Madhya Pradesh High Court
Gannon Dunkerley And Co. Limited ... vs Indore Smart City Development Limited ... on 11 October, 2018
HIGH COURT OF MADHYA PRADESH, BENCH AT INDORE
Writ Petition No.24484/2018
(Gannon Dunkerley & Co. Ltd. Vs. Indore Smart City Development Ltd.)
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Indore, dated 11/10/2018
Shri A. K. Chitale, learned Senior Counsel with Shri Bharat
Chitale, learned counsel for the petitioner.
Shri Manoj Munshi, learned counsel for the respondent.
The petitioner before this Court has filed present petition
being aggrieved by order dated 05/10/2018 passed by the
Executive Engineer and Executive Director terminating the contract
of the petitioner and also being aggrieved by forfeiture of
Performance Security Deposit (Bank Guarantee).
02- The petitioner's contention is that the petitioner was awarded
a works contract for development of Integrated Smart City Road
Network Work including the work of Jawahar Marg Bridge and the
total contract value of project is Rs.1,72,75,40,000/-. The petitioner's
grievance is that the respondent has unilaterally terminated the
contract and are encashing the Performance Bank Guarantee.
03- The petitioner has raised various grounds before this Court
and his contention is that the contract executed between the parties
dated 05/01/2018 could not have been terminated in the manner
and method it has been done. Learned Senior Counsel Shri Chitale
has vehemently argued before this Court that the action of the
respondent is bad in law and various other grounds have been
raised in support of the aforesaid averment.
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04- On the other hand, Shri Munshi while arguing the matter at
the outset has drawn the attention of this Court towards clause 12 of
the agreement executed between the parties and his contention is
that there is a Dispute Resolution Mechanism provided under the
contract and the petitioner should approach the Competent
Authority first. The Dispute Resolution System provided under the
contract reads as under:-
"12. DISPUTE RESOLUTION SYSTEM
12.1 No dispute can be raised except before the Competent
Authority as defined in Contract data in writing giving full
description and grounds of Dispute. It is clarified that
merely recording protest while accepting measurement
and/or payment shall not be taken as raising a dispute.
12.2 No issue of dispute can be raised after 45 days of its
occurrence. Any dispute raised after expiry of 45 days of
its first occurrence shall not be entertained and the
Employer shall not be liable for claims arising out of such
dispute.
12.3 The Competent Authority shall decide the matter within 45
days.
12.4 Appeal against the order of the Competent Authority can
be preferred within 30 days to the Appellate Authority as
defined in the Contract data. The Appellate Authority shall
decide the dispute within 45 days.
12.5 Appeal against the order of the Appellate Authority can be
preferred before the Madhya Pradesh Arbitration Tribunal
constituted under Madhya Pradesh Madhyastham
Adhikaran Adhiniyam, 1983
12.6 The contract shall have to continue execution of the works
with due diligence notwithstanding pendency of a dispute
before any authority or forum."
05- Learned Senior Counsel has argued before this Court that the
order of termination has been passed by the Competent Authority
i.e. Chief Executive Officer and it is also signed by Executive
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Direction and therefore, the petitioner does not have right to appeal
before the Competent Authority nor before the Appellate Authority.
06- This Court has carefully gone through the order terminating
the contract, however, the fact remains that under the Dispute
Resolution System, Clause-12.5 provides for raising a dispute
before the Madhya Pradesh Madhyastham Adhikaran and
undisputedly, in the present case the contract which has been
terminated is a "Works Contract".
07- In the considered opinion of this Court, as there is a remedy
available to the petitioner under the Madhya Pradesh Madhyastham
Adhikaran Adhiniyam, 1983, the petitioner is granted a liberty to
approach the Tribunal and in case the petitioner approaches the
Tribunal, the Tribunal shall decide the matter on merits and the
Tribunal shall not dismiss the petitioner's case on the ground that he
has not preferred an appeal before the Competent Authority.
08- Learned counsel for the petitioner has also argued on the
question of grant of interim relief i.e. restraining the respondent from
encashing the Bank Guarantee.
