Calcutta High Court
Rahee Gpt (Jv) & Ors vs The Union Of India & Ors on 10 November, 2017
Author: Soumen Sen
Bench: Soumen Sen
IN THE HIGH COURT AT CALCUTTA
Ordinary Original Civil Jurisdiction
ORIGINAL SIDE
BEFORE:
THE HON'BLE JUSTICE SOUMEN SEN
GA No.855 of 2014
CS No.97 of 2014
RAHEE GPT (JV) & ORS.
VERSUS
THE UNION OF INDIA & ORS.
For the Petitioners/Plaintiffs : Mr. Pratap Chatterjee, Sr. Adv.,
Mr. Samrat Sen, Sr. Adv.,
Mr. R.L. Mitra, Adv.,
Mr. N. Dasgupta, Adv.,
Ms. Priyanka Dhar, Adv.
For the Respondents/Defendants : Mr. Partha Sarathi Bose, Sr. Adv.,
Mr. Sutanu Chakrabarty, Adv., Hearing Concluded On : 08.11.2017 Judgment On : 10th November, 2017 Soumen Sen, J:- In a suit for declaration that the recession of contract by the defendant is illegal and the invocation of the performance bank guarantee is fraudulent and wrongful, the plaintiff has filed this application praying essentially for an order of injunction restraining the defendant no.1 from encashing the performance bank guarantee bearing No.01154101 IPG 000277 dated 19th August, 2010 for a sum of Rs.61,53,350/-.
The dispute essentially arose during the performance of a contract awarded to the plaintiff for construction of foundation, substructure, approaches including allied and miscellaneous works for bridge No.182(9 x 45.7 mtr.) between IB and Brajraj Nagar Station in connection with 3rd Line between Champa-Jharsuguda. The suit originally filed was directed against the threat by the Union of India to invoke the bank guarantee furnished in lieu of performance by the plaintiff. The grievance of the plaintiff is that the plaintiff in course of construction of the Railway Bridge found it impossible to undertake the construction by well-sinking method due to rocky bed. The plaintiff contends that the construction could be carried out only by piling. The plaintiff contends that under the scope of work the plaintiff would be required to do Geotech Investigation which involves soil testing. The plaintiff, however, was prevented from doing so by the defendant on the ground that the soil testing had already been carried out for the said bridge before awarding the contract and the plaintiff was requested to proceed on the basis of the said soil investigation report. However, after doing about 55% of the work the plaintiff encountered insurmountable difficulties in proceedings further due to hard rock beneath the earth. It was well neigh impossible for the plaintiff to undertake construction applying the well sinking method. The well sinking method is completely unsuitable for construction of the bridge with the said topographical feature and this fact was never disclosed to the plaintiff. The plaintiff had no means to ascertain the presence of hard rock bed in an around the said area where the construction would take place as the defendant no.1 requested the plaintiff to carry construction on the basis of the soil report made available by the defendant to the plaintiff. The plaintiff contends that it is admitted position that the rock bed would not permit such construction. Notwithstanding the aforesaid and for no fault of the plaintiff the contract was subsequently terminated and according to the plaintiffs a fresh contract has been awarded or is proposed to be awarded with the plaintiffs being disqualified to participate in the tender process although a very fundamental process of construction has been altered from the well sinking method to the piling method. The claim of the plaintiff is vindicated in the light of the complete change of procedure for construction suggested by the Union of India, in proposing the altered terms for the same construction. In the suit that was initially limited to the performance guarantee or the bank guarantee furnished, in lieu thereof, the plaintiffs subsequently amended the plaint to challenge the termination of contract and seek damages. The case made out by the plaintiffs is that it was impossible to perform the contract. The said amendment was allowed and upheld by the Division Bench.
