Gujarat High Court
Swan Lng Pvt. Ltd. vs National Marine Infrastructure India ... on 26 February, 2018
Bench: M.R. Shah, A.Y. Kogje
C/FA/577/2018 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
FIRST APPEAL NO. 577 of 2018
With
CIVIL APPLICATION NO. 1 of 2018
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE M.R. SHAH sd/
and
HONOURABLE MR.JUSTICE A.Y. KOGJE sd/
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1 Whether Reporters of Local Papers may be allowed to see NO
the judgment ?
2 To be referred to the Reporter or not ? NO
3 Whether their Lordships wish to see the fair copy of the NO
judgment ?
4 Whether this case involves a substantial question of law as NO
to the interpretation of the Constitution of India or any
order made thereunder ?
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SWAN LNG PVT. LTD.
Versus
NATIONAL MARINE INFRASTRUCTURE INDIA PVT. LTD.
=============================================
Appearance:
MR. KAMAL TRIVEDI, SENIOR ADVOCATE WITH MR. JAY KANSARA FOR
M/S WADIAGHANDY & CO for the PETITIONER(s) No. 1
MR. MIHIR THAKOR, SENIOR ADVOCATE WITH MS PAURAMIB SHETH for
the RESPONDENT(s) No. 1
=============================================
CORAM: HONOURABLE MR.JUSTICE M.R. SHAH
and
HONOURABLE MR.JUSTICE A.Y. KOGJE
Date : 26/02/2018
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE M.R. SHAH) 1.0. Admit. Ms. Paurami Sheth, learned advocate waives service of notice of admission on behalf of the respondent. In the facts and circumstances of the case and with the consent of the learned Page 1 of 27 C/FA/577/2018 JUDGMENT advocates for the respective parties, the appeal is taken up for final hearing today.
2.0. Feeling aggrieved and dissatisfied with the impugned further order passed by the learned Judge, Commercial Court, Rajkot passed below Exh.1 in Civil Miscellaneous Application No.3 of 2018 dated 17.02.2018, the original defendant has preferred the present First Appeal under Section 13 of the Commercial Courts, Commercial Division and Commercial Appellate Division of the High Courts Act, 2015 (hereinafter referred to as the " Commercial Court Act, 2015").
3.0. The facts leading to the present First Appeal in nutshell are as under:
3.1. A concessionaire agreement was executed in favour of SEL, whereby SEL was required to construct the LNG Port infrastructure facility on the land allotted to it by the authority. That prior thereto, Gujarat Maritime Board vide its communication dated 28.11.2013 issued Letter of Intent in favour of SEL for setting up a Greenfield LNG Port Terminal FSRU facility in Jafrabad. That thereafter, aforesaid agreement was executed in favour of SEL. SEL was required to initiate the construction of Port facility upon receiving a construction permission from GMB. Therefore, for the purpose of executing the work, SEL floated a Special Purpose Vehicle by the name of Swan LNG Pvt. Ltd (appellant herein) on 12.02.2013. That in order to facilitate the project and for the purpose of construction of LNG Infrastructure Facility, which includes work of dredging, reclamation and marine work, a tender Page 2 of 27 C/FA/577/2018 JUDGMENT was issued inter alia, inviting bids from various entities.