09- The Division Bench of this Court has recently dealt with a
similar issue in the case of Dinesh Kumar Sharma Vs. State of
M.P. & Another decided on 10/09/2018 in Writ Petition
No.20138/2018. The Division Bench of this Court in paragraph No.2
HIGH COURT OF MADHYA PRADESH, BENCH AT INDORE
Writ Petition No.24484/2018
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to 12 of the aforesaid judgment has held as under:-
"2. The petitioner was granted contract for construction of
Jhabua Road i.e. 9.62 Km. left over portion of Indore Ahmedabad
Road NH- 59. Such contract stands terminated on 23.07.2018.
The petitioner has raised the dispute before the Superintending
Engineer, P.W.D., Circle Indore. Later vide aseparate order dated
16.08.2018, the Bank Guarantee was sought to be encashed. It is
the order of encashment of the Bank Guarantee which is sought
to be disputed by the petitioner in the present writ petition.
3. Learned counsel for the petitioner placed reliance upon
judgment of Hon'ble Supreme Court in the case of M/s Gangotri
Enterprises Vs. Union of India reported as AIR 2016 SC 2199.
4. The law is well settled that the Bank Guarantee is an
independent contract which cannot be disputed except on a
question of fraud. The three Judges Bench in the case of General
Electric Technical Services Company INC. Vs. Punj Sons (P)
Ltd.and another reported as (1991) 4 SCC 230 examined the
scope of intervention of Court in the matter relating to encashment
of Bank Guarantee wherein it has been held as under:-
"9. The question is whether the Court was justified
in restraining the Bank from paying to GETSCO under the
bank guarantee at the instance of respondent-1. The law
as to the contractual obligations under the bank guarantee
has been well settled in a catenae of cases. Almost all
such cases have been considered in a recent judgment of
this Court in U.P. Cooperative Federation Ltd. v. Singh
Consultants and Engineers (P) Ltd., [1988] 1 SCC 174
wherein Sabyasachi Mukherji, J., as he then was,
observed (at 189) 'that in order to restrain the operation
either of irrevocable letter of credit or of confirmed letter of
credit or of bank guarantee, there should be serious
dispute and there should be good prima facie case of fraud
and special equities in the form of preventing irretrievable
injustice between the parties. Otherwise, the very purpose
of bank guarantees would be negatived and the fabric of
trading operations will get jeopardised'. It was further
observed that the Bank must honour the bank guarantee
free from interference by the Courts. Otherwise, trust in
commerce internal and international would be irreparably
damaged. It is only in exceptional cases that is to say in
case of fraud or in case of irretrievable injustice, the Court
should interfere. In the concurring opinion one of us (K.
Jagannatha Shetty, J.) has observed that whether it is a
421 traditional bond or performance guarantee, the
obligation of the Bank appears to be the same. If the
documentary credits are irrevocable and independent, the
Bank must pay when demand is made. Since the Bank
pledges its own credit involving its reputation, it has no
defence except in the case of fraud. The Bank's
obligations of course should not be extended to protest the
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unscrupulous party, that is, the party who is responsible for
the fraud. But the banker must be sure of his ground
before declining to pay. The nature of the fraud that the
courts talk about is fraud of an "egregious nature as to
vitiate the entire underlying transaction". It is fraud of the
beneficiary, not the fraud of somebody else."
5. Later another three judges Bench in the case of
Svenska Handelsbanken Vs. M/s Indian Charge Chrome and
others reported as (1994) 1 SCC 502 has held as under:
"86. We have already held that the contracts between the
lenders and the borrower are not vitiated by any fraud
much less established fraud and there is no question of
irretrievable injury. Therefore, there was no reason for the
High Court to set aside the order of the trial court. Again
there is no case of any irretrievable injury either of the type
as held in the case of Itek Corpn.6 as there is no difficulty
in the judgment of this country being executable in the
courts in Sweden.
87. The High Court was not right in working on mere
suspicion of fraud or merely going by the allegations in the
plaint without prima facie case of fraud being spelt out from
the material on record.
88. The High Court was also in error in considering the
question of balance of convenience. In law relating to bank
guarantees, a party seeking injunction from encashing of
bank guarantee by the suppliers has to show prima facie
case of established fraud and an irretrievable injury.
