Delhi High Court
R.S. Infraprojects Pvt. Ltd. vs Zamil Infra Pvt. Ltd. And Anr. on 23 March, 2015
Author: Manmohan
Bench: Manmohan
51
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* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ CS(OS) 809/2015
R.S. INFRAPROJECTS PVT. LTD. ..... Plaintiff
Through: Mr. Sudhir Nandrajog, Senior
Advocate with Mr. S.K. Maniktala,
Mr. Akshay Sharma and Mr. Vinod
Gupta, Advocates.
versus
ZAMIL INFRA PVT. LTD. AND ANR. ..... Defendants
Through: None.
% Date of Decision : 23rd March, 2015
CORAM:
HON'BLE MR. JUSTICE MANMOHAN
JUDGMENT
MANMOHAN, J: (Oral) This matter has been listed in pursuance to a special mentioning being allowed by the Hon'ble Judge Incharge (Original Side). I.A. 6083/2015 in CS(OS) 809/2015 Heard. The production of original documents is dispensed with as prayed for in the application subject to the plaintiff producing the same as and when so directed.
Accordingly, present application stands disposed of.
CS(OS) 809/2015 Page 1 of 12I.A. 6084/2015 in CS(OS) 809/2015 Plaintiff is permitted to pay the shortfall in the Court-fees within a period of three days.
Accordingly, present application stands disposed of. CS(OS) 809/2015 Let the plaint be registered as suit.
Issue summons in the suit to the defendants by registered post and dasti, returnable for 15th April, 2015.
The summons to the defendant shall indicate that a written statement to the plaint shall be positively filed within two weeks of the receipt of the summons. Liberty is given to the plaintiff to file a replication within one week of the receipt of the advance copy of the written statement. I.A. 6082/2015 in CS(OS) 809/2015 Issue notice to the defendants by registered post and dasti, returnable for 15th April, 2015.
Present suit has been filed for declaration and permanent injunction. Along with the suit, an application has been filed seeking stay of encashment of bank guarantee being BG No.4094IGPER003514 dated 05 th March, 2014 for Rs. 2,00,00,000/- issued by defendant No.2-bank.
Mr. Sudhir Nandrajog, learned senior counsel for plaintiff submits that the encashment of bank guarantee needs to be stayed as it would cause irretrievable injury and injustice to the plaintiff.
Mr. Nandrajog states that defendant No.1 is a service company with no assets in India. In support of his submission, he relies upon a judgment of this Court in M/s. Continental Construction Ltd. & Anr. Vs. Satluj Jal Vidyut Nigam Ltd., (2006 (I) R.A.J. 434(Del). The portion of the judgment CS(OS) 809/2015 Page 2 of 12 relied upon by learned senior counsel for plaintiff is reproduced hereinbelow:-
"25. It was contended on behalf of the applicants that even the claims which are of the value of less than Rs.5 crores and have been determined by the internal determinative process prescribed under the terms of the contract, have not been honoured by the respondents. On the contrary, the respondents have acted with greater vehemence on grant of claims. It is also indicated that special experts, including foreign persons, were appointed to examine the version of the applicants at site and all such reports are favourable to the applicants and does not in any way help the unjustified and unfair attitude adopted by the respondents. Once the parties have opted for providing of an internal determinative forum or adjudicative mechanism, then it is obligatory and is expected from each one of them that they shall not only abide by such terms but would honour the decision of such Forum in its spirit and substance. The parties should essentially abide by these terms and should not disrespect or hinder or cause to hinder the result of such determination. The conduct of a party in this regard would be a relevant factor to be considered by the court, while deciding such interim applications. The expression „extraordinary special equities‟ or „irretrievable injustice/injury‟ are not defined expressions. They are to have such connotation and meaning as may be justified with reference to the facts and circumstances of each case. The court has to give such construction which would avoid reduncing, hardship or even repugnancy. The clauses of the agreement between the parties would have to be construed in their simple language so as to implement the essence of the contract. There is no doubt that court has to look into the terms of the bank guarantee and letter of invocation primarily for the purposes of deciding the fate of a prayed injunctive relief. The undue influence and pressure caused by the respondents on the applicant in extracting extensions, undertakings may not be completely proved on record at this stage of the proceedings, but this is a relevant factor to determine the extent of irretrievable injustice/injury to CS(OS) 809/2015 Page 3 of 12 which the applicant would be exposed, if the encashment of the bank guarantee is permitted. There is an apparent attempt on the part of the respondents to frustrate the findings recorded by the internal determinative adjudicating machinery i.e. CMD‟s findings as well as the finding of DRB, as afore-referred. Once these findings are against the respondents and it has been held that the applicant is entitled to extension of period, it will be more than unfair to permit the respondents to invoke the bank guarantees at