Accordingly, respondent herein participated in the process and submitted its tender. On the basis of evaluation of technical and the financial parameters as incorporated in the bidding document, respondent herein was selected for carrying out construction work of LNG Port infrastructure facility including dredging and marine work. A Letter of Award dated 05.08.2016 was issued in favour of the respondent herein. It appears that on 15.11.2016, the parties entered into an Agreement for Engineering, Procurement, Construction and Commissioning Contract for the purpose of construction of LNG Portal infrastructure facility at Jafrabad. According to the appellant, time was the essence of contract agreement and the Marine Work was required to be completed within an overall period of 36 months from the date of commencement and Dredging and Reclamation Work was required to be completed within an overall time line of 22 months from the date of commencement. That the total contract price was fixed at INR 2215,45,25,200/. That the respondent was required to furnish a Performance Bank Guarantee for an amount equivalent to 9% of the total contract price i.e. INR 190,39,07,268/ in favour of appellant within a period of 28 days from the effective date of Contract Agreement. That the respondent to furnish the Performance Bank Guarantee of Rs.190,39,07,268/. However, it appears that first Bank Guarantee was not in consonance with the Contract Agreement and the appellant disputed such Performance Bank Guarantee and thereafter amended the Performance Bank Guarantee was provided by the respondent on 23.03.2017. That the said Bank Guarantee is unconditional and irrevocable. It Page 3 of 27 C/FA/577/2018 JUDGMENT appears that thereafter dispute arose between the parties as according to the appellant, the respondent Contractor did not commence the work and the respondent failed to adhere to time line provided under the contract agreement. At this stage, it is required to be noted that the Contract Agreement provides various Key Milestones (KM) and Control Milestones (CM) which were strictly required to be adhered to by respondent Contractor. The dispute arose between the parties as Key Milestones and Control Milestones were not achieved by the respondent. There were various correspondences between the parties, for which, talks were going on to extend the cut off date, however thereafter same was not further materialized as it needed the novatio of contract as terms and conditions of the contract were required to be amended. According to the appellant, in order to achieve the project as per the LNG Policy, 2012, it was required to complete the construction work within a period of 36 months since various other entities such as Gujarat State Petroleum Corporation Limited, Bharat Petroleum Corporation Limited, Indian Oil Corporation Limited and ONGC Limited executed Regasification Agreement with appellant and have become the Terminal Users. Therefore, according to the appellant any delay in completion of construction of LNG Terminal shall invite heavy penalties upon appellant from the aforementioned entities. In addition to the above, appellant has also executed a Bank Guarantee for an amount of Rs.72,57,00,000/ as construction approval granted by GMB on 08.12.2016.
3.2. According to the appellant, owing to various delay Page 4 of 27 C/FA/577/2018 JUDGMENT attributable to the respondent, entire project has been delayed and appellant is on the verge of facing penal actions those may be initiated by various entities for non completion of work within the stipulated time period. It is the case on behalf of the appellant that therefore, considering the aforesaid facts and circumstances, parties mutually agreed to reduce the scope of Contract Agreement and thereby, allowing appellant to expedite the process of construction of LNG Port infrastructure facility, however, without affecting and / or amending the terms and conditions of the contract agreement that before revised terms of the contract agreement came to be finalized and / or during the course of negotiations between the parties and when revised terms of the contract agreement were being finalized, the respondent herein approached the Commercial Court at Rajkot on 09.02.2018 by preferring Commercial Civil Miscellaneous Application No. 3 of 2018 under Section 9 of the Arbitration Act and prayed for appropriate relief to restrain the appellant herein from invoking Bank Guarantee. That vide order dated 09.02.2018, the learned Commercial Court issued the urgent show cause notice by passing a detailed speaking order and observing why exparte adinterim injunction restraining the appellant herein original opponent from invoking the Bank Guarantee is not issued. The notice was made returnable on 16.02.2018. The observations made by the learned Commercial Court made in the order dated 09.02.2018 shall be referred to hereinafter. As there was no injunction granted by the learned Commercial Court and as Performance Bank Guarantee in favour of the appellant was unconditional and irrevocable Performance Bank Guarantee, the appellant herein in fact invoked Page 5 of 27 C/FA/577/2018 JUDGMENT the Bank Guarantee. A Bank draft was issued by the Banker Axis Bank in favour of the appellant. That on 16.02.2018 on the returnable dated, the learned Presiding Officer / Judge was not available as he was on leave. The appellant herein appeared through its advocate on 16.01.2018 itself. Adjournment application at Exh.12 was submitted on behalf of the appellant original opponent. It appears that in the said application, it was specifically stated that amount of bank guarantee has already been deposited in the account of the opponent. The matter was adjourned to 17.02.2018. On 17.02.2018, the learned Judge has passed the impugned order and has ordered that in case if the demand draft issued by the Axis Bank in favour of the appellant herein original opponent has not so far as been encashed, thereby crediting the amount thereunder to the account of the opponent, the same may not be processed further. The learned Judge has also further observed that in case, however, the draft has already been encashed, by crediting the account, the said amount be kept suspended i.e. it may not be permitted to be withdrawn by the opponent for the time being. That thereafter, the learned Judge has adjourned the matter to 06.03.2018.
3.3. Feeling aggrieved and dissatisfied with the impugned order passed by the learned Judge, Commercial Court, Rajkot dated 17.02.2018 passed below Exh. 1, original opponent has preferred present First Appeal under Section 13 of the Commercial Court Act, 2015.