Mr. Pratap Chatterjee learned Senior Counsel appearing with Mr. Samrat Sen, Senior Advocate for the plaintiffs has submitted that the Union did not permit the plaintiffs to have soil testing of its own and had ask the plaintiff to execute the work on the basis of the soil report furnished by the defendant, by reason whereof, it was not possible for the plaintiffs to ascertain the presence of hard rock under the earth which were completely unsuitable to undertake construction by well sinking method. The defendant was aware of the said difficulties but insisted that the plaintiff should continue with the work and has thereafter issued a show cause notice on 5th March, 2014 alleging that no action has been taken by the plaintiffs to commence the work and there has been no adequate progress of the work. Mr. Chatterjee has referred to the representation made by the plaintiffs in answer to the show cause being a letter dated 14th February, 2014 and submits that in the said representation it has been categorically stated that the plaintiffs were not allowed to carry out the Geotechnical Investigation and were handed over the report of Geotechnical Investigation carried out by railways themselves on which basis the design of the bridge foundation were to be made. The type of foundation recommended in the report was well foundation and contract also provided for well foundation. The plaintiff based on such report appointed an experience design consultant and submitted the design for approval of railways. The plaintiffs contended that as per the standard design requirements of well foundation the required depth of well foundation was coming out to be on the higher side, considering that the wells were to penetrate in rock. Although it was unusual but since it was based on the Geotech report issued by the railways the plaintiff submitted the design with rider that if good hard rock is encountered at higher level than the proposed founding level, well may be plugged at level higher than the proposed level after ensuring adequate socket depth in the rock. Mr. Chatterjee submits that in the said representation it has been categorically stated that the railway was not sure of feasibility of construction of well foundation at such depth in rock as approved by them. Mr. Chatterjee submits that the Union at present is holding a sum in excess of Rs.61 lakhs against the absurd claim of Rs.15 crores made in the written statement recently filed. The claim sounds in damages. Mr. Chatterjee submits that under Clause 17B of the Indian Railways Standard General Conditions of Contract published in July, 2013 the Union is entitled to damages for contracts valued about Rs.2 lakhs 10% of first Rs.2 lakhs and 5% of the balance contract sum. The Union cannot claim over and above the aforesaid sum. The claim on account of liquidated damages under the said clause could not exceed more than Rs.61 lakhs and accordingly the enforcement of the bank guarantee is illegal. Mr. Chatterjee refers to Section 17 of the Indian Contract Act and submits that even a reckless representation or omission to disclose essential fact would constitute a fraud. Mr. Chatterjee submits that the Union being aware of the hard rock beneath the earth in an around the construction area should have disclosed such facts so as to enable the plaintiffs to take an informed decision. Mr. Chatterjee has referred to decisions in the case of 'Gangotri Enterprises Ltd. versus Union of India and Ors.' reported at (2016) 11 SCC 720, paragraph 40 and 'State of Haryana and Ors. versus Continental Construction Ltd.' reported at (2002) 10 SCC 508, paragraph 3 to argue that having regard to the fact that, the sum claimed by the defendant no.1 from the plaintiff is in a nature of damages which is not yet adjudicated upon in the suit inasmuch as the sum in excess of Rs.61 lakhs is being retained by the defendant no.1 and an interim order of injunction against the bank guarantee is subsisting since 7th March, 2014 against the defendants, the interim order may be confirmed till the disposal of the suit.
The defendant no.1 has filed an affidavit in opposition. The principal challenge to the injunction application appears to be that the performance guarantee or the bank guarantee furnished in lieu thereof, is an unconditional bank guarantee. The defendant no.2 is obliged on demand by the defendant no.1 to pay the amount covered by the said guarantee irrespective of the dispute between the plaintiff and the defendant no.1.
Mr. Partha Sarathi Bose learned Senior Counsel representing the defendant no.1 submits that unless the plaintiff is able to establish fraud and irretrievable prejudice the Court may not interfere with the revocation of bank guarantee. Mr. Bose submits that the formation of the contract is not vitiated by fraud. The dispute arises during the execution of the contract. The plaintiff has not been able to show any establish fraud for which the Court may come to the aid of the plaintiff. Mr. Bose has referred to the judgment in 'Reliance Salt Ltd. versus Cosmos Enterprises and Another' reported at (2006) 13 SCC 599 and submitted that in the said decision it has been categorically held that bank guarantee constitutes an agreement between the bank and the principal, albeit, at the instance of the promisor. When a contract of guarantee is sought to be invoked, it was primarily for the bank to plead a case of fraud and not for a promisor to set up a case of breach of contract. Mr. Bose has relied upon the following observation of the Hon'ble Supreme Court made in paragraph 17 of the said judgment which reads:
'Fraud, which vitiates the contract, must have a nexus with the acts of the parties prior to entering into the contract. Subsequent breach of contract on the part of a party would not vitiate the contract itself.' Mr. Bose has referred to the decision of the Supreme Court in General Electric Technical Services Company Inc. Vs. Punj Sons (P) Ltd. & Another reported at (1991) 4 Supreme Court Cases 230, Hidustan Steel Workers Construction Ltd. Vs. G. S. Atwal & Co. (Engineers) Pvt. Ltd. reported at (1995) 6 Supreme Court Cases 76 and Hindustan Steelworks Construction Ltd. Vs. Tarapore & Co. & Another reported at (1996) 5 Supreme Court Cases 34 for the proposition that in case of an unconditional bank guarantee, the court will not interfere with the same unless there is fraud and irretrievable injunction is established.
