Gujarat High Court
Tbea Shenyang Transformers Group Co. ... vs Alstom Projects India Ltd on 27 September, 2013
Author: S.H.Vora
Bench: S.H.Vora
TBEA SHENYANG TRANSFORMERS GROUP CO. LTD.....Appellant(s)V/SALSTOM PROJECTS INDIA LTD C/FA/2747/2013 CAV JUDGEMNT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD FIRST APPEAL NO. 2747 of 2013 With CIVIL APPLICATION NO.
9919 of 2013 In FIRST APPEAL NO. 2747 of 2013 FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE S.H.VORA ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ?2
To be referred to the Reporter or not ?3
Whether their Lordships wish to see the fair copy of the judgment ?4
Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ?5
Whether it is to be circulated to the civil judge ?
================================================================ TBEA SHENYANG TRANSFORMERS GROUP CO. LTD.....Appellant(s) Versus ALSTOM PROJECTS INDIA LTD & 1....Defendant(s) ================================================================ Appearance:
MR SHALIN MEHTA, SENIOR COUNSEL with MR HEMANG M SHAH, ADVOCATE for the Appellant MR MIHIR JOSHI, SENIOR COUNSEL with MR SALIL M THAKORE, ADVOCATE for the Respondents ================================================================ CORAM:
HONOURABLE MR.JUSTICE S.H.VORA Date : 27/09/2013 CAV JUDGEMNT
1. Challenge in this appeal is judgment and order dated 2.9.2013 passed by the learned 9th Additional District Judge, Vadodara in Civil Misc. Application No.391 of 2013, whereby the learned trial Judge refused the petition filed under section 9 of the Arbitration and Conciliation Act, 1996 (for short the Act ) to prevent the respondents from invoking Bank Guarantee.
2. The dispute between the parties relates to invocation of the Bank Guarantee furnished by the appellant amounting to EUR 1,90,928.60 through their Bankers, M/s ICICI Bank Ltd. The appellant M/s.
TBEA Shenyang Transformers Group Co. Ltd. entered into a contract for the supply of 7 numbers of Single Phase 24.65 MVA, 11 KV/132 GSU Transformers for their 2 x 55 MW Chuzachen Project located at Sikkim, India awarded on 24.12.2007 for Design, Engineering, Manufacture, Shop Testing and Type Testing, Inspection, Supply, Packing and CIF Delivery at Haldia (India) Port along with accessories, for which separate contract was executed between the parties. As per appellant s case, as per condition under clause 11, Performance Security in the form of Bank Guarantee for an amount equivalent to 10% of the Contract price was to be furnished by the appellant to the respondent No.1 and therefore, the appellant provided aforesaid Bank Guarantee at initial stage and the same has been extended further upto 30.9.2013 at the request of the respondent No.1. It is specific case of the appellant that the Bank Guarantee is considered to be valid only up to warranty obligation period i.e. 42 months from the date of CIF delivery at Haldia port of last supply or 36 months of operational acceptance, whichever is earlier. It is the case of the appellant that the warranty period has already expired in June, 2012 and the same has never been extended by the appellant, but it is on the insistence of the respondent no. 1, the period of Bank Guarantee was extended. It is the case of the appellant that it has completed the works under the contract in accordance with the contract and thus, discharged all the obligations from time to time including the delivery of goods as per time schedule agreed upon by and between the parties. However, after a period of 2¿ years from the supply of goods, the respondent no. 1 informed the appellant about some defective tools (testing instruments), which were supplied in the year 2010. It is the case of the appellant that after long period, the respondent No.1 complained about some defects in such testing instruments in 2010 and therefore, the appellant informed the respondent No.1 to send the so-called defective instruments and also informed specifically as to where such instruments are to be sent and to whom it should be informed. However, the respondent did not return the defective instruments and as per the contract, the appellant has agreed to supply spares on request of the respondent no. 1 on chargeable basis. In nutshell, the warranty has nothing to do with the supply of such spares. However, the respondent No.1 was unnecessarily insisting for extension of Bank Guarantee and warranty period on these grounds. So, the appellant finally agreed for the extension of Bank Guarantee period and the same was extended upto 30th September 2013.