Irretrievable injury is of the nature as noticed in the case of
Itek Corpn.6 Here there is no such problem. Once the
plaintiff is able to establish fraud against the suppliers or
suppliers-cum-lenders and obtains any decree for
damages or diminution in price, there is no problem for
effecting recoveries in a friendly country where the bankers
and the suppliers are located. Nothing has been pointed
out to show that the decree passed by the Indian Courts
could not be executable in Sweden.
89. The High Court totally ignored the irretrievable injury
which will be caused to defendant 12 in not honouring the
bank guarantee in international market which may cause
grievous and irretrievable damage to the interest of the
country as opposed to the loss of money to the
borrower/plaintiff. There was no question of defendant 4
not making any demand. The instalments for repayment of
the loans had already been fixed and liable to be paid
without demand by defendant 4. Defendant 12 is under a
duty to pay the instalments regularly on a fixed date
without any demand to defendant 4."
6. In another three Judges Bench judgment reported as
(1996) 5 SCC 450 (Ansal Engineering Projects Ltd. Vs. Tehri
Hydro Development Corporation Ltd and another), the Court
again reiterated that Bank Guarantee is independent and distinct
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contract between the Bank and the beneficiary and is not qualified
by the underlying transaction and the validity of the primary
contract between the person at whose instance the Bank
Guarantee was given and the beneficiary. The relevant
paragraphs are reproduced as under:-
"4. It is settled law that bank guarantee is an independent
and distinct contract between the bank and the beneficiary
and is not qualified by the underlying transaction and the
validity of the primary contract between the person at
whose instance the bank guarantee was given and the
beneficiary. Unless fraud or special equity exists, is (sic)
pleaded and prima facie established by strong evidence as
a triable issue, the beneficiary cannot be restrained from
encasing the bank guarantee even if dispute between the
beneficiary and the person at whose instance the bank
guarantee was given by the Bank, had arisen in
performance of the contract or execution of the works
undertaken in furtherance thereof The Bank
unconditionally and irrevocably promised to pay, on
demand, the amount of liability undertaken in the
guarantee without any demur or dispute in terms of the
bank guarantee. The object behind is to inculcate respect
for free flow of commence and trade and faith in the
commercial banking transactions unhedged by pending
disputes between the beneficiary and the contractor.
5. It is equally settled law that in terms of the bank
guarantee the beneficiary is entitled to invoke the bank
guarantee and seek encashment of the amount specified
in the bank guarantee. It does not depend upon the result
of the decision in the dispute between the parties, in case
of the breach. The underlying object is that an irrevocable
commitment either in the form of bank guarantee or letters
of credit solemnly given by the bank must be honoured.
The Court exercising its power cannot interfere with
enforcement of bank guarantee/letters of credit except
only in cases where fraud or special equity is prima facie
made out in the case as triable issued by strong evidence
so as to prevent irretrievable injustice to the parties. The
trading operation would not be jettisoned and faith of the
people in the efficacy of banking transactions would not be
eroded or brought to disbelief. The question, therefore, is:
whether the petitioner had made out any case of
irreparable injury by proof of special equity or fraud so as
to invoke the jurisdiction of the Court by way of injunction
to restrain the first respondent from encashing the bank
guarantee. The High Court held that the petitioner has not
made out either. We have carefully scanned the reasons
given by the High Court as well as the contentions raised
by the parties. On the facts, we do not find that any case
of fraud has been made out. The contention is that after
promise to extend time for constructing the buildings and
allotment of extra house and the term of bank guarantees
was extended, the contract was terminated. It is not a case
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of fraud but one of acting in terms of contract. It is next
contended by Shri G. Nageshwara Rao, learned counsel
for the petitioner that unless the amount due and payable
is determined by a competent court or tribunal by mere
invocation of bank guarantee or letter of credit pleading
that the amount is due and payable by the petitioner,
which was disputed, cannot be held to be due and payable
in a case. The Court has yet to go into the question and
until a finding after trial, a decision is given by a court or
tribunal that amount is due and payable by the petitioner, it
cannot be held to be due and payable. Therefore, the High
Court committed manifest error of law in refusing to grant
injunction as the petitioner has made out a prima facie
strong case. We find no force in the contention. All the
clauses of, the contract of the bank guarantee are to be
read together. Bank guarantee/letters of credit is an
independent contract between the bank and the
beneficiary. It does not depend on the result of the dispute
between the persons on whose behalf the bank guarantee
was given by the bank and the beneficiary. Though the
question was not elaborately discussed, it was in sum
answered by this Court in Hindustan Steel Workers
Construction Ltd. v. G.S. Atwal & Co. (Engineers) Pvt.
