Orissa High Court
Rail Vikash Nigam Ltd. (Rvnl) &Another vs Harish Chandra (India) Ltd. And Another on 16 January, 2013
Equivalent citations: AIR 2013 ORISSA 162, (2013) 1 CLR 725 (ORI), (2014) 2 BANKCAS 401, (2013) 125 ALLINDCAS 621 (ORI), 2013 (1) CLR 725, 2013 (3) ARBI LR 499, (2013) 1 ORISSA LR 423, (2013) 3 ARBILR 499, (2013) 115 CUT LT 694
Author: M.M. Das
Bench: M.M. Das
ORISSA HIGH COURT: CUTTACK.
ARBA No. 29 OF 2010
In the matter of an Appeal under Section 37 of the Arbitration &
Conciliation Act, 1996.
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Rail Vikash Nigam Ltd. (RVNL) &another ... Appellants
-Versus-
Harish Chandra (India) Ltd. and another ... Respondents.
For Appellants : M/s. R.K. Mohanty,
A.K. Mishra, H.M. Dash and
A.K. Sahoo.
For Respondents: M/s. M. Mohapatra,
L.N. Sahoo,
P.K. Routray,
S. Mohanty &
R.P. Kar
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Decided on 16 .01.2013
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PRESENT :
THE HONOURABLE SHRI JUSTICE M.M. DAS
M. M. DAS, J.This appeal under Section 37 of the Arbitration & Conciliation Act, 1996 (hereinafter referred to as „the Act‟) has been preferred by the appellants, i.e., Rail Vikash Nigam Ltd. („RVNL‟ in short), which is a Government of India Company, and another challenging the order dated 11.10.2010 passed by the learned District Judge, Khurda at Bhubaneswar. The impugned order has been passed in an application filed by the respondents 2 under Section 9 of the Act registered as ARBP No.109 of 2010. The respondents filed the said application under Section 9 of the Act with a prayer to direct the opposite parties 1 and 2 (appellants herein) not to encash the bank guarantees and not to take any coercive action against them.
2. The facts involved in brief are that a commercial contract was entered into between the appellants and the respondents on 23.08.2007 for construction of road bed including bridges and electrification in connection with the new B.G. Railway line between Haridaspur and Paradeep (82 K.M.) valuing Rs.276.35 crores. The appellants paid an advance of Rs.27,63,51,991/- (Rupees twenty seven crores, sixty three lakhs, nine hundred ninety one) against the advance bank guarantee. The work was to be completed by the respondent No.2 by 31.07.2009. It is alleged by the appellants that the respondents abandoned the contract on 10.06.2009, when, only 6.72% of the work was done. The appellant no.2, thereafter, by letter dated 30.09.2009, extended the time period for completion of contract at the request of the respondents. Repeated requests were made to the respondents to restart the work and a number of notices were issued in that regard. The appellants notified their claim to the tune of Rs.351.45 crores on account of failure of the respondents to complete the work and breach of contract. However, the respondents failed to resume the work, which they 3 abandoned. Ultimately, the appellants had to terminate the contract on 07.10.2010. The demand for encashment of the bank guarantees was made within the validity period of the bank guarantees. It may be mentioned that as per the terms of the contract, two bank guarantees were furnished by the respondents against the mobilization advance and towards performance. It is the case of the respondents that they mobilized huge manpower, machineries/equipments and constructed the site office. When they were ready to commence the work, the appellants failed to provide them with the land in question. The stretch of land where the work was proposed to be executed was cultivable land having standing crop on it and the villagers did not permit to execute any work on their land, for which they wrote several letters to the appellants to intervene in the matter and resolve the deadlock, but to no effect. After harvesting of the crops, the respondents could approach the site, but the villagers again did not allow them to work on the plea that compensation was not paid to them despite their correspondences made with the appellants. On issuance of a letter by the appellants for a show cause notice as per Clause - 15.1 of the General Condition of Contract, the respondents challenged the said notice in W.P. (C) No.9854 of 2009. This Court, while issuing notice to the opp. parties on 27.7.2009, passed the interim order to the following effect:
4"In the meantime, no coercive action shall be taken against the petitioners (respondents herein) and the bank guarantee shall not be encashed provided the petitioners (respondents) extend the bank guarantee fifteen days prior to its expiration".