3. It is appellant's case that while extending the Bank Guarantee period upto 30th September 2013, the appellant has specifically denied to extend the warranty period and accordingly, warranty period was not extended and the same was confirmed by the respondent No.1. It is specific case of the appellant that the appellant has always tried to solve the problems and extended full cooperation in spite of certain part is not coming under the warranty and obligations on the part of the appellant, but for the reasons best known to the respondent No.1, it insisted for extension of Bank Guarantee, which in good faith the appellant has extended. In nutshell, it is the case of the appellant that extension of the Bank Guarantee has nothing to do with the extension of warranty period or confirming any liability by the appellant for any services to be provided within the warranty period. The appellant came to know about mala fide intention of the respondent No.1 only when the respondent no. 2, Bank informed the appellant to make arrangement for the payment of money under the Bank Guarantee. On these broad facts, the appellant has asserted in the petition that the respondent No.1 having bad and mala fide intention, made representations before the appellant so as to make the appellant agreed for extension of Bank Guarantee. It is further case of the appellant that the appellant has extended Bank Guarantee on the basis of false promise and with the allurement to continue with the business relations between the parties in future. Since the Bank Guarantee is not supported by the extension of warranty period and as per the terms and conditions of the contract, Bank Guarantee is only for and up to the period of warranty period i.e. 42 months from the date of supply of the material at Haldia Port and since, the said period has already expired, the appellant is not under any obligation under the warranty. However, the respondent No.1 having malice intention from the beginning intended to recover the amount of Bank Guarantee without any legal and contractual rights. Since the Bank Guarantee in question has been extended by committing fraud on the basis of misrepresentation and therefore, it vitiates the very foundation of the Bank Guarantee, and extension thereof on the face of it is based on fraud committed by the beneficiary i.e. respondent No.1 and therefore, it cannot be allowed to take advantage and therefore, it is required to be restrained from doing so.
4. On these broad facts, the appellant has prayed to restrain the respondent No.1 from invoking the Bank Guarantee and further the respondent No.2 Bank may be restrained from making any payment to respondent No.1 under the Bank Guarantee.
5. Per contra, the respondent No.1 contended before the trial Court that application under section 9 of the Act is not maintainable, inasmuch as the injunction has been sought against the respondent No.2 ICICI Bank even though no arbitration agreement subsists with the said party. Further, the contract of Bank Guarantee is independent of and separate from the principal contract between the parties and there is no arbitration clause in the contract of Bank Guarantee, which is the subject matter of this application. It is also contended by the respondent No.1 before the Court that relief prayed for have become infructuous, because the respondent No.1 had already invoked the Bank Guarantee on 22.6.2013 i.e. before filing of the petition under section 9 of the Act on 26.6.2013. It is contended before the trial Court that contract of Bank Guarantee being independent and separate from the principal contract between the parties, the Court should not grant injunction restraining the realization or invocation of the Bank Guarantee except in cases of fraud in connection with the Bank Guarantee or where irretrievable injustice would be caused to the party concerned. Otherwise, the Bank is obligated under law to honour the contract by making payment upon the demand if the invocation is in terms of the contract of the Bank Guarantee. It is contended that existence of any dispute between the parties to the principal contract is not legally recognized as a valid ground from restraining the enforcement of the Bank Guarantee. It is contended before the trial Court that under the Bank Guarantee in question, the respondent No.2 has undertaken to pay respondent No.1 on mere written demand without any demur, reservation contest or protest and/or without any reference to the appellant monies to the extent of Euro 190928.60. The respondent No.1 further contended before the trial Court that in the contract of Bank Guarantee, the invocation thereof is not linked to any dispute, which may exist between the appellant and the respondent No.1. In other words, the Bank Guarantee in question is unconditional Bank Guarantee.
6. The respondent No.1 before the trial Court further contended that the allegations of fraud have been made only by way of an attempt to somehow artificially bring the facts within the parameters and legal requirements for obtaining injunctive relief in the matters relating to a Bank Guarantee. In fact, there is no fraud either in relation to the Bank Guarantee or the principal contract. It is contended before the trial Court that the appellant is estopped from raising contention relating to the expiry of the warranty period, inasmuch as the appellant has itself renewed the Bank Guarantee and extended its validity upto 30.9.2013 and necessary payment of renewal has already been made by the appellant itself. It is also contended before the trial Court that no irretrievable injustice would cause to the appellant if payments under the Bank Guarantee are realized, because the respondent No.1 has an existing and valid claim in liquidated damages against the appellants and more particularly, quoted in para 12 of the affidavit-in-reply filed by the respondent No.1 before the trial Court. It is further contended by the respondent No.1 that the conduct of the appellant disentitles for any relief of injunction and equity, because in para No.5 of the petition, it has averred that though the testing instruments were supplied by the appellant to the respondent No.1 in the year 2010, it was only in 2013 for the first time that the complaint was made by the respondent No.1 regarding defects in the supply of the goods. According to the respondent No.1, the said statement is false to the knowledge of the appellant, because the testing instruments were found defective and the same was informed immediately to the appellant's representative in 2010 and the same was duly recorded at the relevant minutes of the meeting dated 25.3.2010. Thereafter, from time to time, the respondent No.1 informed the appellant by email and requested to take necessary action and corrective measures. No disclosure or reference to any of the letters, email sent by the respondent No.1 has been referred to in the petition. Secondly, it is contended by the respondent No.1 before the trial Court that the respondent No.1 invoked the Bank Guarantee on 22.6.2013. On 25.6.2013, the appellant requested the respondent No.1 to withdraw its claim of the Bank Guarantee so as to enable a positive discussion on the issue. Based on such request, the respondent No.1 on the very next day i.e. on 26.6.2013 wrote to its bank requesting him to keep the demand notice dated 22.6.2013 under abeyance till 7.7.2013. However, while on one hand, the appellant requested for an amicable solution of the dispute and on the other hand, it secretly approached the Court and obtained order of status quo qua Bank Guarantee on 26.6.2013 by not only suppressing the material facts, but also without producing Bank Guarantee before the trial Court.