4.0. Shri Kamal Trivedi, learned Senior Advocate has appeared on Page 6 of 27 C/FA/577/2018 JUDGMENT behalf of the appellant herein original opponent and Shri Mihir Thakore, learned Senior Advocate has appeared on behalf of the respondent herein original applicant.
5.0. Shri Kamal Trivedi, learned Senior Advocate appearing on behalf of the appellant original opponent has vehemently submitted that in the facts and circumstances of the case, the learned Commercial Court has materially erred in passing the impugned order.
5.1. It is further submitted by Shri Kamal Trivedi, learned Counsel for the appellant that in fact the very the learned Judge on 09.02.2018 by speaking order refused to grant any adinterim injunction and issued only show cause notice and despite the same without there being any change in the circumstances on the observations made in the order dated 09.02.2018 and when the appellant original opponent was yet to file reply to Section 9 application, the learned Judge has passed by the impugned order, by which, not only the appellant has likely to suffer irreparable loss even the appellant is likely to face other consequences from GMB and other authorities.
5.2. It is further submitted by Shri Kamal Trivedi, learned Counsel for the appellant that in fact appellant herein original opponent in invoking / encashing Bank Guarantee and even Axis Bank issued the demand draft in favour of appellant herein original opponent and in fact the said demand draft was deposited in the Bank account of the appellant. It is submitted that therefore, as such nothing further was required to be done by the Axis Bank / Page 7 of 27 C/FA/577/2018 JUDGMENT Banker with respect to said Performance Bank Guarantee. It is submitted that therefore, as such learned Commercial Court has materially erred in passing the impugned order. It is submitted that as such the impugned order passed by the learned Commercial Court is just contrary to its own observations made in the order dated 09.02.2018, by which, learned Judge issued only show cause notice and did not grant any exparte adinterim injunction.
5.3. It is further submitted by Shri Kamal Trivedi, learned Counsel for the appellant that even otherwise Performance Bank Guarantee which was executed by the respondent herein original applicant was irrevocable and unconditional Bank Guarantee and therefore, also no injunction at the instance of the respondent herein original applicant, restraining the appellant herein from encashing / invoking the Bank Guarantee could have been granted by the learned Commercial Court. It is submitted that the terms and conditions of the Performance Bank Guarantee provided irrespective of any dispute between the appellant and the respondent, the appellant shall be entitled to invoke / encash the Performance Bank Guarantee on the request made by the appellant. It is submitted that therefore, as the Performance Bank Guarantee executed by the respondent herein original applicant was unconditional and irrevocable neither any injunction can be granted restraining the Bank from encashing the Bank Guarantee nor even the appellant herein can be restrained from encashing / invoking Performance Bank Guarantee.
5.4. In support of his above submission, Shri Trivedi, leaned Page 8 of 27 C/FA/577/2018 JUDGMENT Counsel for the appellant has heavily relied upon the following decisions of the Hon'ble Supreme Court as well as recent decision of the Division Bench of this Court in the case of Hindustan Dorr Oliver Limited vs. Gujarat State Fertilizers and Chemicals Limited rendered in First Appeal No. 891 of 2017, which has been confirmed by the Hon'ble Supreme Court in SLP (C) No.8939 of 2017.
(1). UP State Sugar Corporation vs. Sumac International Limited reported in (1997) 1 SCC 568.
(2). Dwarikesh Sugar Industries Limited vs. Prem Heavy Engineering Works (P) Ltd reported in (1997) 6 SCC 450.
(3). U.P. Cooperative Federation Ltd. vs. Singh Consultants and Engineers (P) Ltd reported in (1998) 1 SCC 110.
(4). Himadri Chemicals Industries Ltd vs. Coal Tar Refining Co reported in (2007) 8 SCC 110.
(5). Vintec Electronics Private Limited vs. HCL Info systems Ltd reported in (2008) 1 SCC 544.
(6). BSES Ltd vs. Fenner India Ltd and Anr reported in (2006) 2 SCC 728.
(7). M/s. Adani Agri Fresh Ltd vs. Mahaboob Sharif and Ors reported in 2015 SCC Online SC 1302.
