Bombay High Court
M/S. Arad Metering Technologies Ltd vs Axelia Utility Management Pvt. Ltd. And ... on 18 March, 2014
Author: S.J. Kathawalla
Bench: S.J. Kathawalla
KPPNair 1 NMSL 540/2014
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
NOTICE OF MOTION (L) NO. 540 OF 2014
IN
SUIT (L) NO. 236 OF 2014
M/s. Arad Metering Technologies Ltd. ... Plaintiff
Vs.
Axelia Utility Management Pvt. Ltd. and others ..Defendants
Mr. M.P.S. Rao, Senior Advocate, along with Mr. Mayur Khandeparkar, Mr.
Sandeep Bhimekar, Ms. Avina Lobo and Mr. Kedar Oak, instructed by M/s. DSR
Legal, for the Plaintiff.
Mr. V.R. Dhond, Senior Advocate, along with Mr. R.S. Kelkar, instructed by Mr.
Shailesh Kalambi and Ms. Pranika Bhatia of M/s. Dastur Dadhich & Kalambi, for
Defendant No.1.
Ms. Vaishali Padalie, instructed by Anant B. Dhinde & Co., for Defendant No.2.
CORAM: S.J. KATHAWALLA, J.
DATE: 18
March, 2014
th
ORAL ORDER:
1. The Plaintiff in the present Suit is inter alia seeking a restraint order against Defendant No.1 from in any manner receiving, accepting and/or seeking payments under a Bank Guarantee dated 13th November, 2013 (Exhibit-AA to the Plaint) and bearing No./0500FPEBG130019 (the "said Bank Guarantee").
The Plaintiff has also taken out the present Notice of Motion seeking ad-interim 1/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 2 NMSL 540/2014 and interim injunctions against Defendant No.1 from receiving and against Defendant No.2 from making any payments to Defendant No.1 under the said Bank Guarantee.
2. Defendant No.1 invoked the Bank Guarantee on 8 th March, 2014. After filing the Suit on 11th March, 2014, for the aforesaid reliefs, the Plaintiff moved an ex parte application before this Court for urgent ad-interim reliefs. On that application, this Court: (a) directed Defendant No.2- the Bank to maintain status quo as of that date; and (b) in the event that it had transferred any funds to Defendant No.1, direct the latter not to withdraw /utilize the same until 12 th March, 2014. On 13th March, 2014, by consent of the parties, the Notice of Motion was heard finally and the ad-interim order was extended upto 18 th March, 2014.
3. Defendant No.1 along with two others was engaged by the Municipal Corporation of Greater Mumbai ("MCGM") to execute an infrastructure project and allied activities in Mumbai. Pursuant to its engagement, the Plaintiff and Defendant No.1 entered into an Agreement styled as "Purchase Order" dated 18 th May, 2010 (Exhibit-B to the Plaint), for "supply of AMR Water Meters for various sizes as per specifications given by the MCGM for the Western Suburbs area of Mumbai".
2/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 3 NMSL 540/20144. The material clauses of the said Purchase Order are set out hereunder:
"This is with reference to above mentioned subject. We are pleased to place our formal Purchase Order for supply of the items listed below on the following terms and conditions:
DESCRIPTION QTY UNIT TOTAL PRICE
PRICE US$
US$
CIF JNPT, CIF JNPT,
MUMBAI MUMBAI
A) Supply of AMR water
meters of following
sizes as per
specifications approved
by the MCGM along
with relevant software
& technology support
1 15mm 20825 72.60 1511895.00
2 20mm 23800 87.05 2071790.00
3 25mm 12460 142.00 1769320.00
4 40 mm 5846 205.30 1200183.80
B) Drive - By + iPAQ 13 3600.00 46800.00
(Hand held unit)
Total order Value: 65,99,988.80
(US Dollar Six Million Five Hundred Ninety-nine thousand,
Nine Hundred Eighty Eight and Eighty cents only)
5) REPRESENTATIONS AND WARRANTY: Arad represents that its AMR Water Meters and ancillary equipments like radio modems, hand held units etc. being supplied will meet the expected performance standards as stipulated by the Municipal Corporation of Greater Mumbai. Arad further represents that it has fully familiarized itself with Mumbai and its terrain and is well acquainted with the intended conditions of installation and use of its AMR Water Meters with the entire system of Radio Modems and other ancillary equipments.3/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 4 NMSL 540/2014
The ARAD walk-by/drive-by AMR system shall be capable so that the meter readings and data extraction can be obtained as and when needed during the entire period of contract. All the necessary technical assistance for this matter shall be provided by ARAD as and when needed.
Based on the above, Arad warranties effective performance of the system including individual water meters for a period of 18 months from the date of installation/commissioning or 24 months from the date of supply whichever is earlier is applicable against any manufacturing defect, poor workmanship and poor materials. Defective Water Meters shall be repaired/replaced and recalibrated and sent back to us within 48 hrs. through our authorized service provider.
10) PERFORMANCE BANK GUARANTEE : The performance guarantee @ 10% of order value is to be submitted in the form of Bank Guarantee drawn on a first class International bank having more than AA rating, valid for 24 months or completion of total supply as per PO, whichever is later, immediately with Letter of credit documents.
11) EXTENDED COMPREHENSIVE WARRANTY - of AMR water meters:
a) We will pay 2% of the order value per year after the warranty for a period of 18 months from the date of installation/commissioning or 24 months from the date of supply whichever is earlier. This payment will be made after successful completion of warranty period.
b) This extended warranty includes all the necessary supply regarding the replacement of faulty meters with new tested extended warranty water meters within 48 hrs. through our authorized service provider.4/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 5 NMSL 540/2014
c) The extended warranty also includes the support regarding the accuracy confirmation of these water meters to the concerned MCGM Officials/customers.
d) It is binding on M/s. ARAD to accept the extended warranty of 5 years against the agreed remuneration of 2% per year for the period of 5 years after the expiry of standard warranty of a period of 18 months from the date of installation/commissioning or 24 months from the date of supply whichever is earlier.
e)During this extended warranty period of 5 years (60 months) M/s. Arad has to extend all the support on technically/hardware/software to AMR meter, HHU and Interfacing software.
