Bombay High Court
Reliance Infrastructure Ltd vs Nlc India Ltd. And 3 Ors on 22 March, 2022
Bench: S.J. Kathawalla, Milind N. Jadhav
KANCHAN
Kanchan P Dhuri 1 / 46 IAL-31437-2021.odt
PRASHANT
DHURI
Digitally signed by
KANCHAN
PRASHANT DHURI
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
Date: 2022.03.22
ORDINARY ORIGINAL CIVIL JURISDICTION
20:14:17 +0530
IN ITS COMMERCIAL DIVISION
INTERIM APPLICATION (L) NO. 31437 OF 2021
IN
COMMERCIAL APPEAL (L) NO.31435 OF 2021
IN
INTERIM APPLICATION (L) NO. 30927 OF 2021
IN
COMMERCIAL SUIT (L) NO. 30924 OF 2021
Reliance Infrastructure Limited ... Applicant/Appellant
In the matter between:
Reliance Infrastructure Limited Reliance Center,
19, Walchand Hirachand Marg,
Ballard Estate, Mumbai-400 001. ... Appellant/Orig. Plaintiff
Versus
1 NLC India Limited,
Having address at Corporate Contracts
Division Block-1, Neyveli-607 801,
Tamil Nadu.
2 State Bank of India having address at
Neville House, J.N. Heredia Marg,
Ballard Estate, Mumbai-400 001.
3 Canara Bank, having address at
Specialised Prime Corporate Branch,
Maker Chambers III, 7th Floor,
Nariman Point, Mumbai-400 021.
Kanchan P Dhuri 2 / 46 IAL-31437-2021.odt
4 IDBI Bank, having address at 4th Floor,
Mafatlal Centre, Nariman Point,
Mumbai-400 021 ... Respondents/Orig.Defendants
.........
Shri Ravi Kadam, Senior Advocate alongwith Shri Prateek Sakseria, Shri Sarosh
Bharucha, Shri Anuj Desai, Shri D.J. Kakalia, Ms. Bhavna Singh and Shri Paresh
Patkar, instructed by Mulla & Mulla & Craige Blunt & Caroe, for the
Appellant/Applicant-Orig. Plaintiff.
Shri V.R. Dhond, Senior Advocate alongwith Ms. Vinodini Srinivasan, Shri Dharmesh
Jain and Ms. Roshani Naik instructed by Shri Anil Agarwal, for Respondent No.1.
Shri Prakash Shinde alongwith Ms. Niyati Merchant, instructed by MDP & Partners,
for Respondent No.4.
.........
CORAM : S.J. KATHAWALLA &
MILIND N. JADHAV, JJ.
RESERVED ON : 9th MARCH 2022
PRONOUNCED ON: 22nd MARCH 2022
JUDGMENT (Per: S.J. KATHAWALLA & MILIND N. JADHAV, JJ.)
1. The present Appeal was filed by the Appellant to challenge the Order dated 29th December 2021 passed by the Learned Single Judge rejecting the Appellant's Interim Application (L) No. 30927 of 2021 ("Interim Application"). The Appellant/ Original Plaintiff had sought a restraint against Respondent No. l from encashing the mobilization Advance Bank Guarantees issued by Respondent Nos.2 to 4 Banks in favour of the Respondent No. 1, at the Appellant's behest, under a Letter of Award dated 21st November 2016. The Ld. Single Judge before whom the ad-interim Kanchan P Dhuri 3 / 46 IAL-31437-2021.odt application was moved during Court vacation, refused to grant any reliefs. No reasons were given in support of Order refusing grant of ad-interim reliefs.
2. Since no reasons were given by the Learned Single Judge at the time of rejecting the Application seeking ad-interim reliefs, as recorded in our Order dated 17 th January, 2022, the parties agreed to argue the Interim Application itself before us, after which the Appeal was heard on several dates.
3. Respondent No. 1 had, in the year 2015, floated a tender inviting bids for setting up two Thermal Power Stations comprising one unit of capacity 250 MW at Bithnok, Rajasthan, India ("BTPP") and another unit of 250 MW at Barsingsar, Rajasthan ("BTPSE"). The Appellant emerged as a successful bidder.
4. On 21st November, 2016, Respondent No.1 issued a Letter of Award ("LOA") to the Appellant for a total contract price of INR. 2302,36,80,813/- plus USD 20,48,58,356. The contract price was revised on 24th April, 2017 to INR 2279,07,02,306/- plus USD 21,11,56,205/-.
5. Clauses 6 and 10 of the LOA provide that an advance shall be extended to the Appellant subject to the Appellant providing Bank Guarantees, for 110% of the amount. Respondent No.1 extended an advance of INR 261,21,09,209/- to the Appellant against twelve (12) Advance Bank Guarantees furnished by Respondent Nos. 2 to 4. The Bank Guarantees were for the aggregate sum of INR 148,98,24,966/- and USD 20,454,402/-.
Kanchan P Dhuri 4 / 46 IAL-31437-2021.odt
6. Respondent No.1 terminated the LOA on 6th September 2021 (with effect from 6th November 2021) citing "unforeseen circumstances" and "frustration" as the reasons for termination.
7. What happened between these two dates, namely 21st November 2016 and 6th September 2021 is seriously disputed. However, we are not required to examine or decide the merits of this dispute, save and except, to the extent it is relevant for the issue before us.
8. Briefly put, the Appellant and Respondent No.1 are "at issue" on the following broad points:
9. The Appellant contends that (i) pursuant to the LOA, it mobilised men and machinery on site; (ii) while it was advised by Respondent No.1 that the Project was put on hold, it was never asked to demobilise them; (iii) half-hearted instructions not to incur costs were given; (iv) this was not a mandate to demobilise; (v) it could not (and therefore did not) demobilise; (vi) this continued mobilisation resulted in costs and expenses; (vii) being entitled to, it has appropriated this against the Advance; (viii) there is now no Advance left. Instead it has to recover damages; and
(ix) in these circumstances, Respondent No.1 cannot invoke the Advance Bank Guarantees. It relies on the fact that the LOA was terminated for reasons other than breach. No invocation citing "breach", parrot-like, in an invocation letter ought to be accepted.
Kanchan P Dhuri 5 / 46 IAL-31437-2021.odt
10. Respondent No.1, on the other hand, has controverted the Appellant's case and asserted that (i) it had addressed repeated communications to the Appellant, conveying in plain, explicit and unequivocal terms that "all project activities shall be put on hold"; 'no activities shall be carried out'; "stop the cost and expenditure" and "not to incur any sort of expenditure" (ii) it was made clear to the Appellant that Respondent No.1 would not be liable to pay any amount; (iii) the Appellant disregarded these and now claims to have run up huge bills; (iv) Respondent No.1 is not liable to pay the same; (v) Respondent No.1 scrutinised the bills/ documents submitted by the Appellant and has found only a claim for INR 29,97,50,000/- and INR 3,24,30,778/- as justified, out of a total claim of INR 1040,06,54,503/- (iv) Respondent No.1 has not invoked the Advance Bank Guarantees for this justified amount; (viii) Respondent No.1 is entitled to invoke the Advance Bank Guarantees for the balance amount. Respondent No.1 also asserted that it has acted fairly and returned the Performance Bank Guarantees. The action of the Appellant in not returning the Advance amount itself constitutes a breach. Infact, identical Guarantees were invoked in December 2020 and payment made.
11. We are in the present proceedings not required to examine and comment upon the merits of the rival contentions and particularly whether the Appellant is entitled to claim (and if so how much) from Respondent No.1.
12. In the backdrop of the aforesaid, on 30th December 2020, initially, three Kanchan P Dhuri 6 / 46 IAL-31437-2021.odt of the twelve Bank Guarantees in the sum of USD 155,34,688/- were encashed.
13. Respondent No.1 next issued Invocation Letters dated 24 th December, 2021 invoking the remaining Bank Guarantees as enumerated therein. The Appellant filed the captioned Suit before this Court and also moved the matter for urgent reliefs.
14. Respondent No.1 addressed further Invocation Letters dated 27th December 2021. On 28th December 2021, Respondent No.2 [State Bank of India] made payment under the Bank Guarantees issued by it to the tune of USD 49,19,714.
15. After hearing the parties, the Single Judge, by his Order dated 29 th December, 2021, dismissed the Interim Application. On Appeal, by Order dated 30 th December 2021, we directed the parties to maintain status quo qua the subject Bank guarantees, which Order was extended from time to time. On our orders, the subject Bank Guarantees issued by Respondent No. 4 [IDBI bank] were also extended from time to time.
