Delhi High Court
Pete Hammond Power Solutions Pvt. Ltd vs Flowmore Ltd. & Anr on 3 May, 2017
Author: Rajiv Sahai Endlaw
Bench: Rajiv Sahai Endlaw
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of decision: 3rd May, 2017
+ CS(COMM) No.316/2017
PETE HAMMOND POWER SOLUTIONS PVT. LTD.... Plaintiff
Through: Mr. Y.P. Narula, Sr. Adv. with Mr.
Aniruddha Choudhury and Mr. Vyas
Kumar, Advs.
versus
FLOWMORE LTD. & ANR ..... Defendants
Through: Mr. Sandeep Sethi, Sr. Adv. with Mr.
Abhinav Mukerji, Mr. Siddharth Garg
and Ms. Bihu Sharma, Advs. for D-1.
Ms. Rakhi Banerjee and R. Taneja,
Advs. for D-2.
CORAM:
HON'BLE MR. JUSTICE RAJIV SAHAI ENDLAW
IA No.5363/2017 (of the plaintiff under Order XXXIX Rules 1&2 CPC).
1. The plaintiff, in this suit for recovery of Rs.3,06,47,668.04p and for
permanent injunction restraining the defendant no.1 from invoking the
performance Bank Guarantees (BG) and restraining the defendant no.2 J.P.
Morgan Chase Bank, N.A. Trade Services (Bank) from making any payment
to the defendant no.1 under the said BG, seeks interim injunction to the
same effect.
2. The suit was entertained and while issuing summons of the suit /
notice of the application, vide ex parte ad interim order dated 1st May, 2017,
subject to the condition that each of the 50 BGs stated to have been
furnished by the defendant no.2 Bank at the instance of the plaintiff in
favour of the defendant no.1 being kept alive and accepting the undertaking
CS(COMM) 316/2017 Page 1 of 13
of the plaintiff that the plaintiff, in the event of not being granted interim
injunction, would bear the actual legal costs of the defendant no.1, payment
under the BG was stayed till today.
3. Though the report of service of summons / notice is awaited but the
counsel for the defendant no.1 and the counsel for the defendant no.2 Bank
appear. The senior counsel for the plaintiff and the senior counsel for the
defendant no.1 have been heard on the application for interim relief.
4. On 1st May, 2017, on reading of page 56 of the plaintiff‟s documents
to which the senior counsel for the plaintiff had drawn attention (and stated
that the other BGs are in identical language), it was observed that the BG
appeared to be unconditional; it was further observed that in view of the
settled law it appeared that no case for grant of ex parte injunction was made
out. However on the undertaking of the plaintiff through counsel that the
plaintiff in the event of not being granted interim injunction would bear the
actual legal costs of the defendant no.1, ex parte stay as aforesaid was
granted.
5. In the aforesaid backdrop, the senior counsel for the plaintiff has
drawn attention to Hindustan Construction Co. Ltd. Vs. State of Bihar
(1999) 8 SCC 436 where, after examining a BG with the following
language:
"In accordance with the provisions of the conditions of
contract, clause 9 (advance mobilisation loan) of the
above-mentioned contract, Hindustan Construction Co.
Ltd., incorporated in Bombay under the Companies Act,
1956, and having their registered office at Construction
CS(COMM) 316/2017 Page 2 of 13
House, Walchand Hirachand Marg, Ballard Estate,
Bombay - 400 038 (hereinafter called `the contractor')
shall deposit with the Executive Engineer, Kharkai Dam
Division II, Icha, Chaliama, Post Kesargarhia, District
Singhbhum, Bihar, a bank guarantee to guarantee their
proper and faithful performance under the said clause of
the contract in an amount of Rs. 10,00,000 (Rupees ten
lakhs only).
We, State bank of India, incorporated under the State
Bank of India Act, 1955, and having one of our branches
at Nyayamurti C.N. Vaidya Marg, Fort, Bombay - 400 023
(hereinafter referred to as `the said Bank'), as instructed
by the contractor, agree unconditionally and irrevocably
to guarantee as primary obligator and not as surety
merely, the payment of the Executive Engineer, Kharkai
Dam Division II, Icha, Chaliama, Post Kesargarhia,
District Singhhbum, Bihar, on his first demand without
whatsoever right of objection on our part and without his
first claim to the contractor, in the amount not exceeding
Rs. 10,00,000 (Rupees ten lakhs only) in the event that the
obligations expressed in the said clause of the above-
mentioned contract have not been fulfilled by the
contractor giving the right of claim to the employer for
recovery of the whole or part of the advance mobilisation
loan from the contractor under the contract."