7. Before submissions made by both the learned senior counsel Mr. Mehta and Mr. Joshi are appreciated, relevant clauses of Letter of Award, special condition of contract and general condition of contract referred to and relied upon by the parties are as under:
4.0 Bank Guarantee (Letter of Award) Supplier shall furnish the bank guarantees as mentioned in Clause 11.0 of the General Conditions of Contract for CPBG and Clause 5.0 of Special Conditions of Contract for ABG.
5.0 Payment (Special Condition) The payments for Contract shall be regulated in accordance with the following provisions:
All Bank Guarantees as per the format attached with GCC to be submitted by the Supplier under the contract shall be issued from reputed bank and co-accepted by any reputed bank/scheduled bank in India within 15 days of contracting signing.
WARRANTY/DEFECT LIABILITY PERIOD (Special Condition) The warranty/Defect liability period under this contract shall be valid upto 42 months from the date of CIF delivery at Haldia Port of last supply or 36 months of operational acceptance whichever is earlier.
11.0 PERFORMANCE SECURITY (General Condition) 11.1 Within 15 days of the Purchase Order, the supplier shall furnish a Performance Security to the Purchaser for the proper fulfilment of the Contract. Such Performance Security shall be in the form of a Bank Guarantee from a bank acceptable to the Purchaser and shall be in the format enclosed as Annexure-A for an amount equivalent to 10% of the Contract Price and valid up to warranty obligations period.
Failure to provide the Contract Performance Security shall constitute a material breach of Supplier s obligations under the Contract.
11.2 The proceeds of the Performance Security shall be payable to the Purchaser as compensation for any loss resulting from the Supplier s failure to complete its obligations under the Contract but shall not be construed in any manner as a limitation of liability of the Supplier.
11.3 In the event, if any extension in the date of completion including extension of the period of Warranty and Defect Liability Period obligations, the Supplier shall at its own cost have the validity of the Bank Guarantee extended up to 90 days after such extended date. Failure to do so at least 30 days before the expiry of the validity of the Performance Guarantee shall entitle the Purchaser to invoke the Bank Guarantee and recover the amount thereunder.
No payment to the supplier shall be released unless the said Performance Security has been submitted to the Purchaser.
18.0 WARRANTY AND DEFECT LIABILITY PERIOD (General Condition).
18.1 The supplier warrants that the Goods supplied under this Contract are new, unused, of the most recent or current models and incorporate all recent improvements in design and materials unless provided otherwise in the contract. The Supplier further warrants that the Goods supplied under this Contract shall have no defect arising from design, materials or workmanship or from any act or omission of the Supplier, that may develop under normal use of the supplied goods.
18.2 The supplier understands and agrees as under:
that the Goods including spares to be supplied under the Contract, are required specifically for incorporation into the Facility.
that the goods shall therefore, perform as an integral part of the Facilities.
that, in view of Purchaser having to warranty the Facility referred as Defect Liability Period free from defects in design, materials, engineering and workmanship for a period of forty-two (42) months from the date of CIF delivery of the last consignment or 36 months from the date of operational acceptance whichever is earlier.
Purchaser shall promptly notify the Supplier, in writing, of any claim arising under this warranty. Upon receipt of such notice, the Supplier shall, with all reasonable speed and at its own cost, repair or replace the defective goods or parts thereof, at the ultimate destination. The parties shall consider whether the defect can be repaired or whether replacement of the defective component(s) is necessary. After this consultation, the Purchaser's shall have the right to instruct the necessary repair or replacement. The replaced parts/goods shall be taken over by the Supplier for disposal after their replacement. No claim whatsoever shall be made on the Purchaser for the replaced parts/goods.
8. Similarly to appreciate rival contentions and submissions made before this Court, Bank Guarantee in question requires to be reproduced so as to deal with the controversy involved in the present appeal in a better manner.