Mr. Bose has accordingly prayed for dismissal of the petition. Interference of the court with invocation of bank guarantee as laid down in several judgments including the judgments relied upon and referred by the parties is limited. The courts have consistently held that unconditional bank guarantee has to be honoured as an unconditional bank guarantee or an irrevocable letter of credit is the life blood of international commerce. The agreement between the bank and the beneficiary, unless vitiated by fraud, has to be respected. The court can interfere with invocation of bank guarantee if it is found that the contract is vitiated by fraud and the bank guarantee has been obtained fraudulently. The fraud, as observed in Reliance Salt Limited (Supra), "must have a nexus with the acts of the parties prior to entering into the contract. In G. S. Atwal (Supra), it was observed that "in case of confirmed bank guarantees irrevocable letters of credit, the Court will not interfere with the same unless there is fraud and irretrievable damages are involved in the case and fraud has to be an established fraud." The nature of the fraud that the courts talk about is fraud of an "egregious nature to vitiate the entire underlying transaction. This is the view in U.P. Cooperative Federation Ltd. vs. Singh Consultants and Engineers (P) Ltd. reported at (1998) 1 SCC 174.
Then there comes special circumstances as special equities which may persuade a court to pass an order of injunction restraining invocation of an unconditional bank guarantee if the court is satisfied that the plaintiff is able to make out a special equity in its pleadings. In Tarapore (Supra), it was observed that commitments of banks must be honoured free from interference by courts and it is only in exceptional cases i.e. in case of fraud or in case where irretrievable injustice would be done if bank guarantee is allowed to be encashed, the Court should interfere. What would constitute special equities has not been laid down in any decisions.
It has been left to the discretion of the court to be applied on sound judicial principles and to prevent irretrievable injustice.
The question arises if the plaintiffs in the instant case are able to make out any of the grounds on which the Court may continue with the order of injunction passed on 7th March 2014.
The argument on behalf of the plaintiffs that in terms of Clause 17- B, the defendant is not entitle to claim damages at rates mentioned therein is not acceptable since the said clause is with regard to extension of time for delay due to contractor. It provides that for the purpose of the said clause, the contract value of the work shall be taken as value of work as per contract agreement including any supplementary work order/contract agreement issued, provided also the total amount of liquidated damages under this condition shall not exceed the percentage value or of the total value of the item or groups of items of work for which a separate distinct completion period is specified in the contract. The said clause will operate, provided the contract is successfully completed. In the instant case, there is a termination of contract. The argument that the contract is vitiated by fraud also cannot be accepted at this stage. It calls for evidence. However, it appears from the communication of Union of India dated 6th March 2014 that soil investigation has been carried out by the Railways before awarding of the contract and to avoid infructuous expenditure and to save time, Railway has advised the contractor not to carry out any soil investigation. The relevant portion of the said letter dated 6th March 2014 reads:-
"2. Since soil investigation had been already carried out for Br.
182, before awarding of contract and to avoid infructuous expenditure and save time, railway has advised you to do not carry out soil investigation. However, design of well foundation submitted by agency and after approval of structural drawing on 01.02.2012, you had accepted the design as no objection raised at that time. Moreover work started and a total payment of about Rs. Six Crore has been already received by you without any dispute with respect to hard/rock strata. During the sinking of well of abutment A-1 (HWH end) the soil strata actually found at site is matching with soil investigation report i.e. no hard rock is found and only black coal is found. Since hard rock strata are actually not available, hence question of founding at higher level does not arise. Hence reason explained by you is not acceptable.
3. It is again reiterated that during the sinking of wells for A-1, P-
1 to P-7 hard rock strata found and only black coal strata is encountered. Since, black coal does not match the properties of hard rock, the sinking of well has to be done as per approved design. You had never requested in writing to railway for review of design. Although during the meeting held at BSP on 29.08.2013, the issue was discussed and it has been advised to you for conducting fresh soil investigations and submits revised design, which has not yet done. The sinking of well is a time tested method in bridge engineering particularly in railways. Hence reason explained by you is not acceptable."
These disputes are required to be decided at the trial of the suit. The fact, however, remains that the plaintiffs appear to have proceeded on the basis of the soil investigation report submitted by the railways and have submitted its design as per standard design requirement of well foundation. The plaintiffs also appear to have done about 55 per cent of the work and thereafter, encountered difficulties which they did not anticipate earlier. Even the Union appears to have not anticipated any such difficulties at the time of floating of the tender and the stand of the plaintiff is vindicated by the subsequent tenders by which the defendant has completely altered the method of construction.