this stage of the proceedings. The cumulative effect of the above analysis of the case is that the respondents have not invoked the bank guarantees in terms of the caluse, the action of the respondent in insisting upon encashment of bank guarantees is bound to cause irretrievable injustice and injury to the applicants, who otherwise have a case of special equities in their favour. Another very relevant factor is that after invoking the bank guarantees on 7th July, 2003, the respondents themselves have always agreed not to invoke the bank guarantees on the condition that the applicants would keep the bank guarantees alive. This is true even as on July 2004, when the respondents wrote a letter dated 20.09.2003. Thus, no injustice would be caused to the respondents if the bank guarantees are not permitted to be encashed at this stage, subject to the condition that they are kept alive by the applicants. This course of action would even balance the equities between the parties and would be least prejudicial to the interest of any of the parties. But, if such bank guarantees are permitted to be invoked/encashed, the applicant would suffer an irretrievable injustice and injury because they may not even be able to bear such a financial imbalance, particularly when their claims against the respondents have been allowed by the domestic adjudicating process prescribed under the terms of the contract."
Mr. Nandrajog, learned senior counsel for plaintiff also refers to the defendant No.1's e-mail dated 24th August, 2014 to contend that the liquidated damages alleged to have been imposed by the Principal CS(OS) 809/2015 Page 4 of 12 Contractor upon the defendant No.1 is only to the tune of Rs.1,36,67,568/- approximately, while defendant No.1 is seeking encashment of bank guarantee of Rs.2,00,00,000/-.
This Court is of the view that it is settled law that encashment of bank guarantee can only be stayed on two grounds namely, fraud and irretrievable injustice/injury.
As far as the concept of irretrievable injunction and injury is concerned, the Supreme court in Dwarikesh Sugar Industries ltd. vs. Prem heavy Engineering Works (P) Ltd. & Anr., (1997) 6 SCC 450 has held as under:-
"22. The second exception to the rule of granting injunction, i.e. the resulting of irretrievable injury, has to be such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately succeeds. This will have to be decisively established and it must be proved to the satisfaction of the court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution."
(emphasis supplied) Also, the passage in the judgment in M/s. Continental Construction Ltd. & Anr. Vs. Satluj Jal Vidyut Nigam Ltd. (supra) relied upon by the plaintiff is actually a quotation from the judgment of the Supreme Court in the case of Hindustan Construction Company Ltd. vs. State of Bihar & Ors.,(1999) 8 SCC 436.
The case of Hindustan Construction Company Ltd. (supra) was disposed of purely on the basis of the term of bank guarantee as it was held that invocation was bad because it was invoked by a wrong person and the CS(OS) 809/2015 Page 5 of 12 bank guarantee in the said case was not unconditional or unequivocal.
The Division Bench of this Court in M/s. Indu Pojects Ltd. vs. Union of India, 204 (2013) DLT 600 has distinguished the judgment of Hindustan Construction Company Ltd. (supra) in the following words:-
"9. Mr. Dave also referred to the decision of the Supreme Court in the case of Hindustan Construction Co. Ltd. v. State of Bihar And Others (1999) 8 SCC 436 to demonstrate that the Supreme Court, does at times, refer to the underlying contract as also to the facts relating to the underlying contact while considering the question of injuncting a bank guarantee. However, we are of the view that the bank guarantee itself in that case made a reference to the underlying contract and this would be apparent from paragraph 14 of the said decision which is to the following effect:-
14. This condition clearly refers to the original contract between HCCL and the defendants and postulates that if the obligations, expressed in the contract, are not fulfilled by HCCL giving to the defendants the right to claim recovery of the whole or part of the "advance mobilization loan", then the Bank would pay the amount due under the guarantee to the Executive Engineer. By referring specifically to clause 9, the Bank has qualified its liability to pay the amount covered by the guarantee relating to "advance mobilization loan" to the Executive Engineer only if the obligations under the contract were not fulfilled by HCCL or HCCL has misappropriated any portion of the "advance mobilization loan". It is in these circumstances that the aforesaid clause would operate and the whole of the amount covered by the "mobilization advance" would become payable on demand. The bank guarantee thus could be invoked only in the circumstances referred to in clause 9 whereunder the amount would become payable only if the obligations are not fulfilled or there is misappropriation. That being so, the bank CS(OS) 809/2015 Page 6 of 12 guarantee could not be said to be unconditional or unequivocal in terms so that the defendants could be said to have had an unfettered right to invoke that guarantee and demand immediate payment thereof from the Bank.