We ICICI Bank Limited a body corporate registered/ constituted under the Law of India, having its registered office at Lank mark, race course circle, Alkapuri, Vadodara 390 007, India and one or its branch at Landmark, race course circle, Alkapuri, Vadodara 390007 (hereinafter referred to as the Bank which expression shall unless repugnant to the context or veaning thereof include its successor, administrator, executor and assigns) do hereby guarantee and undertake to pay APIL on its first written demand through through swift or tested telex any all monies payable by the contractor to the extent of Euro 190928.60 (Euro one hundred ninety thousand nine hundred twenty eight and cents sixty only) as aforesaid any time upto 30th March, 2012 without any demur, reservation contest or protest and/or without any reference to the contractor any such demand made by APIL on the bank shall be conclusive and binding notwithstanding any difference between the owner and the contractor or any dispute pending before any Court, tribunal, arbitrator or any other authority. The bank undertakes not to revoke this guarantee during it occurrence without previous consent of APIL and further agrees that the guarantee herein contained shall continue to be inforceable till APIL discharge this guarantee.
9. Learned Senior Counsel appearing for both the parties made elaborate submissions in light of their respective case before the trial Court and I have considered rival submissions made during the course of hearing of the appeal.
10. Law relating to invocation of Bank Guarantee is by now well settled by catena of decisions of the Hon ble Supreme Court. The Bank Guarantee which provides that they are payable by the guarantor on demand is considered to be an unconditional Bank Guarantee. So, when in the course of commercial transaction/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.
11. In case of U.P. State Sagar Corporation Vs. Sumac International Ltd. reported in (1997) 1 SCC 568, the Hon ble Supreme Court in para No.12 observed as under:
The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or 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 co-exist in some cases. In the case of U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd.
(988 [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 suppler 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 has notice. The fraud must be of an agregious 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 at 352):
"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.
12. It is equally well settled in law that Bank Guarantee is an independent contract between the bank and the beneficiary thereof. The bank is always obliged to honour its guarantee as long as it is unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance, the bank has given guarantee is immaterial and of no consequence. In case of BSES Limited Vs. Fenner India Ltd. reported in 2006 (2) SCC 726, the Hon ble Supreme Court in para 10, observed as under:
10.
There are, however, two exceptions to this Rule. The first is when there is a clear fraud of which the Bank has notice and a fraud of the beneficiary from which it seeks to benefit. The fraud must be of an egregious nature as to vitiate the entire underlying transaction. The second exception to the general rule of non- intervention is when there are special equities in favour of injunction, such as when irretrievable injury or irretrievable injustice would occur if such an injunction were not granted. The general rule and its exceptions has been reiterated in so many judgments of this court, that in U.P. State Sugar Corpn. V. Sumac International Ltd.
(1997) 1 SCC 568 (hereinafter U.P. State Sugar Corpn_) this Court, correctly declare that the law was settled.
13. In Himadri Chemicals Industries Ltd. V. Coal Tar Refining Company reported in (2007) 8 SCC 110, the Hon'ble Supreme Court summarized the principles for grant or refusal to grant of injunction to restrain the enforcement of a bank guarantee or a letter of credit, in para No.14, which reads as under:
(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the Beneficiary is entitled to realize such a Bank Guarantee or a Letter of Credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.
(ii) The Bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.
(iii) The courts should be slow in granting an order of injunction to restrain the realization of a bank guarantee or a Letter of Credit.
(iv) Since a Bank Guarantee or a Letter of Credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of Bank Guarantees or Letters of Credit.
(v) Fraud of an egregious nature which would vitiate the very foundation of such a Bank Guarantee or Letter of Credit and the beneficiary seeks to take advantage of the situation.
(vi) Allowing encashment of an unconditional Bank Guarantee or a Letter of Credit would result in irretrievable harm or injustice to one of the parties concerned
14. Undisputedly, the Bank Guarantee in question on the face of it reading, it appears that it is unconditional and irrevocable and therefore, the appellant cannot be allowed to raise any dispute and prevent the respondent No.1 from encashing the Bank Guarantee.
15. The next question that falls for consideration of the Court is as to whether the present case falls under any of or both the exceptions namely whether there is a clear fraud of which the bank had notice and a fraud of the beneficiary from which it seeks to benefit or there is any fraud committed by the beneficiary while executing underlying contract, which became so because of subsequent event or circumstances in light of decision rendered in case of Hindustan Steel Works Construction Limited Vs. Tarapore & Co. and another reported in (1996) 5 SCC 34 as it is vehemently relied upon by the appellant to get admission of this first appeal. In para 18 of the judgment, the Hon ble Supreme Court has observed as under:
What Mukherji, J. has stated in paragraph 34 of his judgment, namely, that "It is only in exceptional cases that is to say in case of fraud or in case, irretrievable injustice be done the courts should interfere" is really the ratio of the decision of this Court in U.P. Cooperative Federation Ltd. (supra) Therefore, fraud cannot to be said to be the only exception. In a case, where the party approaching the court is able to establish that in view of special equities in his favour if injunction as requested is not granted then he would suffer irretrievable injustice, the court can and would interfere. It may be pointed out that fraud which is recognised as an exception is the fraud by one of the parties to the underlying contract and which has the effect of vitiating the entire underlying transaction. A demand by the beneficiary under the bank gurantee may become fraudulent not because of any fraud committed by the beneficiary while executing the underlying contract but it may become so because of subsequent events or circumstances. We see no good reason why the courts should not restrain a person making such a fraudulent demand from enforcing a bank guarantee .