(8). Ansal Engineering Projects Ltd vs. Tehri Hydro Development Corporation Ltd. & Anr reported in (1996) 5 SCC 450.Page 9 of 27
C/FA/577/2018 JUDGMENT (9). Bank of Baroda vs. Ruby Sales Corporation (Agency) & Anr reported in (2006) SCC Online Guj 130.
Making above submissions and relying upon the above decisions, it is requested to allow the present appeal and quash and set aside the impugned order dated 17.01.2018.
6.0. Shri Mihir Thakore, learned Counsel for the respondent original applicant has vehemently opposed the present Appeal.
6.1. It is vehemently submitted by Shri Thakore, learned counsel for the respondent that as the impugned order passed by the learned Judge, Commercial Court can be said to be interlocutory order / interim order and a final order is yet to be passed by the learned Judge, Commercial Court in Section 9 Application of the Arbitration Act, he has requested not to interfere with the impugned order.
6.2. Shri Thakore, learned counsel for the respondent original applicant has further submitted that in fact the relief which is sought by the original applicant in Section 9 application is restraining the appellant herein original opponent from encashing / invoking Bank Guarantee and no relief is sought against the Bank and therefore, the decisions relied upon by the learned counsel for the appellant referred to herein above shall not be applicable.
6.3. It is further submitted by Shri Thakore, learned counsel for the respondent original applicant that as such when negotiations were going on and in fact it was agreed by and between the parties that the respondent herein original applicant was not required to Page 10 of 27 C/FA/577/2018 JUDGMENT do any further work on marine and was required to complete the dredging work and that too during the extended period, the appellant herein fraudulently invoked the Bank Guarantee. It is submitted that therefore, when the fraud is alleged and it is the case on behalf of the respondent herein original applicant that the appellant herein original opponent has invoked / encashed the Bank Guarantee fraudulently, decisions relied upon by the learned counsel for the appellant referred to herein above shall not be applicable to the facts of the case on hand.
6.4. It is further submitted by Shri Thakore, learned counsel for the respondent original applicant that number of submissions have been made by the learned counsel for the respondent herein original applicant in support of the case on behalf of the original applicant that the delay was attributable to appellant. It is submitted that in any case, after negotiations, the cut off date was extended and during the extended period, the original applicant was required to do dredging work only and that the respondent herein original applicant was relieved from doing any further marine work. It is further submitted that therefore, also opponent herein ought not to have encashed / invoked. It is submitted that therefore, in the facts and circumstances of the case, the learned Judge has not committed any error in passing the impugned order.
6.5. It is further submitted by Shri Thakore, learned counsel for the respondent original applicant that even as per the negotiations and the proposed agreement amount of Performance of Bank Guarantee was required to be reduced to Rs.23 Crores only (even Page 11 of 27 C/FA/577/2018 JUDGMENT according to the appellant herein original opponent Rs.59 Crores only) there was no justification to invoke the entire Bank Guarantee of Rs.190 Crores.
6.6. It is further submitted by Shri Thakore, learned counsel for the respondent original applicant that as such a huge sum is due and payable to the original applicant for the work done and for which, as such, running bills have been issued. It is submitted that as such more than 70% of the dredging work has been done / completed by the original applicant. It is submitted that therefore, also there is no justification for the appellant herein original opponent to invoke / encash the entire Bank Guarantee of Rs.190 Corers.
Making above submissions, it is requested to dismiss the present appeal.
7.0. In rejoinder, Shri Kamal Trivedi, learned Counsel for the appellant has vehemently submitted that as such matter arising between parties of the dispute arising in the contract interse between the contracting parties. It is submitted that as the Performance Bank Guarantee issued was conditional and irrevocable and thereafter when same came to be invoked there is no question of fraud as alleged by the original applicant. It is submitted that as such on the aforesaid ground Section 9 application is not moved and on the aforesaid ground, the injunction restraining the appellant herein from encashing the Bank Guarantee is not sought. It is submitted that there are no such averment / allegation in Section 9 application. It is submitted that Page 12 of 27 C/FA/577/2018 JUDGMENT only in a case where the fraud is alleged at the time of executing the contract between the parties that the Bank Guarantee is irrevocable and unconditional, the same can be invoked / encahsed in whose favour Bank Guarantee is issued.