Ltd. : AIR1996SC131 . This Court had held in para 6 that
the entire dispute was pending before the arbitrator.
Whether, and if so, what is the amount due to the
appellant was to be adjudicated in the arbitration
proceedings. The order of the learned Single Judge
proceeds on the basis that the amounts claimed were not
and cannot be said to be due and the bank has violated
the understanding between the respondent and the Bank
in giving unconditional guarantee to the appellant. The
learned Judge held that the bank had issued a guarantee
in a standard form, covering a wider spectrum than agreed
to between the respondent and the bank and it cannot be
a reason to hold that the appellant is in any way fettered in
invoking the unconditional bank guarantee. Similarly, the
reasoning of the learned Single Judge that before invoking
the performance guarantee the appellant should assess
the quantum of loss and damages and mention the
ascertained figure, cannot be put forward to restrain the
appellant from invoking the unconditional guarantee. This
reasoning would clearly indicate that the final adjudication
is not a pre-condition to invoke the bank guarantee and
that is not a ground to issue injunction restraining the
beneficiary to enforce the bank guarantee. In Hindustan
Steel Works Construction Ltd. v. Tarapore & Co. & Anr. :
AIR1996SC2268, it was contended that a contractor had a
counterclaim against the appellant; that disputes had been
referred to the arbitrator and no amount was said to be
due and payable by the contractor to the appellant till the
arbitrator declared the award. It was contended therein
that those were exceptional circumstances justifying
interference by restraining the appellant from enforcing the
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bank guarantee. The High Court had issued interim
injunction from enforcing the bank guarantee. Interfering
with and reversing the order of the High Court, this Court
has held in para 23 that a bank must honour its
commitment free from interference by the courts. The
special circumstances or special equity pleaded in the
case that there was a serious dispute on the question as
to who has committed the breach of the contract and that
whether the amount is due and payable by the contractor
to the appellant till the arbitrator declares the award, was
not sufficient to make the case an exceptional one
justifying interference by restraining the appellant from
enforcing the bank guarantee. The order of injunction,
therefore, was reserved with certain directions with which
we are not concerned in this case."
7. In another three judges Bench judgment reported as
(1997) 6 SCC 450 (Dwarikesh Sugar Industries Ltd. Vs. Prem
Heavy Engineering Works (P) Ltd. and another) it has been
held as under:-
"24. The letter of invocation issued by the appellant
demanding the payment ot Rs.26,15000/- was in
accordance with the terms of bank guarantee No. 40/51
and the bank was, therefore, under an obligation to honour
its undertaking and to make the payment . It, however,
chose not to fulfill its obligation. If the bank could not in law
avoid the payment, as the demand had been made in
terms of the bank guarantee, as has been done in the
present case, then the court ought not to have issued an
injunction which had the effect of restraining the bank from
fulfilling its contractual obligation in terms of the bank
guarantee. An injunction of the court ought not to be an
instrument which is used in nullifying the terms of a
contract, agreement or undertaking which is used in
nullifying the terms of contract, agreement or undertaking
which is lawfully enforceable. In its aforesaid letter dated
24th November, 1995 respondent no.1 had clearly
admitted that entire supply had not been made. In view of
this also the High court was not justified in granting an
injunction.