This aspect of the matter was wholly ignored by the High Court and it unnecessarily interfered with the order of injunction granted by the Single Judge, by which the defendants were restrained from invoking the bank guarantee.
From the above extract it is apparent that the condition clearly referred to the original contract between the parties. It is also evident that by a specific reference to clause (9) in the bank guarantee, the bank had qualified its liability to pay the amount covered by the guarantee relating to "advance mobilisation loan" to the Executive Engineer only if the obligations under the contract were not fulfilled by HCCL or that HCCL had misappropriated any portion of the "advance mobilisation loan". It was in these circumstances that the Supreme Court held that the said clause would operate and that the whole of the amount covered by the "mobilisation advance" would become payable on demand. The Supreme Court observed that the bank guarantee could thus be invoked only in the circumstances referred to in clause (9) where under the amount would become payable only if the obligations were not fulfilled or there was misappropriation. In other words, the bank guarantee was injuncted from being encashed on the terms of the bank guarantee itself since the bank guarantee referred to the underlying contract. It is only because of this special circumstance that the Supreme Court went into the issue of examining the underlying contract. In the present case, we do not find any reference to the underlying contract which would enable the bank to examine the facts and circumstances relating to the underlying contract.
Furthermore, from the extract referred to above, the Supreme Court was of the view that the bank guarantee in that case was not unconditional or unequivocal in terms so that the beneficiary could be said to have had an unfettered right to CS(OS) 809/2015 Page 7 of 12 invoke the guarantee and demand payment from the bank. The facts of present case are entirely different as the bank guarantee is unconditional and unequivocal. We also note that in Hindustan Construction Co. Ltd. (supra) in paragraph 10 thereof the Supreme Court has clearly noted that in that case, the whole matter could be disposed of purely on the basis of the "terms of the bank guarantee". We also note that the invocation itself was also bad because it was invoked by a wrong person as observed by the Supreme Court in paragraph 21 of the said decision which reads as under:-
21. As pointed out above, bank guarantee constitutes a separate, distinct and independent contract. This contract is between the Bank and the defendants. It is independent of the main contract between HCCL and the defendants. Since the bank guarantee was furnished to the Chief Engineer and there is no definition of "Chief Engineer" in the bank guarantee nor is it provided therein that "Chief Engineer" would also include Executive Engineer, the bank guarantee could be invoked by none except the Chief Engineer. The invocation was thus wholly wrong and the Bank was under no obligation to pay the amount covered by the "performance guarantee" to the Executive Engineer.
In view of the foregoing discussion we do not see any reason to interfere with the impugned orders except to delete the order of costs and observations made with regard to the counsel."
(emphasis supplied) Further, neither any documents have been filed nor any averment has been made that the defendant No.1 is about to be liquidated or any investigation has been ordered by the Central Government under the Companies Act or Provisional Liquidator has been appointed or any serious investigation either by any police authority or by the Serious Fraud Investigating Office has been initiated against the defendant No.1. Consequently, this Court is of the view that by placing reliance on bald CS(OS) 809/2015 Page 8 of 12 averments only, the encashment of bank guarantee cannot be stayed on the ground of irretrievable fraud/injustice.
As far as the argument with regard to levy of liquidated damages of Rs.1,36,67,568/- by the Principal Contractor upon the defendant No.1 is concerned, this Court is of the view that in any proceeding filed for stay of bank guarantee the disputes in the underlying contract cannot be examined. It is settled law that a bank guarantee is an independent contract and the bank at the behest of the contractor cannot look to the terms of the underlying contract entered into between the contractor and the beneficiary. In fact, a Court while dealing with stay of encashment of bank guarantee cannot hold a mini trial with regard to the exact quantum of liquidated damages that is to be recovered by the Principal Contractor against defendant No.1.