12) As discussed and agreed by M/s. ARAD, you will depute your Project Support Team headed by Senior Professionals from ARAD, Israel/USA to support day-to-day issues related to the performance of water meters and AMR systems throughout the contract period.
18) JURISDICTION: The Courts at Singapore shall have exclusive jurisdiction in respect of any dispute arising out of this agreement. Legal disputes if any should be dealt as per International Arbitration Act and Jurisdiction will be Singapore.
5. Pursuant to the terms of the aforesaid Purchase Order, the Plaintiff initially furnished a Bank Guarantee dated 14 th July, 2010, which was issued by the Bank Leumi Le - Israel B.M. of Israel (Exhibit-F to the Plaint). The essential terms of that Guarantee are reproduced hereunder:
"WHEREAS, ARAD TECHNOLOGIES LTD. (HEREINAFTER "THE 5/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 6 NMSL 540/2014 PROVIDER") HAS UNDERTAKEN, PURSUANT TO PROFORMA INVOICE NO. P11000089 AND Purchase Order DATED 18.05.2010 TO SUPPLY AMR WATER METERS OF VARIOUS SIZES AS PER SPECIFICATIONS GIVEN BY THE MCGM FOR WESTERN SUBURBS OF MUMBAI FOR FULL SCALE PROJECT (PHASE-II) (HEREINAFTER "THE ORDER") AND WITH REFERENCE TO L/C NO.
PNP/FLC7623/2010 DATED 26TH MAY 2010 OF PUNJAB NATIONAL BANK , PUNE IMPORTERS CODE NO. 3108015800.
AND WHEREAS IT HAS BEEN STIPULATED BY YOU IN THE AFOREMENTIONED ORDER THAT THE PROVIDER SHALL FURNISH YOU WITH A PERFORMANCE SECURITY ISSUED BY A REPUTABLE GUARANTOR FOR 10 PCT OF THE SUM SPECIFIED THEREIN AS SECURITY FOR COMPLIANCE WITH THE PROVIDER'S PERFORMANCE OBLIGATIONS IN ACCORDANCE WITH THE ORDER.
AND WHEREAS THE UNDERSIGNED BANK LEUMI LE ISRAEL B.M. LEGALLY DOMICILED IN 19 HERZL STREET, TEL-AVIV, ISRAEL, (HEREINAFTER THE "GUARANTOR"), HAS AGREED TO GIVE THE PROVIDER A SECURITY.
THEREFORE, WE HEREBY AFFIRM THAT WE ARE GUARANTORS AND RESPONSIBLE TO YOU, ON BEHALF OF THE PROVIDER, UPTO A TOTAL OF USD 304,870.40 (THREE HUNDRED FOUR THOUSAND EIGHT HUNDRED SEVENTY AND 40/100 UNITED STATES DOLLARS) AND WE UNDERTAKE TO PAY YOU, UPON YOUR FIRST WRITTEN DEMAND DECLARING THE PROVIDER TO BE IN DEFAULT UNDER THE ORDER, WITHOUT CAVIL OR ARGUMENT, ANY SUM OR SUMS WITHIN THE LIMITS OF USD 304,870.40 (THREE HUNDRED FOUR 6/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 7 NMSL 540/2014 THOUSAND EIGHT HUNDRED SEVENTY AND 40/100 U.S. DOLLARS) AS AFORESAID, WITHOUT YOUR NEEDING TO PROVE OR TO SHOW GROUNDS OR REASONS FOR YOUR DEMAND OF THE SUM SPECIFIED THEREIN.
FOR PURPOSES OF IDENTIFICATION THE SIGNATURES ON YOUR DEMAND TO BE AUTHENTICATED BY YOUR BANKERS, BY AUTHENTICATED SWIFT.
THIS SECURITY IS VALID UNTIL THE 2ND DAY OF JULY, 2012".
6. According to the Plaintiff, despite receipt of the said water meters from July, 2010, right upto June, 2012, Defendant No. 1 did not raise any issues with respect to the quality of the said water meters. The Plaintiff provided onsite support with respect to the said water meters through its Partner - Technochem Agencies ("Technochem"). According to the Plaintiff, not once did Defendant No.1 raise any issue with respect to the said meters nor was there any occasion for replacement of the meters. However, on 1 st July, 2012, the Plaintiff received a demand letter dated 21 st June, 2012 from Defendant No. 1 addressed to Bank Leumi Le Israel B.M. of Israel alleging that the performance of the meters supplied by the Plaintiff was not satisfactory and calling upon the said Bank to extend on or before 29th June, 2012, the said Bank Guarantee for a period of one year failing which their letter should be treated as a written demand for payment under the said Bank Guarantee, if the same was not extended. According to the Plaintiff, faced with no choice in the matter, they requested the said Bank vide 7/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 8 NMSL 540/2014 their letter dated 23rd July, 2012, to extend the said Bank Guarantee upto 2 nd January, 2013.
7. According to the Plaintiff, on or about 2 nd July, 2012, the warranty period of 24 months which the Plaintiff was bound to provide as per the said contract with respect to the meters, expired. As per the contract, Defendant No. 1 was to enter into an agreement for extended warranty with respect to the said meters which Defendant No.1 did not do. Defendant No.1 also did not respond to any of the attempts made by the Plaintiff's partner Technochem to contact them in order to resolve the issue.