16. The fraud, if any, must be of a serious nature as to vitiate the entire underlying transaction. The learned trial Judge and this Court minutely examined the pleadings, more particularly, the averments made in para Nos.4 and 5 of the petition of the present case, in which no factual foundation is led in support of allegation of fraud.
There is not even the proper allegation of any fraud as such and in fact, the whole case of the appellant centres around the allegation of any fraud with regard to the alleged breach of contract by the respondent No.1. The plea of fraud in the appellant's words is to the following effect.
4. ........In fact, the said Bank Guarantee is considered to be valid only upto warranty obligation period and the warranty period under the contract has been fixed for the period of 42 months from the date of CIF delivery at Haldia Port of last supply or 36 months of Operational acceptance, whichever is earlier. The said warranty period has already been expired in June, 2012 and the same has never been extended by the applicant. However, on the insistence of the opponent No.1, the period of Bank Guarantee only has been extended and the applicant has specifically denied the request of the opponent No.1 to extend the warranty period.
5.........It is submitted that after the period of 2¿ years from the supply of goods, the opponent no. 1 informed the applicant about some defective tools (testing instruments), which were supplied in the year 2010, however, in 2013, i.e. after a long period, the opponent No.1 has complained about some defect in such testing instruments. The applicant had informed the opponent No.1 to send the so called defective instruments. It was specifically informed to the opponent No.1 that where such instruments to be sent and to whom it should be informed. It was made clear that the resupply of so called defective instruments shall be made on chargeable basis, based upon the request of opponent No.1 about technical parameters that were required for such equipments. It was specifically made clear that the revised offer will be sent to the opponent No.1 as and when the same will be received from the applicant supplier. In spite of these facts, the so called defective instruments were never returned to the applicant. Moreover, as per the contract, the applicant has agreed to supply spares on request of the opponent No.1 on chargeable basis. Thus, the warranty has nothing to do with such spares.......
17. In Court s considered opinion, such vague and indefinite allegations made do not satisfy the requirement in law constituting any fraud much less a fraud of a serious nature as to vitiate entire transaction. In fact, the appellant s case as asserted in the petition is such that it was agreed that warranty period would be 42 months from the date of CIF delivery at Haldia Port of last supply or 36 months of operational acceptance, whichever is earlier. In light of clause 5 of Special Contract Condition, the respondent No.1 released the payment to the appellant after receipt of the goods and therefore, release of payment by the respondent No.1 is nothing but an admission as to receipt of goods in satisfactory condition. So, according to the appellant, releasing payment upon acceptance of goods shall ipso facto infer acceptance of goods as per order and in good condition by the respondent No.1 and thus, resulting into commencement of warranty period. It is argued by learned Senior Counsel Mr. Mehta that respondent No.1 received accessories at Haldia Port on 2.2.2009, whereas the transformers were received at Haldia Port on 8.12.2008 and thus, warranty period commenced from December 2008 and pursuant to the contractual condition, the same has ended after 42 months i.e. June 2012, whereas for the accessories, it has been completed in the month of August, 2012 as payment had already been released. So, it seems that there is bona fide disputes between the parties as to whether warranty period has commenced as per the case of the appellant or the respondent No.1. In this background of bona fide disputes cropped up between the appellant and the respondent No.1 and pending resolution thereof, if the respondent No.1 invokes Bank Guarantee within extended period, in Court s considered opinion, it cannot be construed that there is any fraud played by the respondent No.1. On the contrary, it is forthcoming on record that party exchanged various correspondence and also held meetings before expiry of warranty period and more particularly, meeting dated 25.3.2010 held at Siligudi (West Bengal) and in the said meeting, the party discussed various issues with regard to problems cropped up in respect to the contract in question and in para 9 and 10, the discussion was minutized as under:
9.
M/s Alstom has explained the problems of the testing equipment supplied by M/s TBEA. M/s TBEA has asked to recheck the instruments again and give clear feedback so as to take up with the original manufacturer of the equipment. M/s TBEA will get back on these issues soon and will do the needful at the earliest.
10. M/s TBEA has agreed to extend all kinds of support in future for the Transformers supplied. Further, M/s TBEA assured the warranty/guarantee as per the Supply terms and conditions.