29. It is unfortunate that the High Court did not consider
it necessary to refer to various judicial pronouncements of
this Court in which the principles which have to be followed
while examining an application for grant of interim relief
have been clearly laid down. The observation of the High
Court that reference to judicial decisions will not be of
much importance was clearly a method adopted by it in
avoiding to fo11ow and apply the law as laid down by this
Court. Yet another serious error which was committed by
the High Court, in the present case, was not to examine
the terms of the bank guarantee and consider the letters of
invocation which had been written by the appellant. If the
High Court had trail the trouble of examining the
documents on record, which had been referred to by the
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trial court, in its order refusing to grant injunction, the court
would not have granted the interim injunction. We also do
not find any justification for the High Court in invoking the
alleged principle of adjust enrichment to the facts of the
present case and then deny the appellant the Right to
encash the bank guarantee. If the High Court had taken
the trouble to see the law on the point it would have been
clear that in encashment of bank guarantee the
applicability of the principle of undue enrichment has no
application.
30. We are constrained to make these observation with
regard to the manner in which the High Court had dealt
with this case because this is not an isolated case where
the courts, while disobeying or not complying with the law
laid down by this Court, have at time been liberal in
granting injunction restraining encashment of bank
guarantees.
31. It is unfortunate, that notwithstanding the
authoritative the pronouncements of this Court, the High
Courts and the courts subordinate thereto, still seem
intent on affording to this Court innumerable opportunities
for dealing with this area of law, thought by this Court to be
well settled.
8. Such is the view of the Hon'ble Supreme Court in the
case of Adani Agri Fresh Ltd. v. Mahaboob Sharif and others,
(2016) 14 SCC 517, wherein on review of the judgments, it was
held as under:-
"9. Reliance was also placed on Vinitec
Electronics (P) Ltd. v. HCL Infosystems Ltd. [Vinitec
Electronics (P) Ltd. v. HCL Infosystems Ltd., (2008) 1
SCC 544 : (2008) 1 SCC (Civ) 342] The following
observations have been recorded in the above
judgment: (SCC pp. 547-50 & 553, paras 11-14 & 24-
7)
"11. The law relating to invocation of bank
guarantees is by now well settled by a catena of
decisions of this Court. The bank guarantees which
provided that they are payable by the guarantor on
demand is considered to be an unconditional bank
guarantee. When in the course of commercial
dealings, unconditional guarantees have been given
or accepted the beneficiary is entitled to realise such
a bank guarantee in terms thereof irrespective of any
pending disputes. In U.P. State Sugar Corpn. v.
Sumac International Ltd. [U.P. State Sugar Corpn. v.
Sumac International Ltd., (1997) 1 SCC 568] , this
Court observed that: (SCC p. 574, para 12)
'12. The law relating to invocation of such
bank guarantees is by now well settled. When
in the course of commercial dealings an
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unconditional bank guarantee is given or
accepted, the beneficiary is entitled to realise
such a bank guarantee in terms thereof
irrespective of any pending disputes. The bank
giving such a guarantee is bound to honour it
as per its terms irrespective of any dispute
raised by its customer. The very purpose of
giving such a bank guarantee would otherwise
be defeated. The courts should, therefore, be
slow in granting an injunction to restrain the
realisation of such a bank guarantee. The
courts have carved out only two exceptions. A
fraud in connection with such a bank
guarantee would vitiate the very foundation of
such a bank guarantee. Hence if there is such
a fraud of which the beneficiary seeks to take
advantage, he can be restrained from doing
so. The second exception relates to cases
where allowing the encashment of an
unconditional bank guarantee would result in
irretrievable harm or injustice to one of the
parties concerned. 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 this head must be of such an
exceptional and irretrievable nature as would
override the terms of the 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 coexist in some cases.'
12. It is equally well settled in law that bank
guarantee is an independent contract between bank
and the beneficiary thereof. The bank is always
obliged to honour its guarantee as long as it is an
unconditional and irrevocable one. The dispute
between the beneficiary and the party at whose
instance the bank has given the guarantee is
immaterial and of no consequence. In BSES Ltd. v.