(emphasis in original)
it was held that (i) though the guarantee no doubt uses the expression
"agree unconditionally and irrevocably" to guarantee payment but these
expressions were immediately qualified by "in the event that the obligations
expressed in the said clause of the above-mentioned contract have not been
fulfilled by the contractor giving the right of claim to the employer for
recovery of the whole or part of the advance mobilisation loan from the
CS(COMM) 316/2017 Page 3 of 13
contractor under the contract" and this condition clearly referred to the
original contract and postulated that if obligations expressed in the original
contract were not fulfilled giving to the defendants the right to claim
recovery of whole or part of the "advance mobilisation loan" then the bank
would pay the amount due under the guarantee; and, (ii) by referring
specifically to clause 9, the bank has qualified its liability to pay the amount
covered by the guarantee relating to "advance mobilisation loan" only if the
obligations under the contract were not fulfilled.
6. The senior counsel for the plaintiff has also drawn attention to Vinitec
Electronics Private Ltd. Vs. HCL Infosystems Ltd. (2008) 1 SCC 544, the
relevant clause of the BG under consideration wherein was as under:-
"Therefore, we, the Bank, hereby affirm that we are
guarantors and responsible on behalf of the supplier up to
a total of Rs.16,81,238.50 (Rupees sixteen lakhs eighty-one
thousand two hundred thirty-eight and paise fifty only) and
we undertake to pay any sum or sums within the limit of
Rs.16,81,238.50 (Rupees sixteen lakhs eighty-one thousand
two hundred thirty-eight and paise fifty only) as aforesaid
upon receipt of written demand from the purchaser and
Company within the validity of this bank guarantee
establishing the supplier to be in default for the
performance of their warranty obligations under the
contract."
(emphasis added)
and it was held that the bank had undertaken to pay provided it was
„established‟ that the supplier was in default of the performance of its
obligations under the contract, making it abundantly clear that what was
furnished was a conditional BG and the bankers were liable to pay only upon
CS(COMM) 316/2017 Page 4 of 13
establishing the fact that the supplier was in default for the performance of
its warranty obligations under the contract.
7. The senior counsel for the plaintiff next referred to the language of the
BG subject matter of this suit and relevant part whereof is as under:-
"1) In pursuance of the aforesaid purchase / work
order and in consideration of promises, the bank hereby
guarantees to the owner due observance and fulfillment by
the supplier of the terms and conditions of the said
purchase / work order relating to the said work and of the
performance warranty which is an integral part of the said
purchase / work order and agrees and undertakes that if
the contractor fails to observe and fulfill the terms of the
said purchase order and / or performance warranty, then
the bank shall immediately, without demur and without
reference to supplier, pay to the owner on receipt of
written demand such sum or sums of money to the extent of
Rs.3,57,500/- (Rupees three lakh fifty seven thousand five
hundred only) which is 10% of purchase / contract value of
the said purchase / work order, on account of losses and
damages suffered by the owner as may be claimed by the
owner by reason of such non-observance and non
fulfilment including but not restricted to bad workmanship,
usage of sub-standard material, repeated rectification of
defect or any other defect or deficiency which lead to sub-
standard performance by the suppliers / contractors as
aforesaid and shall also indemnify the owner against all
losses and damages which may be suffered by the owner as
aforesaid and against all costs, charges and expenses
which may be incurred by the owner.
2) We, the Bank, do hereby undertake to pay Rs.3,57,500/-
(Rupees three lakh fifty seven thousand five hundred only)
under the guarantee without any / demur or reference to
CS(COMM) 316/2017 Page 5 of 13
supplier or delay, merely on receipt of a written demand
from the owner any such demand made on the bank by the
owner shall be conclusive as regards the amount due and
payable by the bank under this guarantee. The bank
guarantee shall be completely at the disposal of the owner
and we are bound ourselves with all directions given by
owner regarding this bank guarantee. However,
notwithstanding anything said above our liability under
this guarantee shall be restricted to an amount not
exceeding Rs.3,57,500/- (Rupees three lakh fifty seven
thousand five hundred only).
3) We, the bank, undertake to pay the owner any money, so
demanded not withstanding any dispute or disputes raised
by contractor in any suit or proceeding pending before any
court or tribunal or arbitrators or any other authority etc.
relating thereto our liability under these presents being
absolute, unequivocal and unconditional."
and contended (i) that the BG with which this suit is concerned also
refers to the purchase order; (ii) that the BG is stated to be in consideration
of the purchase order: (iii) thereby all the terms and conditions of the
purchase order are incorporated in the BG; (iv) that defendant no.2 Bank has
guaranteed to the defendant no.1 due observance and fulfilment by the
defendant no.1 of the terms and conditions of the purchase order; (v) that
thus payment under the BG cannot be made till it is determined whether the
plaintiff has fulfilled its part of the terms and conditions or not; (vi) that
there is no default or breach on the part of the plaintiff; (vii) that the
defendant no.1 has till date not made any grievance to the plaintiff about the
performance of the plaintiff and the defendant no.1 cannot be permitted to
straightway invoke the BG; and, (viii) the defendant no.1 while invoking the
BG also has not made out a case for satisfying the defendant no.2 Bank of
CS(COMM) 316/2017 Page 6 of 13
the plaintiff having failed to observe and fulfil the terms and conditions of
the purchase order and of the performance warranty.