18. Apart from it, thereafter also, party exchanged various mails and since issues raised during the warranty period could not be resolved, the respondent No.1 invoked the Bank Guarantee. Not only that, it has also come on record that at the request of the appellant through mail dated 25.6.2013, the respondent No.1 kept his demand notice dated 22.6.2013 under abeyance till 7.7.2013. The whole purpose to keep the demand in abeyance was to have a positive discussion between the appellant and the respondent No.1 for the issues in question. Instead of commencing discussion, the appellant filed petition under section 9 of the Act on 26.6.2013 and obtained ex parte injunction order against invocation of Bank Guarantee. Surprisingly, the appellant succeeded in obtaining injunction order without producing Bank Guarantee before the trial Court and it only came on record through the respondent No.1 when it filed its reply before the trial Court.
19. The contention raised by learned Senior Counsel Mr. Mehta for the appellant to the effect that warranty came to an end as per clause 8 of Special Condition in the month of March 2012 is devoid of any merit for the simple reason that the Bank Guarantee, on the face of it, is linked with the performance of the contract. However, the Bank Guarantee, though expired in the month of March 2012, but extended six times from time to time mutually and at the appellant's cost. However, bare perusal of condition No.10 of Letter of Award stipulates that warranty shall be applicable as per provisions, requirements as defined under clause 18 of the General Condition of contract. So, on combined reading of various clauses of Letter of Award, Special Condition and General Condition of the contract, it cannot be inferred that the Bank Guarantee is co-extensive with the warranty period as per clause 8 of the Special Condition. So, extension of Bank Guarantee after expiry period at the appellant's cost for about 18 months makes it abundantly clear that the Bank Guarantee is linked with the performance of the contract. The reason to find that the Bank Guarantee is linked with the performance of the contract is such that from the reading of various communications and decisions taken by the parties to the proceedings in the meeting and through exchange of mails shows that special tools supplied by the appellant in the year 2009 were found defective from the time of receipt in India, the appellant was to supply spares upto period of five years on chargeable basis (vide condition No.17), the appellant was required to provide services for erection and commission. In light of various obligations, which the appellant was required to discharge makes the Bank Guarantee linked with the performance of the contract and therefore, clause 8 of the Special Condition cannot be read in isolation of other various conditions agreed by the parties. Therefore, the respondent No.1 is well within its rights when it invoked the Bank Guarantee in addition to it being separate and independent contract.
20. Learned Senior Counsel Mr. Mehta appearing for the appellant could not satisfy the Court as to what is wrong if the respondent No.1 complained about some defects in the testing instruments in the year 2010, which was supplied in the year 2008. Whatever, complaints raised at the end of the respondent Nos.1 were well within the warranty period and under the contract, the appellant was required to attend the complaints from time to time. It also appears that the complaints raised at the end of the respondent No.1 were accepted by the appellant, but in resolving such complaints/issues, the dispute cropped up as to how and in what manner, the testing instruments shall be transported. So, in nutshell, there is no dispute with regard to genuineness of the complaints/issues raised by the respondent No.1. It is because of these reasons, the appellant extended the Bank Guarantee not once or twice, but six times and during such period, issues raised, more particularly, minutized in the meeting held on 25.3.2010 could not be materialized which resulted into invocation of the Bank Guarantee. In this connection, it is relevant to take note of the observations made by the Hon'ble Supreme Court in para 16 of the decision of U.P. State Sugar Corporation (supra).
Clearly, therefore, the existence of any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees. There must be a fraud in connection with the bank guarantee. In the present case we fail to see any such fraud. The High Court seems to have come to the conclusion that the termination of the contract by the appellant and his claim that the time was of the essence of the contract, are not based on the terms of the contract and, therefore, there is a fraud in the invocation of the bank guarantee. This is an erroneous view. The disputes between the parties relating to the termination of the contract cannot make invocation of the bank guarantees fraudulent. The High Court has also refereed to the conduct of the appellant in invoking the bank guarantees on an earlier occasion on 12th of April, 1992 and subsequently withdrawing such invocation. The court has used this circumstance in aid of its view that the time was not of the essence of the contract. We fail to see how an earlier invocation of the bank guarantees and subsequent withdrawal of this invocation make the bank guarantees or their invocation tainted with fraud in any manner. Under the terms of the contract it is stipulated that the respondent is required to give unconditional bank guarantees against advance payments as also a similar bank guarantee for due delivery of the contracted plant within the stipulated period. In the absence of any fraud the appellant is entitled to realise the bank guarantees.