Fenner India Ltd. [BSES Ltd. v. Fenner India Ltd.,
(2006) 2 SCC 728] this Court held: (SCC pp. 733-34,
para 10)
'10. There are, however, two exceptions to
this rule. The first is when there is a clear fraud
of which the bank has notice and a fraud of the
beneficiary from which it seeks to benefit. The
fraud must be of an egregious nature as to
vitiate the entire underlying transaction. The
second exception to the general rule of non-
intervention is when there are "special
equities" in favour of injunction, such as when
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"irretrievable injury" or "irretrievable injustice"
would occur if such an injunction were not
granted. The general rule and its exceptions
has been reiterated in so many judgments of
this Court [ See e.g. U.P. State Sugar Corpn. v.
Sumac International Ltd., (1997) 1 SCC 568 at
pp. 574-77, paras 12-16, State of Maharashtra
v. National Construction Co., (1996) 1 SCC
735 at p. 741, para 13, United Commercial
Bank v. Bank of India, (1981) 2 SCC 766,
Centax (India) Ltd. v. Vinmar Impex Inc.,
(1986) 4 SCC 136] , that in U.P. State Sugar
Corpn. v. Sumac International Ltd. [U.P. State
Sugar Corpn. v. Sumac International Ltd.,
(1997) 1 SCC 568] (hereinafter U.P. State
Sugar Corpn.) this Court, correctly declare that
the law was "settled".'
13. In Himadri Chemicals Industries Ltd. v. Coal
Tar Refining Co. [Himadri Chemicals Industries Ltd. v.
Coal Tar Refining Co., (2007) 8 SCC 110] , this Court
summarised the principles for grant of refusal to grant
of injunction to restrain the enforcement of a bank
guarantee or a letter of credit in the following manner:
(SCC pp. 117- 18, para 14)
'14. ... (i) While dealing with an application for
injunction in the course of commercial
dealings, and when an unconditional bank
guarantee or letter of credit is given or
accepted, the beneficiary is entitled to realise
such a bank guarantee or a letter of credit in
terms thereof irrespective of any pending
disputes relating to the terms of the contract.
(ii) The bank giving such guarantee is bound to
honour it as per its terms irrespective of any
dispute raised by its customer.
(iii) The courts should be slow in granting an
order of injunction to restrain the realisation of
a bank guarantee or a letter of credit.
(iv) Since a bank guarantee or a letter of credit
is an independent and a separate contract and
is absolute in nature, the existence of any
dispute between the parties to the contract is
not a ground for issuing an order of injunction
to restrain enforcement of bank guarantees or
letters of credit. (v) Fraud of an egregious
nature which would vitiate the very foundation
of such a bank guarantee or letter of credit
and the beneficiary seeks to take advantage of
the situation.
(vi) Allowing encashment of an unconditional
bank guarantee or a letter of credit would
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result in irretrievable harm or injustice to one
of the parties concerned.'
14. In Mahatama Gandhi Sahakra Sakkare
Karkhane v. National Heavy Engg. Coop. Ltd.
[Mahatma Gandhi Sahakra Sakkare Karkhane v.
National Heavy Engg. Coop. Ltd., (2007) 6 SCC 470]
this Court observed: (SCC p. 471 b-d)
'If the bank guarantee furnished is an
unconditional and irrevocable one, it is not
open to the bank to raise any objection
whatsoever to pay the amounts under the
guarantee. The person in whose favour the
guarantee is furnished by the bank cannot be
prevented by way of an injunction from
enforcing the guarantee on the pretext that the
condition for enforcing the bank guarantee in
terms of the agreement entered into between
the parties has not been fulfilled. Such a
course is impermissible. The seller cannot
raise the dispute of whatsoever nature and
prevent the purchaser from enforcing the bank
guarantee by way of injunction except on the
ground of fraud and irretrievable injury.
What is relevant are the terms
incorporated in the guarantee executed by the
bank. On careful analysis of the terms and
conditions of the guarantee in the present
case, it is found that the guarantee is an
unconditional one. The respondent, therefore,
cannot be allowed to raise any dispute and
prevent the appellant from encashing the bank
guarantee. The mere fact that the bank
guarantee refers to the principle agreement
without referring to any specific clause in the
Preamble of the deed of guarantee does not
make the guarantee furnished by the bank to
be a conditional one.'
***
24. The next question that falls for our consideration is as to whether the present case falls under any of or both the exceptions, namely, whether there is a clear fraud of which the bank has notice and a fraud of the beneficiary from which it seeks to benefit and another exception whether there are any 'special equities' in favour of granting injunction.