8. Besides the aforesaid, the senior counsel for the plaintiff has argued
(i) that the financial condition of the defendant No.1 is not good; (ii) that
when the summons / notice issued were attempted to be served, it was
realised that the address of the registered office of the defendant no.1 at
Mohan Co-operative Industrial Estate is a vacant plot of land with only
some temporary structure thereon; (iii) that Company Petition No.592/2015
of this Court filed by Shree Vinayak Iron Works is pending for winding up
of the defendant no.1 for non-payment of Rs.58,44,954.96p and
Rs.1,14,606.96p/-; a copy of the orders dated 19th August, 2015 and 8th
September, 2016 therein are handed over in this Court; and, (iv) that owing
to the precarious financial health of the defendant no.1, once the defendant
no.1 is permitted to realise the monies under the BG, the plaintiff will be
unable to recover back the same.
9. I have enquired from the senior counsel for the plaintiff as to how
similarity is found in the language of the BGs subject matter of the present
suit and the BG subject matter of Hindustan Construction Co. Ltd. and
Vinitec Electronics Private Ltd. supra.
10. The senior counsel for the plaintiff states that the differences in
language are minor, else the purport is the same.
11. I have further enquired from the senior counsel for the plaintiff,
whether not it is incumbent for a BG to specify the consideration for which
it is being furnished and whether not in stating which consideration
necessarily has to mention the principal contract between the party
CS(COMM) 316/2017 Page 7 of 13
furnishing BG and the beneficiary thereof; without the consideration being
mentioned, the BG would be liable to be challenged on that ground alone.
12. Per contra, the senior counsel for the defendant no.1 (i) has handed
over copies of the correspondence exchanged between the defendant no.1 on
the one hand and Odisha Power Transmission Corporation Limited being the
principal employer of the subject project (and of which defendant no.1 is the
contractor and the plaintiff is the sub-contractor) and Wapcos Limited being
the Project Management Consultant of the project, to contend that there have
been complaints with respect to the transformers supplied by the plaintiff
and performance thereof; (ii) has handed over e-mails in this regard of the
defendant no.1 to the plaintiff; (iii) has drawn attention to page 37 of
plaintiff‟s documents also containing an e-mail dated 24th April, 2017 in this
regard; (iv) has argued that it is well established that the only grounds on
which the courts can interfere with a unconditional irrevocable BG is fraud
of an egregious nature nullifying the underlying transaction and the plaintiff,
on payment under the BG, being placed in a irretrievable passion, whereby it
is not possible for the plaintiff to recover the monies, taken under the BG;
(v) has argued that the language of the BG subject matter of Hindustan
Construction Co. Ltd. and Vinitec Electronics Private Ltd. and the BG
subject matter of the present suit is materially different; (vi) has drawn
attention to Mahatama Gandhi Sahakra Sakkare Karkhane Vs. National
Heavy Engg. Coop. Ltd. (2007) 6 SCC 470 holding that in Hindustan
Construction Co. Ltd. clause (9) of the principal contract between the
parties therein was expressly mentioned and owing thereto it was held that
the amount covered by the BG became payable and the BG could be
CS(COMM) 316/2017 Page 8 of 13
invoked only in the circumstances referred to in clause (9) of the principal
contract and it was further held that mere fact that the BG refers to the
principal agreement without referring to any specific clause in the preamble
of the deed of guarantee does not make the guarantee furnished by the bank
a conditional one; (vii) it was argued that the BG subject matter of the
present suit is more akin to the BG in Mahatama Gandhi Sahakra Sakkare
Karkhane supra than to the BGs in the judgments cited by the senior
counsel for the plaintiff; (viii) has argued that in the plaint, no plea of any
irretrievable injustice has been taken and today in the court for the first time
winding up petition preferred against the defendant no.1 is referred to; (ix)
has argued that mere pendency of a winding up petition does not lead to the
inference of the defendant No.1 being unable to pay; and, (x) has invited
reference to U.P. State Sugar Corporation Vs. Sumac International Ltd.
(1997) 1 SCC 568 and argued that the Supreme Court has held no such case
of irretrievability is made out even when the defendant was a sick company
under the Sick Industrial Companies (Special Provisions) Act, 1985.
13. I have however drawn attention of the senior counsel for the
defendant no.1 to para 18 of U.P. State Sugar Corporation supra where the
undertaking of the appellant company to earmark the amounts realised from
the BG for the purposes of recovery of claims if any which the respondent
may ultimately be found to be entitled to recover from the appellant and have enquired whether it was in view thereof that the Supreme Court, notwithstanding the appellant company before it being sick, had not interfered with the BG.