The Supreme Court in U.P. Cooperative Federation Ltd. vs. Singh Consultants and Engineers (P) Ltd. , (1988) 1 SCC 174 has held as under:-
"19. .............The plaintiffs appealed to the Court of Appeal in England. It was held by a Bench consisting of Lord Denning, M.R., Browne and Geoffrey Lane, L.J. that a performance guarantee was similar to a confirmed letter of credit. Where, therefore, a bank had given a performance guarantee it was required to honour the guarantee according to its terms and was not concerned whether either party to the contract which underlay the guarantee was in default. The only exception to that rule was where fraud by one of the parties to the underlying contract had been established and the bank had notice of the fraud. Accordingly, as the defendants' guarantee provided for payment on demand without proof or conditions, and was in the nature of a promissory note payable on demand, and the plaintiffs had not established fraud on the part of the buyers, the defendants were required to honour their guarantee on the demand made by the Libyan bank. It followed that the CS(OS) 809/2015 Page 9 of 12 judge had been right to discharge the injunction and that the appeal would be dismissed.
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28. I am, however, of the opinion that these observations must be strictly considered in the light of the principle enunciated. It is not the decision that there should be a prima facie case. In order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise the very purpose of bank guarantees would be negatived and the fabric of trading operation will get jeopardised.
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34. On the basis of these principles I reiterate that commitments of banks must be honoured free from interference by the courts. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases that is to say in case of fraud or in case of irretrievable injustice be done, the court should interfere.
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44. The modern documentary credit had its origin from letters of credit. We may, therefore, begin the discussion with the traditional letter of credit. Paul R. Verkuil in an article explains the salient features of a letter of credit in these terms:
"The letter of credit is a contract. The issuing party
-- usually a bank -- promises to pay the „beneficiary‟
-- traditionally a seller of goods -- on demand if the beneficiary presents whatever documents may be required by the letter. They are normally the only two parties involved in the contract. The bank which CS(OS) 809/2015 Page 10 of 12 issues a letter of credit acts as a principal, not as agent for its customer, and engages its own credit. The letter of credit thus evidences -- irrevocable obligation to honour the draft presented by the beneficiary upon compliance with the terms of the credit."
45. ..........The bank must pay if the documents are in order and the terms of credit are satisfied. The bank, however, was not allowed to determine whether the seller had actually shipped the goods or whether the goods conformed to the requirements of the contract. Any dispute between the buyer and the seller must be settled between themselves. The courts, however, carved out an exception to this rule of absolute independence. The courts held that if there has been "fraud in the transaction" the bank could dishonour beneficiary's demand for payment. The courts have generally permitted dishonour only on the fraud of the beneficiary, not the fraud of somebody else.
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49. This was also the view taken by this Court in United Commercial Bank case. There A.P. Sen. J. speaking for the Court, said (pages 323 and 324): (SCC pp. 783-84, paras 40-
42) ". . .the rule is well established that a bank issuing or confirming a letter of credit is not concerned with the underlying contract between the buyer and seller. Duties of a bank under a letter of credit are created by the document itself, but in any case it has the power and is subject to the limitations which are given or imposed by it, in the absence of the appropriate provisions in the letter of credit......
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53. Whether it is a traditional letter of credit or a new device like performance bond or performance guarantee, the CS(OS) 809/2015 Page 11 of 12 obligation of banks appears to be the same. If the documentary credits are irrevocable and independent, the banks must pay when demand is made. Since the bank pledges its own credit involving its reputation, it has no defence except in the case of fraud. The bank's obligations of course should not be extended to protect the unscrupulous seller, that is, the seller who is responsible for the fraud. But, the banker must be sure of his ground before declining to pay. The nature of the fraud that the courts talk about is fraud of an "egregious nature as to vitiate the entire underlying transaction". It is fraud of the beneficiary, not the fraud of somebody else. If the bank detects with a minimal investigation the fraudulent action of the seller, the payment could be refused. The bank cannot be compelled to honour the credit in such cases. But it may be very difficult for the bank to take a decision on the alleged fraudulent action. In such cases, it would be proper for the bank to ask the buyer to approach the court for an injunction.
(emphasis supplied) Consequently the interim relief for stay of encashment of bank guarantee is declined.
MANMOHAN, J MARCH 23, 2015 js CS(OS) 809/2015 Page 12 of 12