There cannot be any doubt that the bank guarantee is unconditional in terms and on demand the bank is obliged to pay the aforesaid sum. However, the special equity would come in since it appears prima facie that injustice would be caused at this stage without the issue being decided as to whether the contract was impossible to perform by allowing the defendant no.1 to appropriate the said amount during the pendency of the suit. The Courts in India exercise jurisdiction both in equity as well as at law but exercise of equity jurisdiction is always subject to the provisions of law. Equity jurisdiction can be exercised only when no law operates in the field. Injunction is a discretionary and equitable remedy intended to prevent injustice. The exercise of the jurisdiction must be principled, but the criterion is injustice (see Mercedes-Benz AG Vs. Leiduck, 1996 (1) A.C. 284) The bank giving a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of use a bank guarantee is otherwise be defeated. The Courts, therefore, are extremely cautious and slow in granting an injunction to restrain the realization of a bank guarantee. The Courts, however, have carved out two exceptions, namely, fraud and irretrievable harm or injustice as grounds on which the encashment and/or enforcement of bank guarantee may be refused. A fraud in connection with a bank guarantee would vitiate the very foundation of such bank guarantee and, accordingly, if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under the head of irretrievable harm or injustice must be of such an exceptional and irretrievable nature as would override the terms of the bank guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may co-exist in some cases. (See Uttar Pradesh State Sugar Corpn. Vs. Sumac International Ltd., (1997) 1 SCC 568) The third exception which is of recent origin is special circumstances or special equity which may at times overlap with the irretrievable harm or injustice on which encashment may be refused.
The limited categories on which the Court may refuse encashment of a bank guarantee or a performance guarantee are summarized below:-
(i) If there is a fraud in connection with the bank guarantee which would vitiate the very foundation of such guarantee and the beneficiary seeks to take advantage of such fraud.
(ii) The applicant, in the facts and circumstances of the case, clearly establishes a case of irretrievable injustice or irreparable damage.
(iii) The applicant is able to establish exceptional or special equities of the kind which would prick the judicial conscience of the Court.
(iv) When the bank guarantee is not invoked strictly in its terms and by the person empowered to invoke under the terms of the guarantee. In other words, the letter of invocation is in apparent violation to the specific terms of the bank guarantee.
The exceptional cases would be few but it could never be stated as an absolute proposition of law that under no circumstances the Court would injunct encashment/invocation of a bank guarantee which might have been furnished by a party as an independent contract. A beneficiary is not vested with an unquestionable or unequivocal legal right to encash the bank guarantee on demand. The obligation of the bank furnishing the bank guarantee to pay would be subject to a limited exceptional circumstance aforenoticed. As a matter of rule, the bank would be under obligation to encash the bank guarantee, once it is invoked in its terms. The exceptions aforenoticed are merely indicative of the kind of cases where the Court may injunct encashment of a bank guarantee. It is neither possible nor permissible to exhaustively classify the cases where the Court would not interfere and where the Court would judicially intervene in such matters.
The factual exposition of the present litigation demonstrates, prima facie, that the plaintiffs proceeded on the basis of the soil investigation report furnished by the railways and on such basis drawings were prepared. The defendant admits of such fact. What follows next is the extreme difficulty faced by the plaintiff to negotiate such hard rocks not within its contemplation and knowledge. It may so happen that the defendant No.1 was also taken by surprise and may not have been at all aware of existence of such hard rocks. The subsequent tender shows that the procedure was completely changed. If ultimately at the trial it is established that plaintiff was not at fault at all and the contract is impossible to perform the plaintiff would get all the reliefs. The plaintiffs have been able to make out a strong arguable case on merits. In a matter relating to enforcement of an unconditional bank guarantee, the plaintiff is required to establish a higher degree of equity rather than equity alone. Special equity would mean special features in a matter of this kind which would persuade the Court to rely upon equity, justice and good conscience to present irretrievable damage and prejudice. The features consisting special equity in the instant case has already been discussed. It would be unconscionable at this stage to allow the defendant No.1 to realize the said amount.
In my view, Mr. Bose is justified in contending that there are separate clauses with regard to the earnest money security deposit and performance guarantee and the monies deposited towards earnest money and security deposit cannot be equated with performance guarantee. The contract makes it quite clear.
The claim of the defendant essentially sounds in damages. Even if the argument of the plaintiff is accepted that Clause 17(B) is applicable in the instant case, the amount held by the defendant towards earnest money and security deposit is inadequate. The interest of the defendant is also required to be taken into consideration as the said defendant is prevented from having immediate benefit of the amount covered under the performance guarantee. In the event the counter claim succeeds the defendant would be entitled to the said amount. The equities are to be balanced. The performance guarantee furnished by the plaintiffs is valid till 26th March, 2018. The original bank guarantee is in the custody of the defendant No.1. The order of injunction restraining the defendant No.1 to encash the bank guarantee shall continue subject to the renewal of the performance guarantee by the plaintiffs till the disposal of the suit. The plaintiffs shall keep the bank guarantee renewed from time to time. The bank guarantee should be renewed at least 15 days prior to the date of its expiry upon intimation to the plaintiffs, failing which the defendant No.1 shall be entitled to invoke the bank guarantee forthwith and realize proceeds thereof to be adjusted towards its claim.
The application being G.A. No. 855 of 2014 stands disposed of. However, there shall be no order as to costs.
Urgent Photostat certified copy of this judgment, if applied for, be given to the parties on usual undertaking.
(SOUMEN SEN, J.)