16. The Appellant has advanced the following three main contentions before us:
1.i That the subject Bank Guarantees are conditional, and are payable only upon a breach of contract by the Appellant. The Appellant has submitted that this precondition has not been met.
1.ii That the Bank Guarantees have been invoked without complying with a mandatory provision in the underlying contract.
1.iii That the invocation is not in terms of the Bank Guarantees.
Kanchan P Dhuri 7 / 46 IAL-31437-2021.odt
17. Since a lot turns on the question of whether or not the Bank Guarantees are conditional, we will first decide Whether the Bank Guarantees are conditional.
18. In order to appreciate the submissions of the parties, it is necessary to first consider the terms of the Bank Guarantees themselves. All seven Bank Guarantees at hand are identical. The relevant clauses of one such Advance Bank Guarantee are reproduced hereunder:
"2. According to the said Contract, the Purchaser has undertaken to make an advance payment of Rs. 27,75,52,323/- being the payment of the 1st Installment of 5% for Ex-Works Supplies of Plant and Equipment against Issuance of an Advance Payment Guarantee by a Bank for a value of 110% of Advance Amount.
3. For this Advance Payment, we, the undersigned, IDBI Bank Limited, a company incorporated under the Companies Act, 1956 and also a Banking Company within the meaning of Section 5(c) of the Banking Regulation Act, 1949, having its registered office at ..hereby guarantee to the effect that we irrevocably undertake to pay the PURCHASER merely on demand and without any previous notice and without any demur and without recourse to the CONTRACTOR and without referring to any other source, any and all monies payable by the CONTRACTOR towards the advance or part thereof paid by the PURCHASER, but not exceeding Rs. 30,53,07,555/-... provided the PURCHASER advices us that the CONTRACTOR has failed to fulfil his contractual obligations stipulated in the said Contract. Any such demand made by the Purchaser on the Bank shall be conclusive and binding, absolute and unequivocal notwithstanding any difference between the PURCHASER and the CONTRACTOR or any dispute or disputes raised/ pending before any Court, Tribunal, Arbitrator or any other authority.
8. We the Bank further agrees that the decision of the PURCHASER as to the failure on the part of the Kanchan P Dhuri 8 / 46 IAL-31437-2021.odt CONTRACTOR to fulfil the contractual obligations stipulated in the said Contract and/or the amount payable by the Bank to the PURCHASER shall be final, conclusive and binding."
(Emphasis supplied)
19. Shri Ravi Kadam, the Learned Senior Advocate appearing for the Appellant submitted that all the Bank Guarantees are conditional. Shri Kadam drew our attention to the words "provided the PURCHASER advices us that the CONTRACTOR has failed to fulfil his contractual obligations stipulated in the said Contract" in Clause 3 above and contended that:
a.i the terms of the Advance Bank Guarantees contain a condition which was required to be fulfilled to enable the bank to encash the said Bank Guarantees. a.ii such condition required a breach on the part of the Appellant of a contractual stipulation. Additionally, the condition contained in the subject Advance Bank Guarantees required the Respondent No. I to advise the banks of the breach committed by the Appellant of its contractual stipulations. a.iii the Appellant has not committed any breach of any contractual stipulation.
Respondent No.1 has at no point alleged that the Appellant has failed to fulfil its obligations under the LOA or addressed any correspondence to this effect. Respondent No.1 had itself put the project on hold and eventually terminated it for "unforeseen reasons" and not on account of any breach by the Appellant. a.iv thus, the condition underlying the Bank Guarantee was never met. a.v that for all intents and purposes, the terms of the Bank Guarantees are similar to the clause considered in the case of Hindustan Construction Co Ltd v. State of Bihar1, where a clause stating that the Guarantee is payable in the event the 1 (1999) 8 SCC 436 Kanchan P Dhuri 9 / 46 IAL-31437-2021.odt obligations expressed in a particular clause of the contract were not fulfilled, was held to be conditional.
20. In response, Shri Venkatesh Dhond, the Learned Senior Advocate appearing for Respondent No.1, made the following submissions:
(i) That a plain reading of the terms of the Bank Guarantees, read as a whole, make it clear that they are absolute and unconditional.
(ii) Clause 3 of the Bank Guarantees makes it clear that they are payable "merely on demand"; " without any demur"; "without recourse to the CONTRACTOR" and "without referring to any other source". Further, Clause 3 states that the demand by Respondent No.1 is to be honoured "notwithstanding any difference between the PURCHASER and the CONTRACTOR or any dispute or disputes raised/ pending before any Court, Tribunal, Arbitrator or any other authority" . Clause 8 also makes it manifest that that any decision of Respondent No.1 as to the failure of the Appellant to fulfil its contractual obligations and/or as to the amount payable by the Bank is final, conclusive and binding. Read together, these Clauses make it express that the question of whether or not there is a breach on the part of the Appellant cannot be looked into by the Bank. The inescapable conclusion, therefore, is that the Bank Guarantees are unconditional.
(iii) The words "provided the PURCHASER advices us that the CONTRACTOR has failed to fulfil his contractual obligations stipulated in the said Contract" do not, by any stretch make the Bank Guarantees conditional. Those words only prescribe what the invocation must state. They merely prescribe a form in which the invocation of the Bank Guarantees has to be made. Typically, a Bank guarantee is Kanchan P Dhuri 10 / 46 IAL-31437-2021.odt paid on an invocation or demand. A clause which prescribes what words this demand must contain, does not make it conditional. To hold so would be to make almost every (unconditional) Bank Guarantee conditional.
(iv) Reliance was placed on the judgments of the Apex Court in Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corpn. Ltd2; Mahatma Gandhi Sahakra Sakkare Karkhane v. National Heavy Engg. Coop. Ltd. 3 and Reliance Salt Ltd. v. Cosmos Enterprises,4 . Reliance was also placed on the judgment of this Court in Felgeura Gruas v. Tuticorin Coal Terminal Pvt. Ltd 5 in support of the proposition that Bank Guarantee cannot be said to be conditional merely because it may contain a clause requiring the beneficiary to advise or state that it is being invoked on account of a breach of the underlying contract.
(v) That it is well settled law that a Bank Guarantee is an entirely independent contract, unqualified by the underlying transaction. Therefore, the merits of the disputes between the Appellant and Respondent No.1, are not relevant to the present issue concerning the validity of the Bank Guarantee invocation.
21. A holistic reading of Clauses 3 and 8 is essential to arrive at a decision as to whether the Bank Guarantees are conditional or unconditional. Clause 3 of the Bank Guarantee provides that :
(i) It is payable merely on demand, without any previous notice and without any demur and without recourse to the Appellant.
(ii) It provides that the Bank may not refer to any other source.
2 (1996) 5 SCC 450 3 (2007) 6 SCC 470 4 (2006) 13 SCC 599 5 2018 SCC OnLine Bom 33 Kanchan P Dhuri 11 / 46 IAL-31437-2021.odt
(iii) While the Bank Guarantee requires Respondent No.1 to advice the Bank that the Appellant has failed to fulfil his contractual obligation stipulated in the Contract, it immediately adds that any demand to that effect shall be conclusive, binding, absolute and unequivocal, notwithstanding any difference between the Appellant and Respondent No.1.
22. Further, Clause 8 of the Bank Guarantee makes it clear that "Bank further agrees that the decision of the PURCHASER as to the failure on the part of the CONTRACTOR to fulfil the contractual obligations stipulated in the said Contract and/or the amount payable by the Bank to the PURCHASER shall be final, conclusive and binding".
23. In the face of such language, we reject the contention that the Bank Guarantee was conditional. If we were to accept such a contention, then the natural corollary would be that the Bank is required or entitled to independently examine the record and satisfy itself on whether or not the Appellant is in breach of the underlying contract before making payment under the Bank Guarantee. The apparent intent of the Bank Guarantees is to avoid precisely that outcome. The Bank Guarantees make it clear that the Bank is not entitled to look behind Respondent No.1's advice and inquire into whether the Appellant has actually committed any breach. The purpose of the Bank Guarantees is therefore to eliminate any discretion that the Bank may lay claim to and not to empower the Bank to act as an arbiter of contractual disputes between the Kanchan P Dhuri 12 / 46 IAL-31437-2021.odt Appellant and Respondent No.1. If the interpretation put forward by the Appellant is accepted, a bulk of the language in Clauses 3 and 8 of the Bank Guarantees will be rendered completely redundant and otiose.