8. According to the Plaintiff, thereafter Defendant No. 1 on the one hand did not show any inclination to resolve the issues and on the other hand kept on insisting that the Plaintiff extend the Bank Guarantee from time to time under the threat that if the Plaintiff fails to extend the same, Defendant No.1 shall proceed to invoke the same. The Plaintiff therefore reluctantly extended the Bank Guarantee from time to time.
9. On 1st October, 2013, the Plaintiff filed an ex parte Motion for an interlocutory injunction in the Tel Aviv Magistrates' Court seeking restraint orders against Defendant No.1 from invoking the Bank Guarantee as set out in clause 5 above, until the decision of the proceedings which were to be instituted 8/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 9 NMSL 540/2014 in Singapore were received, which according to the Plaintiff was the Court having jurisdiction. The injunction was granted by the Magistrates' Court in Tel Aviv subject to the Plaintiff filing an action with the Competent Court in Singapore by 16th October, 2013. According to the Plaintiff, the Plaintiff thereafter attempted to institute proceedings in the appropriate Court at Singapore, but the same could not be instituted and after much discussion the Plaintiff and Defendant No.1 reached an understanding which was recorded in a letter dated 14th October 2013, according to which the Plaintiff, Defendant No.1 and MCGM agreed to conduct a joint inspection of the problematic meters. The letter also stated that the Plaintiff had extended the Bank Guarantee till 31 st December, 2013 and a new guarantee would be issued by Defendant No.2 in favor of Defendant No. 1 till 31 st March, 2014. The letter also stated that if the issues were not resolved by 31st March, 2014, then Defendant No. 1 would revoke the Bank Guarantee.
10. According to the Plaintiff, on 13th November, 2013, Defendant No.2 issued a Bank Guarantee in favour of Defendant No. 1 for US $ 304870.40, which was valid till 31st March, 2014. Thereafter in order to resolve the disputes, a joint survey was conducted by MCGM, the Plaintiff and Defendant No.1 and only a few meters out of the installed meters were found defective, which meters the Plaintiff was ready to replace/install free of cost even though it was beyond the expiry of the free warranty period of 24 months within which the Plaintiff 9/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 10 NMSL 540/2014 was bound to provide. According to the Plaintiff, Defendant No.1 sent an e-
mail dated 20th February, 2014, to their Partner - Technochem stating that they had given details of 1800 meters to be replaced in October, 2013 and requested them to complete the survey in 40- 45 days. It was alleged by Defendant No. 1 that the Plaintiff had only sent two technicians without any resources resulting in hardly 7 to 10 meters being surveyed daily. Defendant No. 1 falsely alleged that they were ready to give full support, but it was the Plaintiff who was not responding to the request of Defendant No.1. Defendant No. 1 also alleged that they had followed up with the Plaintiff for additional manpower to complete the survey and that the Plaintiff had provided only 9 numbers out of the 5 per cent inspected meters that they were supposed to maintain. According to the Plaintiff, further e-mails dated 25 th and 26th February, 2014, were sent by their Partner - Technochem to the Plaintiff containing further updates with respect to the meeting held on 25 th February, 2014, and that Technochem in their letters to MCGM had recorded their grievances regarding the non-co-
operation by Defendant No.1. According to the Plaintiff, while in the process of conducting the joint survey with MCGM and Defendant No.1, the Plaintiff was informed that Defendant No.1 has invoked the said Bank Guarantee resulting in the institution of the present Suit.
11. Mr. Rao, the Learned Senior Advocate appearing for the Plaintiff has relied on the clauses of the contract/Purchase Order dated 18 th May, 2010, set 10/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 11 NMSL 540/2014 out hereinabove and has submitted that the obligations of the Plaintiff with respect to the water meters was limited to the timely delivery, installation and onsite support for a maximum warranty period of 24 months, and not beyond.
The said contract expressly provides that after the expiry of the warranty period of 24 months, Defendant No. 1 was to enter into an agreement at 2 per cent of the order value per year for the extended warranty period of 5 years. It is submitted that once the period of warranty agreed in the agreement is over and is not extended, the contract stands discharged on performance of the obligations by the Parties, and the Bank Guarantee cannot be kept alive, and also comes to an end. It is submitted that once the delivery and installation of the water meters was complete on 2nd July, 2010, upon expiry of the warranty period of 24 months, the performance of the said contract would also be complete and the Bank Guarantee would also come to an end. The action of Defendant No.1 repeatedly demanding extension and/or revocation of the Bank Guarantee was unfounded, fraudulent, illegal, bad in law and indicated high-
handedness.
12. The Learned Senior Advocate for the Plaintiff relied on the decisions of M/s. Radhey Shyam Bansal vs. M/s. Indian Farmers Fertilizers Co-operative Limited1 and Larsen & Toubro Ltd. vs. Maharashtra State Electricity Board and Ors.2, the facts whereof, it is submitted, were similar to the present case. 1 [ 85 (2000) Delhi Law Times 484] 2 [ (1995) 6 SCC 68] 11/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 12 NMSL 540/2014
13. The Learned Counsel for the Plaintiff further submitted that the action of Defendant No. 1 vide their notice dated 8th March, 2014, to revoke the said Bank Guarantee dated 13th November, 2013, in the face of sustained efforts made by the Plaintiff, their Partner - Technochem and the MCGM to resolve the issues, and the willingness of the Plaintiff to replace all the problematic meters, is a clear indication of their fraudulent and mala fide intention to appropriate the Bank Guarantee amount illegally and that the same has no connection with the performance of the obligations by the Plaintiff. It is submitted that the actions of Defendant No.1 are designed to harass the Plaintiff and extract onsite technical support using the threat of invocation, thereby avoiding the obligation of entering into an Agreement of extended warranty, by virtue of which they would have to pay 2 per cent of the order value every year. It is also submitted that Defendant No. 1 is seeking to unfairly and illegally enrich itself at the cost of the Plaintiff by encashing the performance guarantee that it is not entitled to do after the expiry of the warranty. It is submitted that if Defendant No. 1 is successful in fraudulently invoking the Suit Bank Guarantee, the same will cause irretrievable injury to the Plaintiff. It is therefore submitted on behalf of the Plaintiff that the interim reliefs sought by the Plaintiff against Defendant Nos. 1 and 2 in the above Notice of Motion be granted.