7.1. Now, so far as submission on behalf of the respondent original applicant that as the relief sought in Section 9 Application is against the appellant herein original opponent and no relief is sought against the Bank, it is submitted that even in the case before this Court in Hindustan Dorr Oliver Limited (supra), the relief sought was against one of the contracting party restraining it from encashing Bank Guarantee and even no relief was sought against the Bank, the Division Bench of this Court has specifically observed and held that once the Bank Guarantee executed is unconditional and irrevocable, no injunction can be granted. It is submitted that the said decision has been confirmed by the Hon'ble Supreme Court.
Making above submissions, it is requested to allow the present Appeal.
8.0. At the outset, it is required to be noted that Shri Trivedi, learned counsel for the appellant herein original opponent has suggested that as the Bank Guarantee is already invoked / encashed and demand draft is already deposited in the Bank Account of the appellant, till final decision on Section 9 application is taken and subject to further order that may be passed, appellant is ready and willing to keep the said amount aside, to the said suggestion, Shri Thakore, learned counsel for the respondent Page 13 of 27 C/FA/577/2018 JUDGMENT original applicant has stated at the bar that respondent is not agreeable to the same and despite pointing out to him that any observation on merits with respect to invocation of Bank Guarantee shall come in the way while deciding Section 9 application, he has stated at the bar that the respondent is conscious of the same and is inviting the order on merits, therefore, we are entering into the merits of the case whether the appellant can be restrained from invoking / encashing Bank Guarantee and / or whether Performance Bank Guarantee issued by the respondent is unconditional and / or irrevocable Performance Bank Guarantee.
9.0. Heard the learned counsel for the respective parties at length. At the outset, it is required to be noted that before the learned Commercial Court in Section 9 application of the Arbitration and Conciliation Act, 1996, the respondent herein original applicant has sought following reliefs:
"a. That this Hon'ble Court be pleased to order and direct the opponent to return the Original Bank Guarantee No. 0200FBG170001 dated 23.03.2017 for a sum of Rs.190,39,07,268/ issued by the Axis Bank, Rajula Branch, Gujarat to the applicant.
b.That this Hon'ble Court be pleased to issue an injunction / direction / order restraining the Opponent from invoking the Bank Guarantee No. 0200FBG170001 dated 23.03.2017 for a sum of Rs.190,39,07,268/ issued by the Axis Bank, Rajula Branch, Gujarat;
9.1. Considering the averments and allegations in the application, the only ground on which, Section 9 application is submitted and the reliefs are sought is that as per the negotiations which were going, original applicant was thereafter required to do dredging Page 14 of 27 C/FA/577/2018 JUDGMENT work only and was relieved from doing marine work and consequently amount of Performance Bank Guarantee would be reduced and therefore, the appellant herein original opponent be restrained from encashing the Bank Guarantee. At this stage, it is required to be noted that on 09.01.2018, the learned Judge issued only show cause notice and did not grant any exparte adinterim injunction by observing in para 9 as under:
"9.This Court has noticed that pleadings of the applicant are bereft of the reasons as to why the parties could not agree to addendum to the contract, despite exchanging drafts between the parties. In the circumstances, it cannot be said that there is a strong prima facie case of the applicant in respect of novatio of the contract. Merely because, the parties have negotiated or that the correspondences has been exchanged between the parties, does not mean that the contract between the parties has been modified. For novatio, all terms of contract must be agreed to between the parties. Secondly, as to value of the performed marine works, what value would be ascribed has not been spelt out in either of the drafts exchanged between the parties, much less, on oath before this Court. Therefore, to assume without hearing the other side, that the performed marine work has been pegged to a lower value and that therefore, the value of performance bank guarantee would stand reduced proportionately, is not palatable on the face of it. It may be recalled that it was the argument of learned advocate that the opponent has suggested performance security at Rs.59,34,00,000/ in its draft addundum to contract agreement (continuous page 508) that may be taken to appropriate performance security between the parties. This Court is inclined to disagree. At best, exchange of draft could only be said to be offers and / or counter offers. To pick out a particular clause of a counter offer, as binding to the parties, would be against the provisions of the Contract Act. Offer has to be accepted as a whole. A portion of an offer cannot be said to be binding between the parties when the other conditions are either yet to be determined or not yet agreed upon by the acceptor. "Page 15 of 27
C/FA/577/2018 JUDGMENT 9.2. That the notice was made returnable on 16.02.2018. It appears that there was no injunction and even according to the appellant herein Bank Guarantee in their favour was unconditional and irrevocable irrespective of any dispute between the parties, they are entitled to invoke / encash the Bank Guarantee and the Bank is required to pay said the amount under the Performance Bank Guarantee then invoked the Bank Guarantee and in fact also encashed the same. The Axis Bank as such issued the demand draft in favour of the appellant which also came to be deposited in the Bank in favour of the original opponent. Therefore, as such it cannot be said that the Bank Guarantee was already invoked / encahsed. Despite the same and despite any change in the circumstances, more particularly, with respect to the observation made by the learned Judge recorded in the order dated 09.02.2018, more particularly, para 9 reproduced herein above, the learned Judge has passed the impugned order. Considering Section 13 of the Commercial Court Act, 2015 against any order passed by the Commercial Court, appeal would be maintainable. In the facts and circumstances of the case and considering the impugned order and more particularly, when as observed herein above the Bank Guarantee was already invoked and encashed and considering the fact the proposed Bank Guarantee was unconditional and irrevocable Bank Guarantee, interference of this Court is called for.