21. Since there is no evidence or even averments in the petition as to fraud in connection with the Bank Guarantee or contract in question, the respondent No.1 is well within its rights to invoke the Bank Guarantee as it being unconditional and independent to primary contract. From the bare perusal of the Bank Guarantee, it is crystal clear that it is an independent contract and it is not linked with the primary contract. Even in para 9 of the petition, the appellant has stated that the cause of action to file the present petition arose as and when the respondent No.1 without any legal or valid reason mala fide tried to invoke the Bank Guarantee in question. In other words, there is no whisper about existence of any element of fraud, which gave the the appellant cause of action to file the petition under section 9 of the Act. It is well settled that to maintain action qua encashment of the Bank Guarantee, the appellant shall bring its case under any of or both the exceptions, namely where there is a clear fraud and a fraud of the beneficiary from which it seeks to benefit and another exception where there are any special equities in favour of granting injunction. In fact, existence of these two exceptions gives cause of action to any party to file a petition like the present one. So, in Court's considered opinion, the averments made in para 4 and 5 of the petition do not satisfy the requirement in law constituting any fraud much less fraud of a serious nature as to vitiate the entire transaction. The case therefore, does not fall within the first exception.
22. Coming to the second exception, whether encashment of Bank Guarantee would cause any irretrievable harm or injustice to the appellant. In order to find out case in connection with second exception, I have minutely examined the petition. There is no plea of any special equities by the appellant in its favour. So, plea of irretrievable injustice is concerned, the appellant in its petition must show injury of the kind which was the subject matter of decision in the Itek Corporation v. The First National Bank of Boston etc. In the said case, it is observed as under:
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 relisation 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 the ultimately succeeds, will have to be decisively established. Clearly, a mere apprehension that the other party will not be able to pay, is not enough.
23. Under the circumstances, the plea taken as regards irretrievable injustice is again vague and not supported by any evidence. There is no dispute that vide notice dated 18.7.2013, the appellant has requested the respondent No.1 to refer the disputes of the subject matter to the Arbitrator as per terms and conditions of the contract. Therefore, the appellant can always get the relief provided he makes his case before the Arbitral Tribunal and there is no allegation that it would be difficult to realize the amount from the respondent No.1 in case the appellant succeeds before the Arbitral Tribunal. It is also fruitful to refer to the observations recorded by the Hon'ble Supreme Court in case of Hindustan Steel Works Construction Limited Vs. Tarapore & Co. and another reported in (1996) 5 SCC 34 in para No.8 to 12 and 14.
8. With respect to an irrevocable letter of credit this Court in the case of Tarapore & Co. vs. Tractors Export, Moscow 1969 (2) SCR 920 pointed out that such a contract between the banker and the beneficiary is independent of and unqualified by the contract of sale or other underlying transaction and quoted with approval the following observations made by Jenkins L.J. in Hamzeh Malas and Sons vs. British Imex Industries Ltd. 1958 (2) Q.B. 127:
"We have been referred to a number of authorities, and it seems to be plain enough that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not. An elaborate commercial system has been built upon the footing that bankers' confirmed credits are of that character and in my judgment, it would be wrong for this court in the present case to interfere with that established practice."
9. In United Commercial Bank vs. Bank of India 1981 (3) SCR 300 this Court again emphasised that obligation of a Bank in such a case is absolute, as a letter of credit constitutes the sole contract with the banker and the bank issuing the letter of credit has no concern with any question that may arise between the seller and the purchaser of the goods. Therein the following passage from the judgment of Kerr. J. in R.D. Horbottle (Mercantile) Ltd. vs. National Westminster Bank Ltd. 1977 (3) W.L.R. 752 was quoted as a correct statement of law on the point:
"It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the life-blood of international commerce. Such obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain. Expect possible in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in the contracts. The courts are not concerned with their difficulties to enforce such claims; these are risks which these merchants take. In this case the plaintiffs took the risk of the unconditional wording of the guarantees. The machinery and commitments of banks are on different level. They must be allowed to be honoured free from interference by the courts. Otherwise, trust in international commerce could be irreparable damaged."
10. In United commercial Bank's case (supra) the High Court had granted a temporary injunction restraining the United Commercial Bank from making a recall of the amount paid by it under reserve against the relative bills of exchange drawn against the letter of credit issued by it from the Bank of India an in terms of the letter of guarantee or indemnity executed by that Bank. While allowing the appeal this court observed that the courts usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of letter of credit or bank gurantee between one bank and another.
11. In Centax (India ) Ltd (supra) it has been held in clear terms that a bank gurantee resembles and is analogous to a letter of credit and the same considerations which apply to a letter of credit in the matter of interference by the court should apply to a bank guarantee.
12. In U.P. Cooperative Federation Ltd. (supra) also Mukherji, J. n paragraph 21 of his judgment has observed as under:
"...An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with expect in case of fraud or in case of question of apprehension of irretrievable injustice has been made out. This is the well settled principle of the law in England. This is also a will settled principle of law in India....."