14. Mr. Dhond, the Learned Senior Advocate appearing for Defendant No.1, has denied and disputed the submissions advanced on behalf of the Plaintiff. He 12/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 13 NMSL 540/2014 has pointed out that admittedly the said Bank Guarantee is an unconditional Bank Guarantee and that the Plaintiff has not argued that the same is a conditional guarantee. The first Defendant has invoked the said Bank Guarantee as provided in the Bank Guarantee itself and there is no default on the part of Defendant No.1 as regards the manner of invocation of the said Bank Guarantee.
It is submitted that what the Plaintiff has sought to do throughout is to raise disputes qua the underlying/main contract. It is submitted that it is trite law that the contract of Bank Guarantee is a contract independent of the underlying/main contract and this Court ought to consider and decide the present Application without reference to the underlying/main contract or to the disputes/claims thereunder. It is submitted that as laid down by the Hon'ble Supreme Court of India in several of its decisions, the invocation of a Bank Guarantee can be prevented only on two grounds, viz. in case of a fraud of an egregious nature which would vitiate the very foundation of the guarantee and in case of irretrievable injustice shown to be caused to the Plaintiff. It is submitted that the Plaintiff has not only not made out any case of fraud, but a case of irretrievable injustice or special equities is not even pleaded in the Plaint.
Without prejudice to the above contentions, it is submitted on behalf of Defendant No. 1 that dissatisfied with the supply of meters by the Plaintiff as also its unsatisfactory performance under the above Purchase Order, Defendant No. 1 was constrained to invoke the Bank Guarantee for the sum of USD 304,870.40 on or about 8th March, 2014. It is submitted that the thrust of the 13/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 14 NMSL 540/2014 Plaintiff's case is that the main contract i.e. Purchase Order dated 18 th May, 2010, has been fully performed and the same having come to an end by efflux of time, and the parties contrary to what was contemplated, not having entered into an extension of their agreement, the said Bank Guarantee has come to an end and consequently Defendants No.1's invocation of the same was bad in law.
It is submitted that the main contract i.e. Purchase Order dated 18 th May, 2010 has not been fully performed by the Plaintiff and it therefore cannot be said that the same has come to an end by efflux of time. It is submitted that there was no occasion or need for Defendant No.1 to have entered into an extension of their agreement. It is denied that the Bank Guarantee came to an end and consequently, Defendant No.1's invocation of the same was bad in law. It is submitted on behalf of Defendant No.1 that under the Purchase Order, the Bank Guarantee was to remain valid for 24 months or completion of the total supply as per Purchase Order, whichever is later, and that the total supply was to comprise of about 62,931 meters and 13 hand held units whereas, the Plaintiff had supplied a total of about 26,864 meters and 6 hand held units. It is submitted that Defendant No.1 had repeatedly brought to the notice of the Plaintiff the defects in the goods supplied and the deficiencies in services rendered by the Plaintiff and therefore the Plaintiff had repeatedly consented to the extension of the Bank Guarantee without any protest.
15. It is further submitted on behalf of Defendant No.1 that the Plaintiff's 14/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 15 NMSL 540/2014 claim that no objections/complaints were made in relation to its alleged compliance in terms of the Purchase Order, is belied not just by the letters addressed by the Defendants at pages 54, 67,72 and 84 of the Plaint but also from the following:-
(i) Although, required to depute its own Project Support Team headed by "Senior Professionals" to support day to day issues, the Plaintiff had failed to do so;
(ii) Despite being required to provide backup stock of meters/HHU's, the Plaintiff did not do so ;
(iii) Not only did the Plaintiff supply fewer than 50% of the total order quantity, even the goods supplied, regularly malfunctioned and did not meet the requirements of MCGM;
(iv) That it was not Defendant No.1 but the Plaintiff that had acted fraudulently in moving the Court in Israel just as the First Guarantee was about to expire;
(v) That even thereafter, the Plaintiff had willingly executed the aforesaid Performance Security Bond - belying its allegations of coercion/fraudulent intent on the part of Defendant No.1;
(vi) That the Plaintiff's reliance on the letter dated 14th October, 2013 (Exhibit-Y at page 83 of the Plaint) was misplaced inasmuch as contrary to what was argued, the letter itself expressly recorded that notwithstanding the renewal of the warranty period, "it is agreed that if 15/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 16 NMSL 540/2014 water meter, HHU & software will not be solved on before 31 March, 2014, Axelia reserves the right of revocation of B.G."
(vii) That each and every letter/e-mail-communication referred to or relied upon by the Plaintiff in support of its case of "fraud" (for instance Exhibit "BB" at page 87 of the Plaint) was either self-generated or addressed by its own representative in India ( viz. Technochem) and therefore, self-
serving;
(viii) That, in any event all allegations of fraud were in relation to the merits of the parties' disputes on the underlying Purchase Order, which could not be dealt with in the present Suit;
(ix) That the Plaintiff had failed miserably to make out a case for restraining the invocation of an unconditional Bank Guarantee, especially in view of its express terms (at pages 52 and 86 of the Plaint);
(x) That the Plaintiff had not even pleaded a case of any "special equities"
entitling it to seek the injunction prayed for; and
(xi) That, in any event, the Plaintiff has not even alleged that this Defendant is a fly-by-night entity or in a precarious/unstable financial condition, which may have made the Plaintiff apprehensive of the difficulties in recovering any monies which may ultimately be found due to it.