CS(COMM) 316/2017 Page 9 of 1314. The senior counsel for the defendant no.1 responds that it was by way of concession; else the ratio of the judgment is that the mere fact that the company invoking the BG was before the Board for Industrial & Financial Reconstruction (BIFR) is no reason to hold that irretrievable injustice would be caused by encashment of the BG.
15. The senior counsel for the plaintiff in rejoinder argued (i) that the BG in the present case refers to the purchase order and is thus not unconditional;
(ii) that under the guarantee in the present case also the defendant no.2 Bank agreed to pay only owing to non-fulfilment of the terms and conditions by the plaintiff and the defendant no.2 Bank, without being satisfied in this regard, cannot pay; (iii) that the balance of convenience is in favour of the injunction being granted; (iv) that the invocation is mala fide; and, (v) attention in this regard is drawn to page 25 of the plaintiff‟s documents and it is argued that the defendant no.1 on 17th June, 2016 had agreed to release the payment to the plaintiff on receipt of payment from Odisha Power Transmission Corporation Limited.
16. I have considered the rival contentions.
17. No merit is found in the contention of the senior counsel for the plaintiff of the BGs subject matter of this suit, on an interpretation of language thereof, being conditional. Rather, it appears that if on an interpretation of the language of the subject BG it is held to be conditional, no guarantee can be held to be unconditional. The defendant no.2 bank under the subject guarantee has agreed to "immediately, without demur and without reference to" the plaintiff, pay to the defendant no.1 "on receipt of written demand...... on account of losses and damages suffered" by the CS(COMM) 316/2017 Page 10 of 13 defendant no.1, "as may be claimed" by the defendant no.1. The said language is materially different from the language in Hindustan Construction Co. Ltd. or in Vinitec Electronics Private Ltd. Under the subject BG, the defendant no.2 bank has agreed to be bound by the "claim" of the defendant no.1, as distinct from Hindustan Construction Co. Ltd. wherein the bank had agreed to pay "in the event that ............", making the guarantee therein a conditional one. The promise by the defendant no.2 bank in the subject BG is not qualified by any such words. Similarly, the bank in Vinitec Electronics Private Ltd. had agreed to pay on the party invoking the BG "establishing" the party furnishing the BG being in default. I reiterate, here, as distinct from the beneficiary being required to „establish‟, the beneficiary is only required to „claim‟ and with which claim the defendant no.2 bank has agreed to be bound. Not only so, the defendant no.2 bank has further agreed that the demand made by the defendant no.1 "shall be conclusive as regards the amount due and payable ....... under the guarantee"
and agreed to by "bound.... with all directions given" by the defendant no.1 regarding guarantee. The BG furnished by the defendant no.2 bank, at the instance of the plaintiff, in favour of defendant no.1 is thus clearly an unconditional one.
18. Once BG is held to be unconditional, the law laid down by the Supreme Court in plethora of case law as discussed by me in Ashoka Paper Products Vs. Government of India 2015 SCC OnLine Del 14063 and order dated 20th December, 2016 in CS(Comm) No.1327/2016 titled Universal Energies Ltd. Vs. Indraprastha Gas Limited and need to reiterate which is not felt, would kick in and the court would not be entitled to interfere CS(COMM) 316/2017 Page 11 of 13 therein. A three judges Bench of the Supreme Court in Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engineering Works (P) Ltd (1997) 6 SCC 450 lamented that the High Courts do not consider it necessary to refer to various judicial pronouncements of the Supreme Court in which principles which have to be followed while examining an application for grant of interim injunction qua bank guarantees have been clearly laid down.
19. With respect to the only other ground urged of irretrievable injustice also, I am afraid that in the absence of any pleadings or documents to show that the defendant no.1 is not possessed of assets sufficient to meet its debts, on the basis of oral arguments and documents handed over during the hearing, the said plea cannot be entertained.
20. The plaintiff has thus failed to make out any case for interfering with the subject BG.
21. There is no merit in the application.
22. Dismissed.
CS(COMM) No.316/2017.
23. The plaintiff to within two weeks hereof, in accordance with the undertaking given on 1st May, 2017, pay costs of today‟s hearing, assessed at Rs.2,50,000/-, to the counsel for the defendant no.1, as a condition for proceeding further with the suit.
24. Written statement be filed within four weeks.
25. Replication within further six weeks thereafter.
26. The parties to file affidavits of admission / denial of each other‟s documents within further two weeks thereafter.
CS(COMM) 316/2017 Page 12 of 1327. List on 23rd August, 2017 for framing of issues if any.
RAJIV SAHAI ENDLAW, J MAY 03, 2017 „pp‟..
CS(COMM) 316/2017 Page 13 of 13