10. Now, so far as original applicant is entitled to injunction against the appellant herein original opponent from encashing Bank Guarantee is concerned, as such, as Section 9 application is still pending, we would have refrained ourselves from entering into Page 16 of 27 C/FA/577/2018 JUDGMENT the said question. However, as observed above, the learned counsel appearing on behalf of the respondent herein original applicant has invited the order despite our pointing out to him that any observations by this Court in the present appeal may affect the case before the learned Commercial Court in Section 9 application. Therefore, we have no other alternative but to deal with the aforesaid aspect and our observations and conclusions on the aforesaid are as under:
10.1. The relevant clause of the Bank Guarantee reads as under:
"At the request of the Principal, we, Axis Bank Limited, a Company incorporated under the provisions of the Indian Companies Act, 1956, carrying on its Business of Banking Regulation Act, 1949 and having registered office at Trishul, 3rd Floor, Opposite Smartheshwar Temple, Law Garden, Ellis Bridge, Ahmedabad 380006 and having one of its branches at 4/B Vasundhra Complex Opp. Dakshinamurthy School, Waghawadi Road, Bhavangar, Gujarat 364002, India (hereinafter referred to as the Bank / The Gurantor, which expression shall unless, Repugnant to the context or meaning thereof, include its Administrators, Successors and Assigns) hereby irrevocably and unconditionally undertake to pay you, the Beneficiary / Employer, any sum or sums not exceeding in total the amount of INR 190,39,07,268.00 (The guaranteed amount say: Indian Rupees One Hundred Ninety Crore Thirty Nine Lacs Seven Thousand Two Hundred Sixty Eight only) upon receipt by us of your first written demand and your written statement stating that the principal is in breach of its obligations under the EPC Contract dated 15.11.2016 and we declare that any such demand made on us by you shall be conclusive and binding on us, notwithstanding and difference or dispute between employer and the principal."
10.2. Considering the aforesaid, it can be said that the Performance Bank Guarantee is unconditional and irrevocable and Axis Bank is bound to make payment under the Performance Bank Guarantee to Page 17 of 27 C/FA/577/2018 JUDGMENT the appellant on demand which shall be conclusive, notwithstanding any difference or dispute between the appellant and the respondent. As per the catena of decisions of this Court in the case of Hindustan Dorr Oliver Limited (supra, once the Bank Guarantee / Performance Bank Guarantee is unconditional and irrevocable irrespective of dispute between the parties to the contract, on demand in whose favour Bank Guarantee is issued, entitled to encash / invoke the Bank Guarantee unless there are specific averments and allegations of fraud and that too at the time of executing the Bank Guarantee and at the time of entering into the contract.
10.3. In the case of Vintec Electronics Private Limited [Supra], while discussing and considering the law on the invocation of the bank guarantee, in para 11 and 12, the Hon'ble Supreme Court has observed and held as under :
11. The law relating to invocation of bank guarantees is by now well settled by a catena of decisions of this Court. The bank guarantees which provided that they are payable by the guarantor on demand is considered to be an un conditional bank guarantee. When in the course of commercial dealings, unconditional guarantees have been given or accepted the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. In U.P. State Sugar Corporation v. Sumac International Ltd, [1997] 1 SCC 568, this Court observed that :
"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 Page 18 of 27 C/FA/577/2018 JUDGMENT 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 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."