16. It is therefore submitted on behalf of Defendant No. 1 that the Plaintiff is not entitled to any reliefs as sought in the Notice of Motion and the Notice of 16/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 17 NMSL 540/2014 Motion be dismissed with compensatory costs.
17. The Learned Senior Advocate appearing on behalf of the Plaintiff has in rejoinder submitted that the contention of Defendant No.1 that the Plaintiff short supplied units of water meters is misplaced and erroneous. MCGM has placed orders from three bidders viz. Alexia - Unity, Unity - Alexia and Pratibha Group of Companies. The Plaintiff was only concerned with the first entity Alexia - Unity and was mandated to supply 26,864 units. Also when the joint inspection was undertaken by the Parties, no grievance was made that the Plaintiffs did not install the requisite number of water meters.
18. I have considered the submissions advanced on behalf of the Plaintiff as well as Defendant No. 1 .
19. The Plaintiff has relied on Clause 5 of the terms and conditions of the Purchase Order whereunder the Plaintiff has provided a warranty for effective performance of the system including individual water meters for a period of 18 months from the date of installation / commissioning or 24 months from the date of supply whichever is earlier. It is further provided that the said warranty is applicable against any manufacturing defect, poor workmanship or poor materials. The Plaintiff has also relied on clause 10 of the Purchase Order which provides that the Plaintiff shall submit a performance guarantee to Defendant 17/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 18 NMSL 540/2014 No.1 at 10 per cent of the order value which shall be valid for 24 months or completion of total supply as per Purchase Order whichever is later. The Plaintiff has further drawn the attention of this Court to clause 11 (a) of the Purchase Order and has submitted that Defendant No. 1 has agreed that after successful completion of warranty period, Defendant No. 1 shall pay 2 per cent of the order value per year to the Plaintiff for a period of 18 months from the date of installation/commissioning or 24 months from the date of supply whichever is earlier.
20. The Learned Senior Advocate appearing for the Plaintiff has therefore submitted that the 24 months period expired on 2 nd July, 2012 and therefore the Bank Guarantee came to an end on that day. It is submitted that despite successful completion of the warranty period, Defendant No.1 wanted to avoid payment of 2 per cent of the order value per year and therefore kept on arm twisting the Plaintiff by threatening them to extend the Bank Guarantee from time to time which they reluctantly did. The Plaintiff has therefore submitted that the acts of repeatedly seeking renewal of the said Bank Guarantee and ultimately seeking invocation of the same by Defendant No.1 is fraudulent and illegal.
21. The Purchase Order dated 18th May, 2010, which is annexed as Exhibit-B to the Plaint, records at the very outset that the order placed by Defendant No.1 18/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 19 NMSL 540/2014 on the Plaintiff is for 62,931 number of water meters and 13 hand held units.
Under Invoice dated 26th May, 2010, the Plaintiff has supplied only 26,864 number of water meters and 6 hand held units. The explanation given by the Plaintiff in its written arguments that the order for supply of water meters was distributed amongst three bidders and the Plaintiff was only concerned with the first Defendant and was mandated to supply only 26,864 units is belied by the Purchase Order admittedly placed by Defendant No. 1 on the Plaintiff. Clause 10 of the Purchase Order clearly states that the performance guarantee would be valid for 24 months or completion of the total supply as per the Purchase Order whichever is later. I am therefore prima facie satisfied that the total supply as per the Purchase Order is not completed by the Plaintiff as required under the Purchase Order and therefore the Bank Guarantee was renewed from time to time by the Plaintiff. The Plaintiff is therefore wrong in contending that the warranty period was successfully completed by the Plaintiff and consequently the Bank Guarantee came to an end and the invocation of the Bank Guarantee by Defendant No. 1 on 8th March, 2014 is fraudulent.
22. Even if we assume for the sake of argument that the Plaintiff had completed the supply of water meters as per the Purchase Order, the submission of the Plaintiff that Defendant No. 1 is not entitled to invocation of the Bank Guarantee since the Purchase Order had been worked out and that Defendant No.1 could not be allowed to claim the benefit of the said Bank Guarantee, the 19/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 20 NMSL 540/2014 same having come to an end, cannot be accepted for the following reasons:
(i) On 1st July, 2012 i.e. before expiry of the warranty period, the Plaintiff admittedly received a demand letter dated 21 st June, 2012 from Defendant No.1 addressed to Bank Leumi Le-Israel B.M. wherein Defendant No. 1 had contended that the performance of the meters supplied by the Plaintiff was not satisfactory and calling upon the Bank to extend the Bank Guarantee for a period of one year on or before 29th June, 2012, failing which their letter be treated as a written demand for payment under the said Bank Guarantee if not extended.
The Plaintiff vide its letter dated 23 rd July, 2012, addressed to the Bank Leumi Le-Israel B.M. extended the said Bank Guarantee upto 2 nd January, 2013 and in the said letter to the Bank or by any letter independently addressed to Defendant No.1, did not object to the stand taken by Defendant No. 1 on any ground whatsoever, including the ground that the period of warranty had come to an end or in view thereof the Bank Guarantee itself had come to an end.
(ii) On 20th December, 2012, Defendant No. 1 sent another letter to Bank Leumi Le-Israel B.M. seeking extension of the Bank Guarantee for a further period of six months. Though the Plaintiff has stated in clause 3 (m) of the Plaint that the subject letter "was of considerable astonishment to the Plaintiff since the warranty period of 24 months had expired in July, 2012", the Plaintiff has admittedly by its letter dated 2nd January, 2013 requested the Bank Leumi 20/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 21 NMSL 540/2014 Le-Israel B.M. to extend the Bank Guarantee which was extended upto 2 nd July, 2013. Again the Plaintiff has admittedly not written a single letter to Defendant No.1 protesting against their action seeking extension of invocation of the Bank Guarantee and have also not informed Defendant No.1 or the Bank that they are doing so reluctantly or without prejudice to their contention that the warranty has expired in July, 2012.
