at SCC p. 197)

"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 charged."

8 CJ & JAK, J COMCA.No.30 of 2022

This Court set aside an injunction granted by the High Court to restrain the realisation of the bank guarantee."

13. In Himadri Chemicals Industries Ltd (supra), the

principles with regard to the grant of injunction against the

invocation of unconditional bank guarantee have been culled

out in para 14 which reads as under:

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 realise 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 realisation 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 9 CJ & JAK, J COMCA.No.30 of 2022

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. Thereafter, similar view has been taken in Standard

Chartered Bank v. Heavy Engineers Corporation Ltd4 and in

para 23, it has been held as under:

23. The settled position in law that emerges from the precedents of this Court is that the bank guarantee is an independent contract between bank and the beneficiary and 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 is of no consequence. There are, however, exceptions to this rule when there is a clear case of fraud, irretrievable injustice or special equities. The Court ordinarily should not interfere with the invocation or encashment of the bank guarantee so long as the invocation is in terms of the bank guarantee.

15. In the backdrop of aforesaid well settled legal principles,

we may advert to the facts of the case in hand. Admittedly, the

bank guarantee furnished by the appellant is an unconditional

bank guarantee. The dispute raised by the appellant with

regard to the termination of the contract is wholly irrelevant

while deciding the issue with regard to the invocation. The 4 (2020) 13 SCC 574 10 CJ & JAK, J COMCA.No.30 of 2022

bank guarantee is an independent and distinct contract between

the parties. The appellant has neither been able to plead nor

prove the case of egregious fraud nor has been able to

demonstrate that in case respondent No.1 has permitted to

encash the bank guarantee, the appellant shall suffer

irretrievable injury.