24. The words ""provided the PURCHASER advices us that the CONTRACTOR has failed to fulfil his contractual obligations stipulated in the said Contract" merely require Respondent No.1 to advice the Bank that the Appellant has failed to fulfil its contractual obligation. That advice is final and conclusive and beyond question by the Bank. This, is therefore, a clause that states that the demand or invocation of the Bank Guarantee has to be in a specific form. The clause nowhere states that the Bank is not obligated to pay unless it is satisfied, on an objective assessment of the record, that the Appellant has actually failed to fulfil his contractual obligations. As we have observed, all the other clauses of the Bank Guarantees in fact state to the contrary.
25. In view of the express language of the Bank Guarantees, which makes it clear that the Respondent No.1's decision as to whether the Appellant has failed to fulfil its contractual obligations is final and conclusive, we hold that the Bank Guarantees are unconditional.
26. We are fortified in our view by the decision of the Supreme Court in the case of Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corpn. Ltd. 6 6 (1996) 5 SCC 450 Kanchan P Dhuri 13 / 46 IAL-31437-2021.odt where a similar issue of interpretation had arisen before a Bench of three Judges of the Supreme Court of India. The relevant portions of the Bank Guarantee in that case were extracted by the Supreme Court in Paragraph 2 of its judgment:
"2. Admittedly, the bank guarantee given by the UCO Bank on behalf of the petitioner reads as under:
"On production of a bank guarantee for the above principal amount and interest due thereon, we, UCO Bank, 5, Parliament Street, New Delhi, (hereinafter referred to as 'the Bank') at the request of Ansal Engineering Projects Limited Contractor(s) do hereby undertake to pay to the Corporation an amount not exceeding Rs 57,57,970 plus interest as aforesaid against any loss or damage caused to be suffered or would be caused to or suffered by the Corporation by reason of any breach by the said Contractor(s) of any of the terms or conditions contained in the said agreement.
We, UCO Bank, 5, Parliament Street, New Delhi do hereby undertake to pay the amount due and payable under this guarantee without any demur, merely on a demand from the Corporation stating that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered by the Corporation by reason of breach by the said Contractor(s) of any of the terms or conditions contained in the said agreement or by reason of the Contractor(s) failure to perform the said agreement. Any such demand made on the bank shall be conclusive as regards the amount due and payable by the bank under this guarantee. However, our liability under this guarantee shall be restricted to an amount not exceeding Rs 57,57,970 plus interest due on the outstanding balance of mobilisation advance @ 18% p.a. Kanchan P Dhuri 14 / 46 IAL-31437-2021.odt We undertake to pay to the Corporation money so demanded notwithstanding any dispute or disputes raised by the Contractor(s)/Supplier(s) in any suit or proceeding pending before any court or tribunal relating thereto. Our liability under this present being absolute and unequivocal."
27. After considering the aforesaid clause, the Supreme Court in Ansal Engineering (supra) held that the Bank Guarantee in question was unconditional:
"6. A conjoint reading of the bank guarantee and the letter of invocation demanding payment of amount due and payable by the petitioner would show that the first respondent had specified and quantified in terms of the bank guarantee a total sum with interest due thereon in a sum of Rs 57,57,970 as on 5-4-1995. A demand in terms of clause (i) of the bank guarantee was made. The bank had irrevocably promised and undertaken to pay to the Corporation without any demur or damage an amount not exceeding Rs 57,57,970 plus interest as per terms and conditions contained in the bank guarantee untrammelled by the bilateral agreement between the petitioner and the first respondent-Corporation stating the amount claimed was due and payable on account of loss or damage caused to or likely to be caused to or by the Corporation by reason of any breach by the said contract or any of the terms and conditions contained in the said agreement notwithstanding any dispute or disputes raised under the contract in any suit or proceedings pending before any court or tribunal relating thereto. The liability of the bank is absolute and unequivocal; it would thereby be clear that the bank is not concerned with the ultimate decision of a court and a tribunal in its finding after adjudication as to the amount due and payable by the petitioner to the first respondent. What would be material is the quantification of the Kanchan P Dhuri 15 / 46 IAL-31437-2021.odt liability in the letter of revocation. The bank should verify whether the amount claimed is within the terms of the bank guarantee or letter of credit. It is axiomatic that any payment by the bank, obviously be subject to the final decision of the court or the tribunal. At the stage of invocation of bank guarantee, the need for final adjudication and decision on the amount due and payable by the petitioner, would run contrary to the terms of the special contract in which the bank had undertaken to pay the amount due and payable by the contractor. Thus we hold that there is no question of making out any prima facie case much less strong evidence or special equity or exceptional circumstances for interference by way of injunction."
28. This clause in Ansal Engineering (supra) is similar to the clause at hand, which on one hand requires the purchaser to advice the Bank that the Appellant has failed to fulfil its contractual obligations, but at the same time states that such a demand shall be conclusive. Therefore, we are unable to accept Shri Kadam's submissions in rejoinder that the clause in Ansal Engineering (supra) was not similar to the one at hand.
29. A similar clause in a Bank Guarantee (clause 17) also came up for consideration before the Supreme Court in Mahatma Gandhi Sahakra Sakkare Karkhane v. National Heavy Engg. Coop. Ltd.7 which clause is reproduced below:
"17. The relevant portion of the bank guarantee is extracted hereinbelow:
"1. In consideration of the above premises, the guarantor hereby undertakes to pay to the purchasers 7 (2007) 6 SCC 470 Kanchan P Dhuri 16 / 46 IAL-31437-2021.odt within 30 days of demand, without demur such a sum not exceeding Rs 92,40,000 (Rupees ninety-two lakhs forty thousand only), representing 3% of the contract price as the purchasers may demand upon the failure of the supplier to conduct the trial test of the sugar plant by 24th July, 2003 and also upon the failure of the sellers to commission the project (plant and machinery) before December 2003.
2. The guarantor shall pay to the purchasers on demand the sum without demur and without requiring the purchasers to invoke any legal remedy that may be available to them, it being understood and agreed FIRSTLY that the purchasers shall be the sole judge of and as to whether the amount of bank guarantee has become recoverable from the sellers or whether the sellers have committed any breach(es) of the terms and conditions of the said agreement and the extent of losses, damages, costs, charges and expenses caused to or suffered by or that may be caused to or suffered by purchasers from time to time shall be final and binding to the guarantor and SECONDLY that the right of the purchasers to recover from the guarantor any amount due to the purchasers under this guarantee shall not be affected or suspended by reasons of the fact that any dispute or disputes have been raised by the sellers with regard to their liability or that proceedings are pending before any Tribunal/arbitrator(s) or court with regard thereto or in connection therewith and THIRDLY that the guarantor shall immediately pay the aforesaid guaranteed amount to the purchasers on demand and it shall not be open to the guarantor to know the reasons of or to investigate or to go into the merits of the demands or to question or challenge the demand or to know any facts affecting the demand, and LASTLY that it shall not be open to the guarantor to require the proof of the liability of the sellers to pay the amount, before Kanchan P Dhuri 17 / 46 IAL-31437-2021.odt paying the sum demanded under Clause 1 above."
30. The Supreme Court in Mahatma Gandhi Sahakra Sakkare Karkhane (supra) rejected the argument that the Clause therein was conditional and held that :
"18. A plain reading of Clauses (1) and (2) of the bank guarantee makes it abundantly clear that the guarantor had undertaken to pay to the appellant within 30 days of demand, without demur such an amount not exceeding Rs 92.40 lakhs. The sole discretion is conferred on the purchasers as to whether the amount of bank guarantee has become recoverable from the sellers or whether the sellers have committed any breach of the terms and conditions of the said agreement. The right of the purchaser to recover from the guarantor the guaranteed amount shall not be affected or suspended by the reasons of the fact that any dispute or disputes have been raised by the sellers with regard to their liability or that the proceedings are pending before any tribunal or court with regard thereto or in connection therewith.