(iii) On 8th June, 2013, Defendant No. 1 not only wrote to the Bank Leumi Le-
Israel B.M. seeking an extension of the validity of the Bank Guarantee for a further period of six months but have specifically recorded in the letter as follows:
"We have repeatedly followed up with their local agent for support on AMR water meters, HHU's and soft wear but we regret to put on record that no positive response from them and non-acceptance of their product deficiencies and no replacements are provided".
Interestingly, the Plaintiff once again extended the Bank Guarantee vide their letter dated 18th June, 2013, upto 2nd October, 2013, without disputing the aforestated contention raised by Defendant No.1 in their letter dated 8 th June, 2013.
(iv) On 4th July, 2013, Defendant No. 1 again addressed a demand letter to the Bank requesting for a further extension of the Guarantee for a further period of 21/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 22 NMSL 540/2014 three months and thereafter sent an amended demand letter dated 23 rd September, 2013 for forfeiture of the Guarantee.
(v) On 1st October, 2013, the Plaintiff filed an ex parte motion for an interlocutory injunction with the Tel Aviv Magistrates' Court prohibiting the forfeiture of the guarantee. The Magistrates' Court in Tel Aviv granted an injunction in favour of the Plaintiff upto 16 th October, 2013, on condition that the Plaintiff would present confirmation before the Tel Aviv Magistrates' Court by 16th October, 2013, that it had filed an action with the competent court in Singapore which included inter alia a motion for interlocutory relief with respect to the exercise of the guarantee. The Plaintiff failed to file a Suit before the Singapore Court though an opportunity was given to them by the Tel Aviv Magistrates Court. The Plaintiff has in para 3 (ee) of the Plaint made the following submission:
"(ee) The Plaintiff states that since the said contract had mention of Singapore Court having jurisdiction, they attempted to institute proceedings in the Courts at Singapore however the said proceedings could not be instituted in the courts in Singapore".
No particulars are set out by the Plaintiff as regards the alleged attempts to institute proceedings in the Court at Singapore or to explain why such proceedings despite attempts could not be instituted in the courts at Singapore.
Instead, according to the Plaintiff, an understanding was reached between the 22/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 23 NMSL 540/2014 Plaintiff and Defendant No. 1 which was recorded in the letter dated 14 th October, 2013, whereunder Defendant No.1 and MCGM agreed to conduct joint inspection of the "problematic meters" and in the said letter it was provided that the Plaintiff had extended the Bank Guarantee upto 31 st December, 2013 and a new guarantee would be issued by Defendant No.2 in favour of Defendant No. 1 till 31st March, 2014, which Bank Guarantee was issued and is in fact the subject matter of the present Suit. It is pertinent to note that even in the said letter dated 14th October, 2013, it is expressly agreed by the Plaintiff that if the water meter, HHU and software is not solved on or before 31 st March, 2014, Axelia (Defendant No.1) reserves the right of revocation of the Bank Guarantee.
(vi) From the e-mails dated 20th February, 2014, 25th February, 2014 and 26th February, 2014 relied upon by the Plaintiff itself, it is clear that even qua the facts pertaining to the joint inspection, the Parties were not ad idem and were making allegations against each other, which ultimately resulted in Defendant No. 1 invoking the said Bank Guarantees by their letter dated 8 th March, 2014.
(vii) As agreed under clause 11 (a), after the successful completion of warranty period, Defendant No. 1 was required to pay to the Plaintiff 2% of the order value per year. Though the Plaintiff has now contended that the warranty period was successfully completed by 2 nd July, 2012, the Plaintiff has admittedly not written a single letter to Defendant No.1 recording their said 23/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 24 NMSL 540/2014 contention and calling upon them to pay 2% of the order value after 2 nd July, 2012.
The aforestated conduct of the Plaintiff shows that they have always admitted that there were certain problems with the water meters. The Plaintiff therefore from time to time extended the Bank Guarantee without any protest. Even after obtaining a conditional order from the Tel Aviv Magistrates' Court, the Plaintiff failed to file proceedings before the competent court at Singapore and instead entered into an arrangement with Defendant No. 1 wherein the Plaintiff inter alia agreed to extend the Bank Guarantee upto 31 st March, 2014, and also agreed that if the issue pertaining to the problematic meters is not resolved by 31st March, 2014, Defendant No. 1 reserves the right of revocation of the said Bank Guarantee. The Plaintiff admittedly has till date not called upon Defendant No. 1 to pay 2% of the order value per year as agreed under clause 11
(a) of the Purchase Order because the Plaintiff was always aware that the said payment had to be made by Defendant No. 1 only after successful completion of the warranty period and that the warranty period was not successfully completed as required. The allegations now made by the Plaintiff that the Bank Guarantee had come to an end in view of the successful completion of the warranty period or that Defendant No.1 has perpetrated a fraud on them by repeatedly seeking extension of the Bank Guarantee are therefore absolutely baseless and untenable.