The High Court also committed a grave error in restraining the appellant from invoking bank guarantees on the ground that on India only reasonable amount ca be awarded by way of damages even when the parties to the contract have provided for liquidated damages and that a term in a bank guarantees making the beneficiary the sole judge on the question of breach of contract and the extent of loss or damages would be invalid and that no amount can be said to be due till and adjudication in that behalf is made either by a court on an arbitrator, as the case may be. In taking that view the High Court has overlooked the correct position that a bank guarantees is a independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the primary contract between the person at whose instance the bank guarantee is given and the beneficiary. What the High Court has observed would applicable only to the parties to the underlying transaction or the primary contract but can have no relevance to the bank guarantee given by the bank, as the transaction between the bank and the beneficiary is independent and of a different nature. In case of an unconditional bank guarantee the nature of obligation of the bank is absolute and not dependent upon any dispute or proceeding between the party at whose instance the bank guarantee is given and the beneficiary. The High Court thus called to appreciate the real object and nature of a bank guarantee. The distinction which the High Court has drawn between a guarantee for due performance of a works contract and guarantee given towards security deposit for that contract is also unwarranted. The said distinction appears to be the result of the same fallacy committed by the High Court of not appreciating the distinction between the primary contract between contract between the parties and a bank guarantee and also the real object of a bank guarantee and the nature of bank's obligation thereunder. Whether the bank guarantee is towards security deposit or mobilisation advance or working funds or for due performance of the contract if the same is unconditional and if there is a stipulation in the bank guarantee that the bank should pay on demand without a demur and that the beneficiary shall be the sole judge not only on the question of breach of contract but also with respect to the amount of loss or damages, the obligation of the bank would remain the same and that obligation has to be discharged in the manner provided in the bank gurantee. In General Electric Technical Services Company Inc. vs. Punj Sons
(p) Ltd. (1991 (4) SCC 230) while dealing with a case of bank guarantee given for securing mobilisation advance it has been held that the right of a contractor to recover certain amounts under running bills would have no relevance to the liability of the bank under the guarantee given by In that case also the stipulations in the bank guarantee were that the bank had to pay on demand without a demur and that the beneficiary was to be the sole judge as regards the loss or damage caused to it. This Court held that notwithstanding the dispute between the contractor and the party giving the contract, the bank was under an obligation to discharge its liability as per the terms of the bank guarantee. Larsen and Toubro Limited vs. Maharashtra State Electricity Board (6) SCC 68 and Hindustan Steel Workers Construction Ltd. Vs. G.S. Atwal & Co (Engineers) Pvt. Ltd. 1995 (6) SCC 76 were also cases of work contracts wherein bank gurantees were given either towards advances or release of security deposits or for due, performance of the contract. In both those cases this Court held that the bank gurantees being irrevocable and unconditional and as the beneficiary was made the sole judge on the question of breach of perforamance of the contract and the extent of loss or damages an injunction restraining the beneficiary from invoking the bank guarantees could not have been granted. The above referred three subsequent decisions of this Court also go to show that the view taken by the High Court is clearly wrong.
24. It was vehemently submitted by learned Senior Counsel Mr. Mehta that the impugned judgment is unreasoned and the learned trial Judge has not referred to the various communication exchanged between the parties so as to correctly decide the various contentions raised by the appellant with regard to allegation of fraud. There is no dispute that the Court should give clear reasoning and analyze the various documents placed on record in light of the contentions raised in the petition and based on various legal principles settled in the case law cited at bar. I have also gone through the impugned judgment and I have found that the learned trial Judge has dealt with the allegation of fraud in proper perspective of the matter and more particularly, in light of the averments made in the petition by the appellant itself. I do not find that the impugned order is unreasoned or the learned trial Judge missed any contention raised by the appellant and therefore, there is no substance in the submission made by learned Senior Counsel Mr. Mehta so as to say that the impugned judgment is is either unreasoned or any contention is not dealt with by the learned trial Judge in light of documents on record.
25. In nutshell, whatever the disputes or issues raised in the petition filed under section 9 of the Act before the trial Court is devoid of any merit, inasmuch as the entire petition on the face of it does not prove the existence of both the exceptions, namely fraud and irretrievable injustice and therefore, the learned trial Judge has rightly rejected the petition and no ground has been made out to interfere with the findings recorded by the learned trial Judge while dismissing the petition and therefore, the present appeal deserves to be summarily dismissed and accordingly, it stands dismissed in limine.
26. In view of dismissal of first appeal, civil application does not survive and the same stands disposed of accordingly.
(S.H.VORA, J.) FURTHER ORDER After pronouncement of the judgment, learned Senior Counsel Mr. Mehta for the appellant prays to stay operation of this judgment for a period of one week so as to approach the higher forum. Considering the facts and circumstances, this judgment is stayed for a period of one week from today to enable the appellant to approach the higher forum and relief granted by the trial Court and further extended by this Court shall remain in force for one week from today.
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