19. However, Shri Jayant Bhushan, learned Senior Counsel submitted that the purchasers were entitled to invoke the bank guarantee and demand the payment of money only upon the failure of the supplier to conduct the trial test of the sugar plant by 24-7-2003 and also upon the failure of the sellers to commission the project before December 2003. This condition forms an integral part of the bank guarantee was the submission. We find it difficult to accept the submission. The guarantee executed by the guarantor (PNB) in favour of the purchaser (the appellant) cannot be dissected in the manner suggested by the learned Senior Counsel for the respondent. Clauses 1 and 2 of the guarantee executed by the banker in favour of the purchaser are required to be read together. The respondent cannot be allowed to contend that there is a dispute as to whether it had failed to conduct the trial test of the sugar plant by 24-7-2003 and therefore bank guarantee cannot be invoked. The acceptance of the argument would make Clause 2 of the Kanchan P Dhuri 18 / 46 IAL-31437-2021.odt bank guarantee totally meaningless and inoperative. The guarantor essentially agreed that the purchasers alone shall be the sole judge in the matter as to whether the amount of bank guarantee has become recoverable from the sellers or whether the seller had committed any breach of the terms and conditions of the agreement. The dispute, if any, between the parties with regard to the liability in any proceedings either before the Arbitral Tribunal or court in no manner affects the right of the purchaser to invoke the bank guarantee and realise the guaranteed sum from the guarantor."
31. Shri Kadam in rejoinder submitted that the clause in Mahatma Gandhi did not contain any condition similar to the one at hand, requiring "advice" to the Bank. However, this contention cannot be accepted. The clause in Mahatma Gandhi was in fact on a higher footing than the subject clause, in as much as it stated that the Bank undertakes to pay "upon the failure of the supplier to conduct a trial test.. and to commission the Project". In the present case the Bank has undertaken to pay, provided that Respondent No.1 advises that there has been a failure on the part of the Contractor to fulfil its contractual obligations (which advise, as we have observed, is final and binding). In light of Clause 2 of the Bank Guarantee in that case, which stated that "the purchasers shall be the sole judge of and as to whether the amount of bank guarantee has become recoverable from the sellers", the Supreme Court found that the Bank Guarantee read as a whole was unconditional. The judgment is therefore, squarely applicable to the facts of the present case.
32. The Supreme Court in Reliance Salt Ltd. v. Cosmos Enterprises8, also 8 (2006) 13 SCC 599; 2006 SCC OnLine SC 1252 Kanchan P Dhuri 19 / 46 IAL-31437-2021.odt considered a similar clause and arrived at the same conclusion. Paragraphs 12 and 16 of the said decision are reproduced hereunder :
"12. Before we embark upon the rival contentions of the parties, it would be necessary to notice the salient features of the bank guarantee. The bank guarantee was limited to the extent of Rs 5 lakhs. It was given only against any loss or damage caused to or suffered by the principal company, by reason or any breach of contract by the consignment agent, their due performance of the duties of consignment agent of the principal company, the major terms being settlement of the principal company's bills by the consignment agent within 30 days from the date of those bills. The Bank undertook to pay the amounts due without any demur and merely on demand by the company. Such payment was merely to be made on the basis of a statement that the amount claimed, inter alia, is due by way of loss or damage caused to suffer by the principal company by reason of any breach of contract for non- payment of the principal company's bill by the consignment agent of any of the terms and conditions to be agreed upon in performance of their duties of consignment agent on behalf of the principal company. Any such demand made on Bank of India should be conclusive as regards the amount due and payable by the Bank under the said bank guarantee. It was furthermore stated:
"... that the bank guarantee shall remain in full force and effect for a period of 12 (twelve) months from the date of issue of this guarantee or till the period that would be taken by the consignment agent on behalf of the principal company as the terms and conditions mutually agreed upon shall continue to be enforceable till all the dues of the principal company have been fully paid and its claim satisfied or discharged or till the Managing Director or any other Director of the principal company certified that the due performance of their duties as consignment agent have been fully and properly carried out by the consignment agent and Kanchan P Dhuri 20 / 46 IAL-31437-2021.odt accordingly discharge the guarantee, whichever date is earlier."
16. A bare perusal of the contents of the bank guarantee, as noticed hereinbefore, shows that there is no escape from arriving at a conclusion that the guarantee furnished was an unconditional one."
33. In Felgeura Gruas v. Tuticorin Coal Terminal Pvt. Ltd, one of us (S.J Kathawalla, J.) had the occasion to examine a clause like the one at hand. The clause under consideration there stated that the Bank must pay "if the delivery obligation is not performed by the seller", while also categorically providing that the Bank is not entitled to dispute or enquire into whether the beneficiary was entitled to claim under the Guarantee. In view of the clear assertion that the Bank is not entitled to inquire into the question of breach, the Court arrived at a finding that the Bank Guarantee is unconditional:
"7. The first and the main contention of FGIPL is that the subject Bank Guarantees are conditional. Since the terms of each of the Bank Guarantees are identical, the relevant clauses of one such Advance/Down Payment Bank Guarantee are reproduced hereunder:
"1. If the Delivery Obligation is not performed by the Seller in accordance with the terms of the PURCHASE ORDER, the Guarantor shall, within 7 (seven) days from the receipt of a demand by the Purchaser, pay to the Purchaser any sum not exceeding Rs. 1,70,00,000/- (Rupees One Crore Seventy Lakhs Only).
2. The obligation of the Guarantor under this Guarantee shall be unconditional, absolute and irrevocable, irrespective of the genuineness, validity, regularity or enforceability of the PURCHASE ORDER Kanchan P Dhuri 21 / 46 IAL-31437-2021.odt or any other circumstances which might otherwise constitute a legal and/or equitable discharge of a surety or the Guarantor under the law relating to sureties. The Guarantor shall not be entitled to dispute or inquire into whether the Purchaser has become entitled to claim the said amount under the PURCHASE ORDER or not or whether the Supplier has committed any breach of the PURCHASE ORDER and/or the General Terms and Conditions applicable thereto or not or whether the Purchaser is entitled to recover any damages from the Supplier for breach thereof or not.
3. The Purchaser need not initiate any proceeding or claim against the Seller before lodging any claim under this Guarantee.
18. It is therefore clear that Article 1 of the Advance Bank Guarantee as well as the Performance Bank Guarantee have only made a general reference to the purchase order and generally set out that if the delivery obligation is not performed by the seller/FGIPL in accordance with the terms of the purchase order, or if the seller fails to perform any of its obligation/s under the purchase order, or breaches or violates any of the terms of the purchase order, the guarantor bank shall within seven days from receipt of the demand from the purchaser make payment to TCTPL in a sum not exceeding the amount for which the Bank Guarantee is provided. After the above general reference to the purchase orders in Article 1, the subsequent Articles have made it clear that the Bank Guarantees are absolute and unconditional by a clear assertion that the bank shall not be entitled to dispute or inquire into whether TCTPL has become entitled to claim the guaranteed amount under the purchase order or not; or whether FGIPL has committed any breach of purchase order and/or general terms and conditions applicable thereto or not; or whether TCTPL is entitled to recover any damages from the Supplier/FGIPL for breach thereof or not. It is further clearly asserted in Articles 3, 6, 7(D) and 15 of the Bank Guarantees that TCTPL need not initiate any proceeding or claim against FGIPL before lodging any claim under Kanchan P Dhuri 22 / 46 IAL-31437-2021.odt the Guarantee; that the liability of the Guarantor/Bank under the Guarantees shall be primary, direct and immediate, and not conditional and/or contingent upon pursuit by the purchaser/TCTPL of any remedies that it may have against the seller/FGIPL and/or any other person in relation to the purchase order; that the demand for observance, performance and/or enforcement of any terms and/or provisions of the guarantees and/or purchase order is expressly waived; and that a demand for payment under the guarantees shall be deemed to have been sufficiently made if a claim in writing is sent by post or hand delivered to the Guarantor/Bank at its office and is received by the guarantor. It is required to be made clear that only because TCTPL has in its invocation letters stated that, "the delivery obligation is not performed by the seller" and that "the seller has failed to perform its obligation/s under the purchase order", the submission of FGIPL that TCTPL is conscious of the fact that the Bank Guarantees are conditional, cannot be accepted.
29. I am therefore, of the view that Articles 1 and 2 of the subject Bank Guarantees and the other Articles set out hereinabove can be harmoniously construed, and since I do not find any conflict between Articles 1 and 2 of the subject Bank Guarantees and/or any other Article/s of the subject Bank Guarantees, I hereby hold that the Bank Guarantees in question are absolute and unconditional. The submissions made on behalf of FGIPL in support of their contention that the Bank Guarantees are conditional, therefore cannot be accepted and the case laws relied upon by them do not assist them. The distinction sought to be made by them, with regard to the case laws relied upon by TCTPL, also cannot be accepted."