24/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 25 NMSL 540/201423. The decision of the Hon'ble Delhi High Court in M/s. Radhey Shyam Bansal (supra) relied upon by the Plaintiff is of no assistance to the Plaintiff since in that case there was no denial of correctness of the statement of the Petitioner about satisfactory completion of work. In fact, the Respondent had certified in writing that the job/work awarded to the Petitioner was satisfactorily completed. The Respondent had invoked the Bank Guarantee in that case on the alleged ground that the Petitioner had agreed that the matters concerning various other works/contracts were pending, which submission was disputed by the Petitioner and not accepted by the Court. In the present case, from the correspondence relied upon by the Plaintiff itself it is clear that there were certain problems with the water meters and the Plaintiff had extended the Bank Guarantee without raising any protest from time to time, and that the Plaintiff is now trying to contend for the first time that the Bank Guarantee had come to an end and the Plaintiff was made to extend the same under the threat of its invocation. Similarly the decision of the Hon'ble Supreme Court in the case of Larsen & Toubro Ltd. (supra) relied upon by the Plaintiff does not assist the Plaintiff since there was an express term in the Bank Guarantee provided by Citibank, N.A. at the request of the Contractors that the amount payable under the Bank Guarantee will enure only till successful completion of the trial operations and the plant is taken over. Since the Bank Guarantee was invoked after completion of the trial operations, the Hon'ble Supreme Court took a view 25/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 26 NMSL 540/2014 that the Bank Guarantee in that case was a conditional Bank Guarantee and that the event having ensued, the invocation of the guarantee given by the Citibank dated 10th May, 1985, in the sum of Rs. 2.72 crores was not encashable on its terms.
24. In the present case, the Bank Guarantee sought to be invoked by Defendant No.1 at page 86 of the Plaint is an unconditional Bank Guarantee, the material terms of which are as under:
"....Whereas, Arad Technologies Ltd. (hereinafter 'The Provider') has undertaken, pursuant to Proforma Invoice No. P11000089 And Purchase Order dated 18.05.2010 to supply AMR Water Meters of various sizes as per specifications given by the MCGM for Western Suburbs of Mumbai for full scale project (Phase II) (hereinafter "the Order"). And whereas it has been stipulated by you in the aforesaid order that the provider shall furnish you with a Performance Security issued by a reputable Guarantor for 10 PCT of the sum specified therein as security for compliance with the provider's Performance obligations in accordance with the order And whereas the undersigned BANK OF INDIA, PUNE MAIN BRANCH, legally domiciled in 8A, Dr. Coyaji Road, Camp , Pune 411 001 has agreed to give the Provider a Security. Therefore, we hereby affirm that we are Guarantors and responsible to you, on behalf of the Promoter, upto a total of USD 304,870. 40 (Three Hundred Four Thousand Eight Hundred Seventy and 40/100 United States Dollar) And we undertake to pay you, upon your first written demand declaring the Provider to be in default under the order, without cavil or argument, any sum or sums within the limits of USD 304,870.40 (Three Hundred Four 26/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 27 NMSL 540/2014 Thousand Eight Hundred Seventy and 40/100 United States Dollars) as aforesaid, without your needing to prove or to show grounds or reasons for your demand of the sum specified therein. This security is valid until the 31st day of March 2014.
Special Condition:
This Performance Security becomes operative only after receipt by us of Bank Leumi Le Israel B.M. Authenticated Swift confirming they have received Authenticated Swift sent by your bankers on your behalf confirming your consent to the cancellation of their direct guarantee No. 333-02-0169450X0 and of your demand for payment thereunder.
Notwithstanding anything mentioned hereinbefore, our liability under this guarantee is restricted to USD 304,870.40 (Three Hundred Four Thousand Eight Hundred Seventy and 40/100 United States Dollars) and this guarantee is valid upto 31 st day of March, 2014. We are liable to pay the guaranteed amount or any part thereof only and only if you serve upon as a written claim or payment on or before the aforesaid date i.e. 31st day of March, 2014. We will be discharged from all our liabilities hereunder unless a claim is received by us on or before 31st day of March, 2014, irrespective of whether or not the original guarantee is returned to us".
As per the terms of the said Bank Guarantee, the only requirement for its invocation by its beneficiary i.e. Defendant No. 1 is to send a written demand to the Defendant No. 2 Bank declaring the provider (i.e. the Plaintiff herein) to be in default under the order i.e. Purchase Order dated 18 th May, 2010. The 27/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 28 NMSL 540/2014 Defendant No. 1 has admittedly made a written demand on the Defendant No.2 Bank making the aforestated declaration and the Bank has unconditionally undertaken to honour such demand from Defendant No. 1 without cavil or argument within the limits of USD 304, 870.40, without needing to prove or show grounds or reasons for the said demand by Defendant No.1. The invocation of the said Bank Guarantee by Defendant No. 1 therefore cannot be faulted on any count.
25. It is settled law that the Bank Guarantee is an independent contract and a challenge to the invocation/encashment of an irrevocable and unconditional Bank Guarantee has to be considered without any reference to the underlying/ main contract or to the disputes/claims thereunder. However, the two exceptions which have been carved out by several decisions of the Hon'ble Supreme Court under which the invocation/encashment of such Bank Guarantee/s could be restrained are fraud and irretrievable injury. The Plaintiff has alleged that the invocation of the Bank Guarantee by Defendant No.1 is fraudulent. It is trite law that a Court can restrain encashment of Bank Guarantee in cases of established fraud in issuance of the Bank Guarantee. The fraud has to be absolute and egregious, vitiating the very foundation of the Bank Guarantee. The Hon'ble Supreme Court has in its decision in U.P. State Sugar Corporation vs. Sumac International Ltd.3 held as follows:
3 (1997) 1 SCC 568 28/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 29 NMSL 540/2014 "12. ....... 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. .... ...... ..... ...... In the case of U.P. Cooperative Federation Ltd.
v. Singh Consultants and Engineers (P) Ltd.(1988 [1] SCC 174), which was the case of 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 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 29/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 30 NMSL 540/2014 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 NA (1984 [1] AER 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".
This Court set aside an injunction granted by the High Court to restrain the realisation of the bank guarantee."