25. This Court in more than one decision took the view that fraud, if any, must be of an egregious nature as to vitiate the underlying transaction. We have meticulously examined the pleadings in the present case in which no factual foundation is laid in support HIGH COURT OF MADHYA PRADESH, BENCH AT INDORE Writ Petition No.24484/2018 (Gannon Dunkerley & Co. Ltd. Vs. Indore Smart City Development Ltd.)
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of the allegation of fraud. There is not even a proper allegation of any fraud as such and in fact the whole case of the appellant centres around the allegation with regard to the alleged breach of contract by the respondent. The plea of fraud in the appellant's own words is to the following effect:
'That despite the respondent HCL being in default of not making payment as stipulated in the bank guarantee, in perpetration of abject dishonesty and fraud, the respondent HCL fraudulently invoked the bank guarantee furnished by the applicant and sought remittance of the sums under the conditional bank guarantee from Oriental Bank of Commerce vide letter of invocation dated 16- 12-2003.'
26. In our considered opinion such vague and indefinite allegations made do not satisfy the requirement in law constituting any fraud much less the fraud of an egregious nature as to vitiate the entire transaction. The case, therefore does not fall within the first exception.
27. Whether encashment of the bank guarantee would cause any 'irretrievable injury' or 'irretrievable injustice'. There is no plea of any 'special equities' by the appellant in its favour. So far as the plea of 'irretrievable injustice' is concerned the appellant in its petition merely stated:
'That should the respondent be successful in implementing its evil design, the same would not only amount to fraud, cause irretrievable injustice to the applicant, and render the arbitration nugatory and infructuous but would permit the respondent to take an unfair advantage of their own wrong at the cost and extreme prejudice of the applicant.'"
(emphasis supplied)
14. In deciding the present controversy, we will therefore have to adopt the principles laid down by this Court in U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. [U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174] , and in Vinitec Electronics (P) Ltd. v. HCL Infosystems Ltd. [Vinitec Electronics (P) Ltd. v. HCL Infosystems Ltd., (2008) 1 SCC 544 : (2008) 1 SCC (Civ) 342] Having given our thoughtful consideration to the law laid down by this Court, in respect of grant/refusal of an injunction of an unconditional bank guarantee, and keeping in mind HIGH COURT OF MADHYA PRADESH, BENCH AT INDORE Writ Petition No.24484/2018 (Gannon Dunkerley & Co. Ltd. Vs. Indore Smart City Development Ltd.)
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the terms and conditions, more particularly of the contractual conditions extracted and narrated above, we are satisfied that the courts below were not justified in injuncting the invocation of the three bank guarantees, executed by State Bank of Mysore, at the instance of M/s RMSFC. We accordingly hereby direct Respondents 2 and 3, State Bank of Mysore to honour the same forthwith."
9. In another Judgment reported as Gujarat Maritime Board vs. Larsen and Toubro Infrastructure Development Projects Limited and another, (2016) 10 SCC 46 wherein it has been held that the Bank Guarantee is a separate contract and is not qualified by the contract on performance of the obligations and that between the employer and the Bank, the decision of the employer as to the breach shall be absolute and binding on the Bank. It has been held as follows:-
"11. It is contended on behalf of the first respondent that the invocation of bank guarantee depends on the cancellation of the contract and once the cancellation of the contract is not justified, the invocation of bank guarantee also is not justified. We are afraid that the contention cannot be appreciated. The bank guarantee is a separate contract and is not qualified by the contract on performance of the obligations. No doubt, in terms of the bank guarantee also, the invocation is only against a breach of the conditions in the LoI. But between the appellant and the Bank, it has been stipulated that the decision of the appellant as to the breach shall be absolute and binding on the Bank.