34. Shri Kadam submitted that the clause in Felgeura Gruas does not apply to the facts at hand as the clause therein expressly stated that the bank Guarantee is "unconditional". We are unable to accept this contention. The judgment does not turn Kanchan P Dhuri 23 / 46 IAL-31437-2021.odt solely on the word "unconditional" but rather comes to that conclusion on a harmonious reading of the entire Guarantee including in particular the "clear assertion that the bank shall not be entitled to dispute or inquire into whether FGIPL has committed any breach of purchase order". The clause in question here also contains a similar limitation on the discretion of the Bank, and it must therefore follow that the Bank Guarantee here is also unconditional.
35. Shri Kadam has sought to place reliance upon the decision in Hindustan Construction Co. Ltd v. State of Bihar9, where the Guarantee was held to be conditional. The Bank Guarantee furnished in that case provided as under:
"11. ... ... ...In accordance with the provisions of the Conditions of Contract, Clause 9 (Advance Mobilisation Loan) of the abovementioned contract, the Hindustan Construction Co. Ltd., incorporated in Bombay under the Companies Act, 1956, and having their registered officer at Construction 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, Dist. 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, the State Bank of India, incorporated under 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, Dist. Singhbhum, 9 (1999) 8 SCC 436 Kanchan P Dhuri 24 / 46 IAL-31437-2021.odt 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 abovementioned 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.
36. In Hindustan Construction , the Supreme Court held as follows:
"9. What is important, therefore, is that the bank guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the bank guarantee or the person on whose behalf the guarantee was furnished. The terms of the bank guarantee are, therefore, extremely material. Since the bank guarantee represents an independent contract between the bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, therefore, will have to be in accordance with the terms of the bank guarantee, or else, the invocation itself would be bad.
...
13. The Bank, in the above guarantee, no doubt, has used the expression "agree unconditionally and irrevocably" to guarantee payment to the Executive Engineer on his first demand without any right of objection, but these expressions are immediately qualified by following:
"... 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."
14. This condition clearly refers to the original contract between HCCL and the defendants and postulates that if the obligations, Kanchan P Dhuri 25 / 46 IAL-31437-2021.odt 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 mobilisation 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 mobilisation 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 mobilisation loan". It is in these circumstances that the aforesaid clause would operate and the whole of the amount covered by the "mobilisation 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 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."
37. We are unable to accept Shri Kadam's submission. The language of the Guarantee in Hindustan Construction expressly says that the Bank is required to pay only in the event that the obligations expressed in the relevant clause of the contract had not been fulfilled. Therefore, the payment obligation was linked to an event and not merely to a demand saying or advising so. The former is a fact and the latter is an assertion by the beneficiary. The Court in that case found that the Bank Guarantee specifically refers to clause (9) of the principal agreement and it is under those Kanchan P Dhuri 26 / 46 IAL-31437-2021.odt circumstances that it came to the conclusion that the amount covered by the bank guarantee becomes payable and the same could be invoked only in the circumstances referred to in clause (9) of the principal agreement. The clause under consideration in Hindustan Construction was very different from the one at hand. In the facts at hand, the Bank Guarantees merely require Respondent No.1 to advise that a breach has occurred. That advise is final and binding. The decision in Hindustan Constructions turned on peculiar facts of that case and will not apply to the present case.
38. What is apparent from the authorities as aforesaid is that the terms of the Bank Guarantee ought to be given their plain meaning as commercial persons would. Merely because a Guarantee makes a reference to the underlying contract or contains a clause requiring the beneficiary to advise or state that it is being invoked on account of a breach of the underlying contract, the Guarantee does not automatically become "conditional". This is especially so when the Guarantee states that the Bank is not entitled to inquire into or dispute the beneficiary's opinion on such breach. Such a stipulation typically results in the Guarantee being unconditional.
39. In view of the above discussion, we hold that the Bank Guarantees in question are unconditional. Thus, we need not embark on any inquiry as to whether or not the Appellant is actually in breach of the underlying contract in order to decide whether the invocation of the Bank Guarantees deserves to be restrained.
40. Shri Kadam's next submission was that the Invocation did not comply Kanchan P Dhuri 27 / 46 IAL-31437-2021.odt with the mandatory provision of Clause 10.1.5 of a 'Draft Contract', which he submitted was a part of the "Tender Specifications" that were incorporated in the LOA. Shri Kadam submitted that the Draft Contract requires a notice/ intimation of non-compliance to be issued before the Bank Guarantees can be invoked. Clause 10.1.5 of the Draft Contract is reproduced below.
"The Purchaser shall have the right to encash the Bank Guarantees for non-compliance of any or all the terms and conditions of the contract, and also in terms of the Deed of Joint Undertaking, if any, which the Contractor may enter into along with other parties with the purchaser. Non- Compliance of any or all the terms and conditions of the Contract by the Contractor, will be intimated to the Contractor, specifying the reason with supporting documents before encashment of the Bank Guarantee."
41. Shri Kadam submitted that Respondent No. I has not addressed any intimation to the Appellant stating therein any alleged non-compliance of any term of the Contract by the Appellant before seeking encashment of the subject Bank Guarantees.
42. Shri Dhond opposed the above submission of Shri Kadam on the following grounds:
(i) As the Bank Guarantee is an independent contract, the reliance placed on the Draft Contract was misconceived. The Draft Contract does not bind the Bank or qualify its obligations under the Bank Guarantees. In fact, Bank Guarantee jurisprudence, has, as its foundation, isolating the obligation of the Bank under the Guarantee, from inter-party obligations, under underlying contracts. He submits that Kanchan P Dhuri 28 / 46 IAL-31437-2021.odt this, by itself is alone sufficient to deny the Appellant relief.
(ii) Purely as an alternative (and not to be construed as being in derogation of his primary submission), he submits that the attempt to rely upon the Draft Contract is a complete afterthought and contrary to the Appellant's own pleadings.
The Appellant's pleaded case was that the Draft Contract has not yet been executed and therefore, only the Letter of Award is binding on the parties. This is why the Draft Contract was never annexed to the Plaint and there is no whisper of Clause 10.1.5 or any other clause in the pleadings.
(iii) A perusal of the underlying contract itself shows that the Bank Guarantee was meant to be unconditional. In this regard, Shri Dhond relied on Clause 6.1.3(A)(ii) of the LOA which states that one of the conditions to be fulfilled for the release of advance payments for the supply price component is the "Submission of an unconditional Bank Guarantee for 110% of the advance amount in the prescribed form and acceptance of the same by the Purchaser".
(iv) Further, the same intent is reflected in Clause 10.1.3 of the Draft Contract which states that "10.1 Bank Guarantees General 10.1.3 All the Bank Guarantees shall be payable on first demand, without demur, irrespective of any legal dispute between the Bank and the Contractor to the Purchaser without any condition or dispute whatsoever."
(v) Thus, according to Shri Dhond, it is all the more clear that the alleged breach of any one clause in the Draft Contract is not a reason to restrain the invocation of the Bank Guarantee.
43. In any event and without prejudice to the aforesaid, Shri Dhond submitted that Respondent No.1 complied with the requirement under Clause 10.1.5 Kanchan P Dhuri 29 / 46 IAL-31437-2021.odt of the Draft Contract (of intimating the Appellant of non-compliance of the contract) when it addressed letters dated 30th August, 2019; 8th October 2019; 15th February 2020 and 24th December 2021 calling upon the Appellant to refund the advance amounts. According to Shri Dhond, the failure to repay the advance amounts itself amounts to "non-compliance" of the underlying contract. He says that the Appellant is allegedly in breach of the LOA/ underlying contract, as it has sought to retain the advance amounts even though it has not completed any work under the LOA. Shri Dhond alludes to Clause 6.1.2 of the LOA, providing that "The money advanced to the contractor shall be adjusted on a pro-rata basis while making 60% stage payment for supplies, 70% stage payment for erection and 80% stage payment for civil works." and submits that as the works were put on hold, such a stage was never reached. Further, as the LOA was eventually terminated, Respondent No.1 was entitled to refund of the entire advances which were not adjusted against Running Bills. Failure to return the advance amounts to a breach, which was intimated to the Appellant by the letters set out above.
44. In rejoinder, Shri Kadam further submitted that the contention that reliance on the Draft Contract is contrary to the pleaded case is belied by a bare reading of the Plaint. When the Plaint states that the Draft Contract is not executed, that is merely a statement of fact. That cannot over-ride the fact that the Draft Contract was incorporated in the LOA by reference.