10.4. 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 v. Fenner India Ltd. & Anr, [2006] 2 SCC 728, this Court held:
"10. There are, however, two exceptions to Page 19 of 27 C/FA/577/2018 JUDGMENT 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 nonintervention 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, viz., U.P State Sugar Corpn. v. Sumac International Limited [1997] 1 SCC 568; State of Maharashtra v. National Construction Co. [1996] 1 SCC 735; United Commercial Bank v. Bank of India [1981] 2 SCC 766 and Centax [India] Limited v. Vinmar Impex Inc. [1986] 4 SCC 136, 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'.
10.5. In Himadri Chemicals Industries Ltd. v. Coal Tar Refining Company, [2007] 8 SCC 110, 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 Page 20 of 27 C/FA/577/2018 JUDGMENT 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.
10.6. In Mahatama Gandhi Sahakra Sakkare Karkhane v. National Heavy Engg. Coop. Ltd, [2007] 6 SCC 470, 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 Page 21 of 27 C/FA/577/2018 JUDGMENT 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 principal 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. (Para 22 and 28) [Emphasis supplied]
11. Similar view has been taken by the Hon'ble Supreme Court in the case of Dwarikesh Sugar Industries Ltd (supra), Singh Consultants and Engineers Pvt. Ltd (supra), Fenner India Ltd & Anr (supra), M.s. Adani Agri Fresh Ltd (supra), Ansal Engineering Projects Ltd (supra) and Ruby State Corporation (Agency) & Anr (supra). Applying the law laid down by the Hon'ble Supreme Court as well as decision of this Court in the case of Hindustan Dorr Oliver Limited (supra) (which is reported to have been confirmed by the Hon'ble Supreme Court) to the facts of the case and considering the relevant clause of the Bank Guarantee reproduced herein above and as the Performance Bank Guarantee is irrevocable and unconditional irrespective of the dispute between the parties to the contract, the appellant herein shall be entitled to invoke / encash the Bank Guarantee.
12. Now, so far as submission on behalf of the opponent that injunction sought is not against the Bank but against one of the contracting party and therefore, the aforesaid decisions of the Hon'ble Supreme Court shall be applicable to the facts of the case on hand are concerned, the same has no substance. The question Page 22 of 27 C/FA/577/2018 JUDGMENT which is required to be considered is whether a party to the contract in whose favour Bank Guarantee has been issued can be restrained from encashing / invoking the Bank Guarantee when such Bank Guarantee in their favour is unconditional and irrevocable ? If the submission on behalf of the respondent herein original applicant is accepted, in that case, to get out of the decision of the Hon'ble Supreme Court referred to herein above a party to the contract despite the fact that Bank Guarantee is unconditional and irrevocable may pray injunction only against one of the contracting party and not against the Bank. By changing the form of injunction, the applicant cannot get injunction which otherwise applicant is not entitled to considering the various decisions of the Hon'ble Supreme Court, more particularly, decisions referred to herein above.
13. Now, so far as the submission on behalf of the opponent that there are serious dispute between the parties and in fact the negotiations were going on and in fact the appellant herein original opponent agreed to extend cut off date for doing dredging work and relieved the original applicant from doing any further marine work and therefore, the original opponent was not justified in invoking Bank Guarantee of the full amount is concerned, at the outset, it is required to be noted that all these questions are required to be considered in the arbitration proceedings, if at all, matters are referred to arbitration. As observed herein above, Performance Bank Guarantee is unconditional and irrevocable, the appellant herein original opponent in whose favour Bank Guarantee is issued, is entitled to invoke / encash the same on Page 23 of 27 C/FA/577/2018 JUDGMENT demand irrespective of any dispute between the parties. In fact, there are number of contentious issues, more particularly, with respect to novatio of contract etc. are required to be considered, which can be considered only in appropriate proceedings and not in a Section 9 application where injunction is sought against the invocation / revocation of Bank Guarantee.