26. On the issue of the first exception viz. fraud, the Hon'ble Supreme Court in the case of Vinitec Electronics Pvt. Ltd. vs. HCL Infosystems Ltd.4 held thus:
"25. This Court in more than one decision took the view that fraud, if any, must be of an egregious nature as to vitiate the underlying transaction. We have meticulously examined the pleadings in the present case in which no factual foundation is laid in support of the allegations of fraud. There is not even a proper allegation of any fraud as such and in fact the whole 4 (2008) 1 SCC 544 30/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 31 NMSL 540/2014 case of the appellant centres around the allegation with regard to the alleged breach of contract by the respondent. The plea of fraud in the appellant's own words is to the following effect:
" That despite the respondent HCL being in default of not making payment as stipulated in the bank guarantee, in perpetration of abject dishonesty and fraud, the respondent HCL fraudulently invoked the bank guarantee furnished by the applicant and sought remittance of the sums under the conditional bank guarantee from Oriental Bank of Commerce vide letter of invocation dated 16-12-2003".
26. In our considered opinion such vague and indefinite allegations made do not satisfy the requirement in law constituting any fraud much less the fraud of an egregious nature as to vitiate the entire transaction. The case, therefore does not fall within the first exception".
27. In the instant case, the Plaintiff has not made out any case of fraud much less a case of an absolute and egregious fraud to the knowledge of the Bank, which would affect the very foundation of the Bank Guarantee as is required in law. In view thereof, it cannot be held that the invocation of the Bank Guarantee by Defendant No.1 is fraudulent as alleged by the Plaintiff.
28. As regards the second exception viz. irretrievable injury, it has been repeatedly held by the Hon'ble Apex Court that to avail of the said ground it must be decisively established and proved to the satisfaction of the court that 31/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 32 NMSL 540/2014 there would be no possibility whatsoever of recovery of the amount by the beneficiary. In this context, paragraph 14 of the decision of the Hon'ble Supreme Court in U.P. State Sugar Corporation (supra) is relevant and reproduced hereunder:
"14. On the question of irretrievable injury which is the second exception to the rule against granting of injunctions when unconditional bank guarantees are sought to be realised the court said in the above case that the irretrievable injury must be of the kind which was the subject-matter of the decision in the Itek Corporation case (supra). In that case an exporter in the U.S.A. entered into an agreement with the Imperial Government of Iran and sought an order terminating its liability on stand by letters of credit issued by an American bank in favour of an Iranian Bank as part of the contract. The relief was sought on account of the situation created after the Iranian revolution when the American Government cancelled the export licences in relation to Iran and the Iranian Government had forcibly taken 52 American citizens as hostages. The U.S. Government had blocked all Iranian assets under the jurisdiction of United States and had cancelled the export contract. The Court upheld the contention of the exporter that any claim for damages against the purchaser if decreed by the American Courts would not be executable in Iran under these circumstances and realization of the bank guarantee/Letters of credit would cause irreparable harm to the plaintiff. This contention was upheld. To avail of this exception, therefore, exceptional circumstances which make it impossible for the guarantor to reimburse himself if he ultimately 32/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 33 NMSL 540/2014 succeeds, will have to be decisively established. Clearly, a mere apprehension that the other party will not be able to pay, is not enough. In the Itek case (supra) there was a certainty on this issue. Secondly, there was good reason, in that case for the Court to be prima facie satisfied that the guarantors i.e. the bank and its customer would be found entitled to receive the amount paid under the guarantee".
The above view is also reiterated by the Hon'ble Apex Court in paragraph 22 of its decision in the case of Dwarikesh Sugar Industries Ltd. vs. Prem Heavy Engineerings Works (P) Ltd.5
29. None of the pleadings in the Plaint satisfy the requirement of establishing irretrievable injury as required in law. In fact, no specific pleading qua irretrievable injury or special equities is found in the Plaint. In any event, the mere plea and that too without any basis that the Plaintiff has learnt that Defendant No. 1 is in financial difficulty or is facing financial problems does not fulfil the requirement of establishing irretrievable injury or special equities as laid down in the various cases discussed hereinabove. As held by the Hon'ble Courts, to avail of these exceptions, exceptional circumstances which make it impossible for the party to reimburse itself if it ultimately succeeds, has to be decisively established. A mere apprehension that the other party will not be able to pay is not enough.
5 (1997) 6 SCC 450 33/34 ::: Downloaded on - 29/03/2014 18:57:46 ::: KPPNair 34 NMSL 540/2014
30. In the light of the above circumstances, in my view, the Plaintiff has failed to make out any case to restrain Defendant No.1 from invoking the said Bank Guarantee. The above Notice of Motion is therefore dismissed with costs.
31. The Learned Advocate appearing for the Plaintiff has prayed that the ad-
interim order passed by this Court dated 11 th March, 2014 be continued upto 24th March, 2014. The Learned Advocate for the Plaintiff on instructions also undertakes that in the event of the Plaintiff being unsuccessful in getting necessary relief/s from the Appeal Court, the Plaintiff shall pay interest at the rate of 15% per annum on the amounts payable under the Bank Guarantee to Defendant No. 1 from 11th March, 2014, until payment.
32. The Learned Advocate appearing for Defendant No. 1 on instructions strongly objects to the above application made on behalf of the Plaintiff. He submits that once the Court has come to the conclusion that the Plaintiff is not entitled to restrain Defendant No. 1 from invoking the Bank Guarantee, the question of continuing with the arrangement entered into between the Parties pending hearing of the matter does not arise.
33. Though the Learned Advocate appearing for Defendant No. 1 is correct in his submission, only in view of the aforestated undertaking given by the Plaintiff, which is accepted by this Court, the ad-interim order passed by this Court dated 11th March, 2014, shall continue upto 24th March, 2014.
(S.J. KATHAWALLA, J.) 34/34 ::: Downloaded on - 29/03/2014 18:57:46 :::