Kanchan P Dhuri 30 / 46 IAL-31437-2021.odt
45. We find that the questions raised herein need not detain us for long. Clause 10.1.5 is firmly in the realm of the underlying contract between the parties. It is well settled by a catena of judgments that an unconditional Bank Guarantee is an independent contract, which is not qualified by the primary contract between the parties. The Draft Contract does not bind the Bank, and the Bank Guarantees make it clear that the Bank is not entitled to consult any "other source". Thus, the clauses in the Draft Contract cannot qualify whether or not the Bank is liable to pay under the Bank Guarantees. This is especially so when Clause 10.1.3 of the very Draft Contract that the Appellant relies on itself states that the Bank Guarantees are payable "without any condition or dispute whatsoever".
46. In our view the Appellant is therefore free to adopt whatever remedies it has to enforce its substantive contractual rights.
47. Shri Kadam next submitted that the invocation is not in terms of the Bank Guarantees, which submission is opposed by Shri Dhond on behalf of Respondent No.1.
48. In order to appreciate the submissions of the parties, it is essential to first consider the Invocation Letters themselves. The Bank Guarantees were first invoked by Invocation Letters dated 24th December, 2021 which stated that:
"2. Due to unforeseen reasons, the said LOA was terminated with effect from 6.11.2021 Kanchan P Dhuri 31 / 46 IAL-31437-2021.odt
3. M/s RIL was paid Mobilisation Advance for the above work against the Bank Guarantees cited in Ref (2 to 7) and the details of the BGs are given below...
4. M/s RIL was addressed repeatedly to remit the advance amount paid by NLCIL, but the firm has not remitted the amount, so far. It is to be noted that the LOA was terminated with effect from 6.11.2021
5. Hence claim is lodged on the above Bank Guarantees.."
49. This was followed by Invocation Letters dated 27th December 2021, which stated that:
"We have invoked the Bank Guarantee ... for failure on the part of the Contractor viz. Reliance Infrastructure Limited to fulfil its obligations stipulated in the Contract referred to in the said Bank Guarantee i.e. the contract concluded vide letter of award no. CO CONTS/0038C/BTPP &BTPSE/EPC/2015 dated November 21, 2016.
We are lodging our claim for encashment of the aforesaid Bank Guarantee, and we call upon you to remit the equivalent INR amount of ...into our account as provided below.
Kindly do the needful. This letter be read along with our earlier letter dated 24.12.2021."
50. Shri Kadam submitted that the Invocation Letters were not in accordance with the terms of the Bank Guarantees. His first objection was that Bank Guarantees at the very least required the Respondent No. 1 to advise the banks of the breach committed by the Appellant of its contractual stipulations. The Invocation Letters dated 24th December 2021 ex facie fail to meet this requirement. On the contrary, the Invocation Letters dated 24 th December 2021 truthfully state that the Kanchan P Dhuri 32 / 46 IAL-31437-2021.odt LOA was terminated due to unforeseen circumstances. Thus, these letters, far from advising that there is a breach, advise that there is no breach.
51. As to the Invocation Letters dated 27 th December 2021, Shri Kadam submitted that they do not come to Respondent No.1's rescue at all. The Invocation Letters dated 27th December, 2021 cannot be construed as a fresh invocation of the Bank Guarantees. The language of the Invocation Letters, which starts with "we have invoked", refers to a "past completed act". For this, reliance was placed on a Website Thesaurus and the judgment of the Punjab and Haryana High Court in Harbhajan Singh v. State of Punjab10.
52. Shri Dhond, in response, submitted that although he maintains that the letters dated 24th December 2021 are valid, this Court need not examine this question at all in light of the further letters dated 27 th December, 2021. This letter clearly states that "We have invoked the Bank Guarantee ... for failure on the part of the Contractor viz. Reliance Infrastructure Limited to fulfil its obligations stipulated in the Contract", which Shri Dhond submitted is scrupulously in terms of the Bank Guarantees. The Invocation Letters dated 27th December 2021 clearly constitute a fresh invocation as the language makes it clear that a fresh claim is being lodged. This is apparent from the words, "We are lodging our claim for encashment of the aforesaid Bank Guarantee, and we call upon you to remit the equivalent INR amount of ...into 10 AIR 1973 P&H 31.
Kanchan P Dhuri 33 / 46 IAL-31437-2021.odt our account as provided below.."
53. On 26th of February 2022, we also recorded the statement of Shri Prakash Shinde, appearing for Respondent No. 4 Bank, who on instructions stated that according to the Bank, the invocation of the subject Bank Guarantees is valid and the Bank is liable to pay the amounts thereunder to Respondent No.1. Respondent No.2 [State Bank of India] also found the invocation to be valid and has remitted the amount under the bank Guarantee issued by it.
54. An invocation letter is a commercial document and its interpretation has to take a common-sense approach, without being bogged down by unnecessary semantics. Even assuming that Shri Kadam is correct in his submission that the Invocation Letters dated 24th December, 2021 ex-facie do not contain the exact language required by the Bank Guarantees, we find that the demand made by the letter dated 27th December, 2021 meets the requirements of the Bank Guarantees in so far as it advises the Banks of "failure on the part of the Contractor viz. Reliance Infrastructure Limited to fulfil its obligations stipulated in the Contract".
55. We need not examine the Invocation Letters dated 27th December 2021 with a fine toothed comb to conclude whether they are fresh invocation letters or curative notices/ addendums to the Invocation Letters dated 24 th December, 2021. This question would be relevant only if the law prevented a party from issuing a Kanchan P Dhuri 34 / 46 IAL-31437-2021.odt curative notice/ addendum to overcome a defective invocation letter.
56. In this regard, Shri Dhond has relied upon the decision of the Supreme Court of India in Standard Chartered Bank v. Heavy Engg. Corpn. Ltd. 11 In this case, the Supreme Court has expressly held that even if the first invocation letter is found to be defective, it must be read along with subsequent correspondence to ascertain whether the invocation is in terms of the Bank Guarantee. The Court held that:
"15. The learned counsel further submits that the bank guarantees are in reference to two category of losses (i) non- supply/defective supply of plant and equipment (ii) "other contractual deficiencies" and by the invocation vide letter dated 19- 12-1998 claims caused by "non-supply/defective supply of plant and equipment and other contractual deficiencies" is outside the purview of the bank guarantee. Further, assuming the correctness of the claim, the 1st respondent if suffered loss for both (i) non- supply/defective supply of plant and equipment (ii) "other contractual deficiencies", it is difficult to determine the apportionment between the two categories, because the invocation does not state how they are apportioned. The invocation is thus inchoate and incomplete and this according to the appellant does not constitute a valid invocation at all and it has not been properly appreciated by the Division Bench of the High Court in the impugned judgment [Heavy Engg. Corpn. Ltd. v. Standard Chartered Bank, 2019 SCC OnLine Cal 617 : (2019) 3 Cal LT 133] and has to be interfered by this Court.
25. From the correspondence that has been exchanged by and between them pertaining to invocation of the said guarantees, it clearly manifests that the initial letter of invocation written by the 1st respondent-plaintiff dated 6-11-1998 indeed was per se inadequate and did not enumerate any condition for invocation 11 (2020) 13 SCC 574 Kanchan P Dhuri 35 / 46 IAL-31437-2021.odt of said guarantees save and except a reference to "a substantial amount to be recovered from SCIL". However, in the later correspondence exchanged between the parties dated 19-12-1998 followed by a letter dated 28-12-1998, 1st respondent informed the appellant Bank that due to defective supply of plant and equipment as well as non-supply of plant and equipment and also other contractual deficiencies of SCIL, losses had been suffered by the 1st respondent and it was duly informed to the appellant Bank that the losses had been incurred both on account of supply of plant and equipment and on account of performance of the supply of plant and equipment. On reading of letters exchanged by and between 1st respondent and the appellant Bank pertaining to invocation of the guarantees, the condition of the guarantees had been duly complied with."
57. Therefore, the Supreme Court in Standard Chartered Bank has rejected the hyper-technical approach towards construing invocation letters, and has expressly recognised that a defective invocation letter may be cured by a subsequent addendum, which may be read along with it.