It was the further case of the respondents that during the pendency of the writ application, the period of contract for completion of the work was extended till 30.05.2011, for which the writ application was disposed of for settlement of the dispute in terms of the agreement or by means of arbitration. Various disputes with regard to the execution of the work were raised by the respondents. As per the provisions of Clause - 20.2 of the General Condition of Contract, all disputes arising out of the contract were to be settled amicably, failing which the respondents can opt for appointment of arbitrator under Clause
- 20.3. On these facts, an application under Section 9 was filed by the respondents with a prayer as mentioned above.
3. The learned District Judge, taking note of the preliminary claim of the respondents amounting to Rs.72.63 crores and their final claim of about Rs.400 crores and the fact that the respondents have undertaken to go on extending the bank guarantee till the arbitration proceeding is over as well as taking note of the law as laid down by the apex Court in the cases of Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co., (2007)8 SCC 110, Adhunik Streels Ltd. v. Orissa Manganese and Minerals (P) Ltd., (2007)7 SCC 125 5 and in the case of Colgate Palmolive (India) Ltd. v. Hindustan Lever Ltd. AIR 1999 SC 3105, came to the conclusion in the impugned order that the power under Section 9 of the Act is not independent of the well known principles governing grant of an interim injunction that generally governs the court in this connection. The learned District Judge thereafter, approached the case, as if, the application was for injunction under Order - 39, Rules - 1 & 2 CPC and has attempted to find out as to whether there exists a prima facie case and the balance of convenience is in favour of the respondents, who were the petitioners before him and whether they will suffer irreparable injury if an order is not passed restraining the appellants (opposite parties before him) from invoking the bank guarantees.
4. It is by now well settled in law that the 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 irrecoverable one. The dispute between the beneficiary and the party at whose instance, the bank has given the guarantee is immaterial and has no consequence. The Supreme Court, in the case of BSES LTD. (Now Reliance Energy Ltd.) v. FENNER India Ltd. and another, (2006)2 SCC 728 has held that there are, however, two exceptions to the above rule. The first is when there is a clear fraud of which the bank has notice and a fraud of the 6 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.
5. In the case of Himadri Chemicals Industries Ltd. (supra), the Supreme Court summarized the principles for grant or refusal to grant injunction to restrain the enforcement of bank guarantee or the letter of credit in the following manner:-
"(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 or 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 7 irretrievable harm or injustice to one of the parties concerned."
6. It is, therefore, clear that though in an application under Section 9 of the Act, the broad principle of Order - 39, Rules - 1 & 2 CPC is applicable and required to be followed, but when it is one with regard to restraining a party from invoking an unconditional and irrevocable bank guarantee, the Court is required to examine meticulously as to whether there is a strong prima facie case made out with regard to the fraud of an egregious nature so as to vitiate the underlying transaction and also the Court is required to examine whether in case of non- grant of an order of injunction, the party applying, will suffer from such irreparable injury, which would be of the nature of irretrievable injury. The mere fact that the bank guarantee refers to the principal agreement, without referring to any specific clause in the Preamble of the deed of guarantee, does not make a guarantee furnished by the bank to be a conditional one. In absence of such strong prima facie case of fraud and irretrievable injury, the Court shall not restrain a party from invoking the bank guarantee as in such circumstances, the broad principles of Order - 39, Rules - 1 & 2 CPC will be inapplicable.
7. Keeping the above in view, this Court on examining the facts of the present case finds that a bare reading of the petition under Section 9 of the Act filed by the respondents 8 before the learned District Judge would go to show that there is absolutely no averment or allegation of fraud or irretrievable injustice/injury made therein. The pleadings also do not suggest that the respondents have come up with a case of any alleged fraud on the part of the appellants or with a case as to in which manner, if the appellants are not restrained from invoking the bank guarantees, the same would result in irretrievable harm or injustice to the respondents.
8. This Court, therefore, comes to the irresistible conclusion that the learned District Judge has misdirected himself in passing the impugned order restraining the appellants from invoking the bank guarantees by approaching the case in the parameters of the requirement of Order - 39, Rules - 1 & 2 CPC and not examining the case in the light of the judgments of the apex Court referred to above. Therefore, this Court has no hesitation to set aside the impugned order. Ordered accordingly.
7. In the result, the ARBA is allowed, but in the circumstances without cost.
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M.M. Das, J.
Orissa High Court, Cuttack.
January 16th , 2013/Subha.