14. Now, so far as submission on behalf of the opponent herein original applicant that the appellant has fraudulently invoked the Bank Guarantee and therefore, there is an element of fraud and therefore, none of the aforesaid decisions shall be applicable to the facts of the case on hand is concerned, the aforesaid has no substance. At the outset, it is required to be noted that in Section 9 application as such there are no allegation whatsoever about the fraud. As per the catena of decisions of the Hon'ble Supreme Court, there shall be a specific averment and allegation and mere even alleging that there is fraud, is not sufficient. Learned counsel for the opponent is unable to so any allegation and the averment in Section 9 application with respect to fraud. Under the circumstances, in absence of any specific averment and allegation of fraud in Section 9 application, the appellant herein original opponent cannot be injuncted and / or restrained from encashing unconditional and irrevocable Bank Guarantee. It is the case on behalf of the respondent original applicant (while making oral submission) that during the negotiation, the appellant fraudulently invoked the Bank Guarantee and therefore, there is element of fraud is concerned, the same cannot be accepted. It appears that allegations of fraud are required to be considered at the time when Page 24 of 27 C/FA/577/2018 JUDGMENT Bank Guarantee was furnished and contract was executed between the parties. Merely because, subsequently may be during the negotiations one of the party to the contract in whose favour Bank Guarantee is unconditional and irrevocable Bank Guarantee is issued, is entitled to invoke and encash the Bank Guarantee, came cannot be said to be suffering from vice of fraud, for which, it may be restrained from encashing and invoking Bank Guarantee. Under the circumstances, as such appellant herein original opponent shall be entitled to invoke/ encash the Bank Guarantee which has such is already invoked / encahsed and even demand draft issued by the Axis Bank deposited in the Bank account of the appellant. Under the circumstances, the impugned order dated 17.02.2018, by which, the learned Commercial Court has ordered that in case if the said draft has not so far been encashed, thereby crediting the amount thereunder to the account of the opponent, the same may not be processed further. In case, however, the draft has already been encashed, by crediting the account, the said amount be kept suspended i.e. it may not be permitted to be withdrawn by the opponent for the time being deserves to be quashed and set aside. Again, at the cost of repetition, it is observed that in the facts and circumstances of the case, more particularly, when Bank Guarantee is already invoked and encashed and demand draft issued by the Axis Bank deposited in the Bank account of the appellant, the appellant is ready and willing to keep the said amount aside, the learned counsel appearing on behalf of the respondent herein original applicant under the instructions from the respondent is not agreed to the same and has invited the present order despite being pointed out that observation in the present order may affect their Page 25 of 27 C/FA/577/2018 JUDGMENT Section 9 application.
15. In view of the above and for the reasons stated above, the impugned further order passed by the learned Judge, Commercial Court, Rajkot passed below Exh.1 in Civil Miscellaneous Application No.3 of 2018 dated 17.02.2018, by which, the learned Judge has ordered that in case if the said draft has not so far been encashed, thereby crediting the amount thereunder to the account of the opponent, the same may not be processed further. In case, however, the draft has already been encashed, by crediting the account, the said amount be kept suspended i.e. it may not be permitted to be withdrawn by the opponent for the time being, is hereby quashed and set aside. Present Appeal is allowed to the aforesaid extent. No costs.
In view of allowing of the First Appeal, Civil Application stands disposed of.
sd/ (M.R. SHAH, J.) sd/ (A.Y. KOGJE, J.) FURTHER ORDER After the judgment was pronounced in the first season, in the second season, Shri Thakore, learned counsel for the respondent herein applicant herein has requested to stay the implementation, operation and execution of the present order and continue the impugned order passed by the learned Commercial Court so as to Page 26 of 27 C/FA/577/2018 JUDGMENT enable the original applicant to challenge the present order before the Hon'ble Supreme Court. However, considering the facts and circumstances of the case, more particularly, when we have held that the impugned order passed by the learned Commercial Court is not sustainable and we have held that the Performance Bank Guarantee furnished by the original applicant was unconditional and irrevocable and therefore, the original defendant appellant herein cannot be injuncted and / or restrained from invoking and / or encashing the Performance Bank Guarantee and considering the fact that as such the Performance Bank Guarantee in question is already invoked and encashed and even the demand draft issued by the Axis Bank has been deposited in the Bank Account of the appellant herein and as reported even the appellant is likely to face penal consequences by the GMB, prayer is rejected.
sd/ (M.R. SHAH, J.) sd/ (A.Y. KOGJE, J.) KAUSHIK J. RATHOD Page 27 of 27