58. In view of the above discussion, we do not find any need to enter into a discussion on whether the letters dated 27th December, 2021 are in the past perfect tense, or the present perfect tense, or whether they are fresh invocations altogether. Even assuming that Shri Kadam is correct in his submission that the letters dated 27th December, 2021 are a mere addendum to the Invocation Letters dated 24 th December 2021, the result is that both letters can be read together and constitute a valid invocation.
59. Our view is bolstered by the fact that both the concerned Banks, i.e. Kanchan P Dhuri 36 / 46 IAL-31437-2021.odt Respondent No.2 and 4 have accepted that the Bank Guarantees have been validly invoked.
60. However, Shri Kadam further submits that the letters dated 24 th December 2021 and 27th December 2021 cannot be read together as they are "diametrically opposite" to one and other. He contends that the letter dated 27 th December, 2021 cannot stand as the Invocation Letters dated 24 th December, 2021 have already taken the stand that the contract was terminated "for unforeseen reasons".
61. To this, Shri Dhond submitted that merely because the termination was on account of "unforeseen reasons", Respondent No.1 has not given any clean chit to the Appellant or accepted that there is no breach. According to him, and as noted above, the Appellant has committed a breach of the contract by refusing to remit the advance amounts. He says that the Invocation letter dated 24 th December 2021 expressly refers to this when it states that "M/s RIL was addressed repeatedly to remit the advance amounts paid by NLCIL. But the firm has not remitted the amount, so far". Thus, he states that both sets of Invocation Letters are consistent with one and other. He also submits that merely because the reason stated for termination was something other than a breach does not mean that there is no breach. According to him, a party is entitled to decide which one or more of the available grounds to base its termination upon. This does not mean that the others do not exist. Sometimes it is prudent to base a termination on an admitted reason to avoid needless controversy.
Kanchan P Dhuri 37 / 46 IAL-31437-2021.odt
62. At this stage, there is no need to examine whether or not the failure to return the advance amounts, actually amounts to a breach of the underlying contract. However, Respondent No.1's claim that the failure to repay the advance, amounts to a breach of contract is a plausible (and arguable) view. The Invocation letters dated 24 th December 2021 expressly refer to this so-called breach. The Invocation letters dated 27th December 2021 supply the requisite language of the Bank Guarantees. In such circumstances, we find no fatal inconsistency between the Invocation letters dated 24 th December 2021 and 27th December, 2021.
63. Lastly, Shri Kadam submits that the Appellant's invocation is not valid as it contains a mere "parrot-like recitation" of the language of the Bank Guarantee, without stipulating which specific clause of the Contract has been breached.
64. The Appellant has also sought to rely upon the judgment of the Delhi High Court in Basic Teleservices Ltd v. Union of India 12 to contend that "a beneficiary is not to parrot like repeat the language of the bank guarantee while invoking the same".13 The Appellant contends that Respondent No.1 ought to have enumerated the Clauses of which the Appellant is in breach.
65. Firstly, the law enunciated by the Supreme Court is very clear and instructive. Secondly, Basic Teleservices Ltd. turned on a very peculiar clause which itself required the invocation letter to specify the occurred condition/ conditions and 12 2009 SCC OnLine Del 1657 13 2009 SCC OnLine Del 1657 (Para 57) Kanchan P Dhuri 38 / 46 IAL-31437-2021.odt the facts in that case. The judgment notes:
"29. At this stage, it would be appropriate to set out the relevant terms of the bank guarantee as under:
"The conditions of this Obligation are:
1. If the bidder withdraws its bid during the period of bid validity specified by Authority or
2. If the bidder having been notified of the acceptance of its bid by the Authority during the period of the bid validity
(a) fails or refuses to execute the contract form if required; or
(b) fails or refuses to furnish the Performance Bank Guaratnees and/or Financial Bank Guarantee in accordance with the Instructions to Bidders;
3. We undertake to pay to the Authority, an amount not exceeding Rs. 50,00,00,000/- upon receipt of its first written demand, without any demur if the Authority note that the amount claimed by is due or owing to the occurrence of one or both of the two conditions, specifying the occurred condition or conditions."
40. In the face of the aforesaid material I will take up the aspect of invocation of the bank guarantee first. From the language of the bank guarantee set out hereinabove the defendant No. 2 bank had bound itself to pay the amount thereof if either of the two conditions mentioned therein existed. However, the bank had further agreed/undertaken to pay the said amount "without any demur if the authority note that the amount claimed by is due to or owing to the occurrence of one or both of the two conditions, specifying the occurred condition or conditions."
44. However, the guarantee does not end on that. The bank was to pay immediately without demur only if the telecom authority "noted" that the amount claimed under the bank guarantee upto a maximum of Rs. 50 crores was due to the authority owing to the occurrence of one or both of the two conditions. Not Kanchan P Dhuri 39 / 46 IAL-31437-2021.odt only so the said writing of the telecom authority was also required to specify the occurred condition or conditions. Thus, the Letter of Invocation was required to note, i.e., contain a writing (i) that the amount claimed under the bank guarantee was due to the defendant No. 1, and; (ii) that the said amount had fallen due owing to the occurrence of one or both of the two conditions on occurrence of which the money under the guarantee was payable, and; (iii) specify the condition/conditions which had occurred leading to the bank guarantee being invoked.
"45. If the written demand was to contain all of the said ingredients, then it was not open to the defendant No. 2 bank or for that matter even to the plaintiff to dispute or controvert or to seek proof of the statement of the telecom authority to the effect that the amount was due or owing or that the condition had occurred or not occurred. The letter of invocation only intimates to the defendant No. 2 that the Telecom Authority has ordered that the bank guarantee be forfeited and the Director General Telecom had requested the bank to encash the bank guarantee and remit the amount thereof through a crossed account payee demand draft in favour of the Pay and Accounts Officer, Department of Telecom. The letter nowhere notes either that the amount claimed was due or owing or that any of the conditions on the occurrence whereof the amount was payable had occurred and hence the question of specifying a condition does not arise."
66. Thus, the Bank Guarantee in Basic Teleservices itself required the beneficiary to specify ("note") which of the two conditions had been violated. It is in view of the same that the Delhi High Court observed that the invocation must be in terms of the Bank Guarantee. The language in the Bank Guarantee in the present case merely requires Respondent No.1 to advise the Bank whether the Appellant has failed to fulfil his contractual obligations stipulated in the said Contract (which has been Kanchan P Dhuri 40 / 46 IAL-31437-2021.odt done) and does not require the Appellant to specify any Clause governing the breach. This Court cannot rewrite the Bank Guarantee to expand the requirements stipulated therein.
67. The Appellant has also relied on the decision of the Delhi High Court in Harparshad and Co v. Sudharshan Steel Mills14, where it was observed that:
"2. The bank guarantee furnished by the Punjab National Bank (defendants respondents 2 and 3) in favour of M/s. Harprasad and Co. Ltd. (appellant-defendant No. 1) contains the following material words :--
"In case M/s. Sudarshan Steel Rolling Mills fails in the judgement of Mis. Harparshad and Company Ltd. to carry out or fulfil any of the obligations assumed under the said contract, we undertake to promptly pay the Punjab National Bank, Parliament Street, New Delhi, in favour of M/s. Harprasad and Company Ltd. or to their order merely upon receipt of first written notice, any amount up to Rs. 2,13,618/- that may be claimed by them for any reason or purpose at their own discretion without it being necessary for M/s. Harparshad and Company Ltd. to issue a declaration or take action through administration, legal, or any other channels, or to prove the default of M/s. Sudarshan Steel Rolling Mills and/or the veracity of the affirmations made by them".