12. An injunction against the invocation of an absolute and an unconditional bank guarantee cannot be granted except in situations of egregious fraud or irretrievable injury to one of the parties concerned. This position also is no more res integra. In Himadri Chemicals Industries Ltd. v.Coal Tar Refining Co. [Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co., (2007) 8 SCC 110] , at para 14: (SCC pp. 117-18) "14. From the discussions made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement of a bank guarantee or a letter of credit, we find that the following principles should be noted in the matter of injunction to restrain the encashment of a bank guarantee or a letter of credit:
(i) While dealing with an application for injunction in the course of commercial HIGH COURT OF MADHYA PRADESH, BENCH AT INDORE Writ Petition No.24484/2018 (Gannon Dunkerley & Co. Ltd. Vs. Indore Smart City Development Ltd.)
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dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the beneficiary is entitled to realise such a bank guarantee or a letter of credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.
(ii) The bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.
(iii) The courts should beslow in granting an order of injunction to restrain the realisation of a bank guarantee or a letter of credit.
(iv) Since a bank guarantee or a letter of credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of bank guarantees or letters of credit.
(v) Fraud of an egregious nature which would vitiate the very foundation of such a bank guarantee or letter of credit and the beneficiary seeks to take advantage of the situation.
(vi) Allowing encashment of an unconditional bank guarantee or a letter of credit would result in irretrievable harm or injustice to one of the parties concerned."
13. The guarantee given by the Bank to the appellant contains only the condition that in case of breach by the lead promoter viz. the first respondent of the conditions of LoI, the appellant is free to invoke the bank guarantee and the Bank should honour it "... without any demur, merely on a demand from GMB (appellant) stating that the said lead promoter failed to perform the covenants...". It has also been undertaken by the Bank that such written demand from the appellant on the Bank shall be "... conclusive, absolute and unequivocal as regards the amount due and payable by the Bank under this guarantee". Between the appellant and the first respondent, in the event of failure to perform the obligations under the LoI dated 6-2-2008, the appellant was entitled to cancel the LoI and invoke the bank guarantee. On being satisfied that the first respondent has failed to perform its obligations as covenanted, the appellant cancelled the LoI and resultantly invoked the bank guarantee. Whether the cancellation is legal and proper, and whether on such cancellation, the bank guarantee could have been invoked on the extreme situation of the first HIGH COURT OF MADHYA PRADESH, BENCH AT INDORE Writ Petition No.24484/2018 (Gannon Dunkerley & Co. Ltd. Vs. Indore Smart City Development Ltd.)
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respondent justifying its inability to perform its obligations under the LoI, etc. are not within the purview of an inquiry under Article 226 of the Constitution of India. Between the Bank and the appellant, the moment there is a written demand for invoking the bank guarantee pursuant to breach of the covenants between the appellant and the first respondent, as satisfied by the appellant, the Bank is bound to honour the payment under the guarantee."
10. Thus, the decision of the Respondents to invoke Bank Guarantee is on satisfaction that the petitioner has failed to perform its obligations as agreed. Therefore, the contract was terminated and resultantly invoked the Bank Guarantee. The question as to whether the cancellation is legal and proper, and whether the Bank Guarantee could have been invoked on the extreme situation of the Petitioner justifying its inability to perform its obligations under the contract are not within the scope of judicial review under Article 226 of the Constitution of India. The Bank is bound to honour its commitment as agreed by Bank when it furnished Bank Guarantee, whenever, there is a written demand for invoking the Bank Guarantee.
11. In the case of M/s Gangotri Enterprises (Supra) the Bank Guarantee was sought to be invoked not in relation to the contract in question, but for the Bank Guarantee given in respect of another contract. Therefore, the said judgment is not applicable to the facts of the case. The attention of this Court was not drawn to the larger Bench judgments as noticed above as well.
12. Since the bank guarantee in question was furnished by the petitioner in respect to the contract in question, therefore, in view of the judgments referred to above, the respondents are legally justified in invoking the Bank Guarantee."
10- In light of the aforesaid judgment, this Court is of the opinion that no case for grant of any interim relief is made out in the matter.
The petitioner shall be free to file a claim before the Tribunal and admission is declined.
Certified copy as per rules.
(S. C. SHARMA) (VIRENDER SINGH)
JUDGE JUDGE
Tej
Digitally signed by
Tej Prakash Vyas
Date: 2018.10.24
13:07:23 +05'30'