11. The first thing for respondent No. 1 was to give a written notice to the bank. According to the written statement filed by the bank a written notice was given by the appellant to the bank. But neither the appellant nor the bank has produced that written notice or any copy of it. Can it be said that the mere giving of a written 14 (1980) 17 DLT 502 Kanchan P Dhuri 41 / 46 IAL-31437-2021.odt notice, whatever it may contain, is a sufficient compliance with the terms of the bank guarantee ? For, the law is well settled that the amount due even on an irrevocable commercial credit can be recovered provided that the terms and conditions of the, credit are complied with". (Chitty on Contracts, Vol. 2 24th Edn. para 2598). The terms of the bank guarantee are analysed above. The very first and third terms are "in case M/s. Sudarshan Steel Rolling Mills fails to carry out and fulfil any of the obligations assumed under the said contract". It is true that the second term says that such a failure to carry out any of the terms of the contract is to be "in the judgement of M/s. Harparshad and Co. Ltd." The power of judgement given to the appellant thereby has to be exercised by the appellant. The judgement has to be that the respondent No. 1 has failed to carry out any of the obligations imposed upon it by the agreement, dated 22nd June, 1977. Unless the notice in writing sent by the appellant to the bank said so, the notice was not in compliance with the terms of the bank guarantee. Unless the terms of the bank guarantee were complied with the liability of the bank to pay the amount to the appellant did not arise. The first rule of the construction of a contract or a document is to ascertain the intention of the parties to it (Chitty on Contracts Vol. I. 24th Edn. para 698). What was the intention of the parties conveyed by the language of the bank guarantee ? If the argument of the appellant that the liability thereunder is absolute is to be accepted, then the appellant was entitled to recover the amount of the bank guarantee from the bank without complying with the terms of the bank guarantee. If that had been the intention of the parties the bank guarantee would not have said that the liability would arise on failure of respondent No. 1 in the judgement of the appellant to fulfil the terms of the contract. There is a distinction between the absolute liability, as contended by the appellant, and the absolute liability which arises after the terms of the bank guarantee are fulfilled. The intention of the parties according to the language of the bank guarantee was that the absolute liability should arise only after the terms of the bank guarantee are fulfilled. It was necessary for the appellant to show that it had become entitled to recover the amount under the bank guarantee because in its judgement respondent No. 1 had failed to Kanchan P Dhuri 42 / 46 IAL-31437-2021.odt perform any of the obligations under the contract. The appellant has made no attempt to show that it has complied with the conditions of the bank guarantee. In the written statement filed by it in the suit or in the memorandum of appeal before us, the appellant had not stated that in its judgement respondent No. 1 has failed to comply or carry out any of the particular obligation under the contract. Nor has the appellant said that the judgement of the appellant so arrived at regarding the failure of respondent No. 1 to fulfill any obligations under the contract was conveyed to the bank in the written notice sent by the appellant to the bank.
12. In this connection we may point out that the Punjab National Bank in this case, as every other bank issuing a bank guarantee, has a duty to perform. The bank must not, take up the position that it would be willing to pay the amount of the bank guarantee on a mere demand simply because its customer who has got the bank guarantee issued in favour of the other party to the contract has already secured the bank against any loss that may be caused by the recovery of the amount of the bank guarantee from the bank by the other party in the contract. The bank has itself a duty to satisfy itself that the demand by the beneficiary under the bank guarantee is made in accordance with the terms of the bank guarantee. For instance, if in the present case the appellant has simply called upon the bank to pay the money under the bank guarantee, such a notice in writing is not in accordance with the terms of the bank guarantee. It is the duty of the bank to satisfy itself that the demand is made on the ground that in the judgement of the appellant respondent No. 1 has failed to fulfil any of the obligations under the contract. Further, the bank has to see that the judgement is exercised in respect of some definite obligation to be performed by respondent under the contract. It is not sufficient for the appellant merely to reiterate parrot-like words of the bank guarantee. The statement by the appellant in the notice in writing that respondent No. 1 has failed to carry out and fulfil any of the obligations assumed under the said contract would simply be unintelligible. 'Any of the obligations' are meaningless words unless and until a reference is made to some particular Kanchan P Dhuri 43 / 46 IAL-31437-2021.odt obligation which respondent No. 1 has failed to carry out in the judgement of the appellant, The duty of the appellant in making thy demand on the bank is like the duty of the plaintiff to disclose the cause of action in the plaint. Just as a plaint is liable to be rejected for non-disclosure of the cause of action, a demand by the beneficiary of the bank guarantee is liable to be rejected by the bank if it does not state the facts showing that the conditions of the bank guarantee have been fulfilled. Just as the allegations in the plaint have to be assumed to be true at the stage plaint is to be entertained, similarly the allegations in the demand would have to be assumed to be true by the bank provided that the proper allegations are made just as a proper pleading has to be made in the plaint. The bank is not to enquire into the truth of the allegations just as the court is not to enquire into the truth of the pleadings at the stage of the filing of the plaint."
68. At the outset, we note that since the aforesaid judgment of the Delhi High Court in 1979, the Supreme Court has enumerated the position which we have noted above. In fact, the judgments of the Supreme Court in Mahatma Gandhi Sahakra Sakkare Karkhane (supra) ; Ansal Engineering (supra) and Reliance Salt (supra) all make it clear that the question of the Bank "satisfying itself", and that too by inquiring into whether any specific obligation has been breached simply does not arise. In any case, the judgment in Harparshad is clearly distinguishable on facts. That was a final judgment after trial. Paragraph 9 of the judgment observes, as a finding of fact that "The appellant has made no attempt to show that it has complied with the conditions of the bank guarantee. In the written statement filed by it in the suit or in the memorandum of appeal before us, the appellant has not stated that in its judgment Respondent No.1 has failed to comply or carry out any of the particular Kanchan P Dhuri 44 / 46 IAL-31437-2021.odt obligation under the contract. Nor has the appellant said that the judgment of the appellant so arrived at regarding the failure of respondent No.1 to fulfil any obligations under the contract was conveyed in the written notice sent by the appellant to the bank". The decision therefore turns on the fact that the beneficiary in that case had never informed the Bank that "in its judgement respondent No. 1 has failed to comply or carry out any of the particular obligation under the contract". Respondent No.1 has done so here. Further, Respondent No.1 has also referred to what is according to it a specific breach, viz, the breach to repay the advance amount. Thus, in our view, even this judgment is of no assistance to the Appellant.
69. In our considered view, therefore, the Bank Guarantees were validly invoked.
70. The final question which we need to examine and answer is "whether the invocation is fraudulent ?"
71. Several contentions have been raised before us on Respondent No.1's decision to put the project "on hold". Detailed arguments were advanced on the extensive correspondence exchanged between the parties in this regard.
72. Given our finding that the Bank Guarantees are unconditional, the elaborate factual matrix that the Appellant seeks to rely upon is only relevant to consider whether Respondent No.1 has perpetrated a fraud upon the Appellant.
73. Very briefly, it is the Appellant's grievance that Respondent No.1 did not Kanchan P Dhuri 45 / 46 IAL-31437-2021.odt call upon the Appellant to demobilise its equipment/ machines till 8 th February, 2018, despite repeated requests for clarification. The Appellant states that as a result, it was constrained to incur costs/ losses, worth INR. 1040,06,54,403/-. The Appellant would like us to therefore conclude that this would make the invocation fraudulent.
74. In response, Shri Dhond submits that Respondent No.1 had repeatedly instructed the Appellant to "stop the cost" in respect of the Project. In such circumstances, if the Appellant chose to incur costs by not demobilising, the Appellant did so at its risk. Shri Dhond submits that far from perpetrating any fraud, Respondent No.1 has been very fair and has assessed and admitted a portion of the Appellant's claims. However, according to Respondent No.1, the remaining claims are frivolous.
75. Respondent No.1 has also emphasised that three of the twelve Advance Bank Guarantees were encashed by Respondent No.1 on 31st December, 2020., which is more than one year ago. A sum of Rs. 105,69,71,356/- out of the total advance of INR. 261,21,09,209/- has already been recovered by Respondent No.1. As there has been no material change in circumstances since that date, Shri Dhond submitted that the Appellant is estopped from seeking reliefs in respect of identical Bank Guarantees.
76. It is trite law that a Court can restrain encashment of bank guarantee in cases of established fraud in the invocation of the bank guarantee. The fraud has to be absolute and egregious, vitiating the very foundation of the bank guarantee.
77. Although it is the Appellant's pleaded case that facts as encapsulated Kanchan P Dhuri 46 / 46 IAL-31437-2021.odt above constitute "fraud", this was not seriously urged before us. We find that the mere fact that the Applicant claims that it is entitled to damages is not "fraud". The issues raised by the parties are arguable, and it is not the function of this Court at this stage to get dragged into a larger adjudication of the merits of the dispute between the parties.
78. Thus, we do not find any merit in the Interim Application (L) No. 30927 of 2021. The same is dismissed. The Appeal also stands dismissed. Other pending application(s) if any also stand disposed of. There shall be no order as to costs.
( MILIND N. JADHAV, J. ) ( S.J. KATHAWALLA, J. ) At the request of the Learned Advocate appearing for the Appellant, ad-interim order shall continue for a period of two weeks from today.
( MILIND N. JADHAV, J. ) ( S.J. KATHAWALLA, J. )