Gujarat High Court
Vijai Electricals Limited vs Transformers And Rectifiers India Ltd on 25 March, 2022
Author: N.V.Anjaria
Bench: N.V.Anjaria
C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/FIRST APPEAL NO. 1691 of 2021
With CIVIL APPLICATION (FOR STAY) NO. 1 of 2021
In R/FIRST APPEAL NO. 1691 of 2021
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE N.V.ANJARIA
And
HONOURABLE MR. JUSTICE SANDEEP N. BHATT
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1 Whether Reporters of Local Papers may be allowed to see the Yes
judgment ?
2 To be referred to the Reporter or not ? Yes
3 Whether their Lordships wish to see the fair copy of the No
judgment ?
4 Whether this case involves a substantial question of law as to No
the interpretation of the Constitution of India or any order made
thereunder ?
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VIJAI ELECTRICALS LIMITED
Versus
TRANSFORMERS AND RECTIFIERS INDIA LTD
==========================================================
Appearance:
ROHAN LAVKUMAR(9248) for the Appellant(s) No. 1
AISHWARYA REDDY(9713) for the Defendant(s) No. 1
GUPTA LAW ASSOCIATES(9818) for the Defendant(s) No. 1
MR SH ALMAULA(120) for the Defendant(s) No. 2
MR UDAY R BHATT(192) for the Defendant(s) No. 3
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CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIA
and
HONOURABLE MR. JUSTICE SANDEEP N. BHATT
Date :25/03/2022
CAV JUDGMENT
(PER : HONOURABLE MR. JUSTICE N.V.ANJARIA) This appeal is preferred under Section 37 of the Arbitration and Conciliation Act, 1996 against order dated Page 1 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 17.2.2021 passed by Commercial Court, City Civil Court, Ahmedabad, dismissing Application Exhibit 23 filed by the appellant herein. It was an application under Section 8 of the Arbitration and Conciliation Act praying to dismiss the suit and refer the parties to the arbitration in view of the Arbitration Clause in the contract.
1.1 It was stated by learned advocate for respective parties that pleadings were complete and no further pleadings were to be added or to be supplemented. They stated that they argued the appeal finally. Accordingly, the appeal was taken up for final consideration.
1.2 The parties submitted the compilation of copies of pleadings and documents which were on record of the Commercial Court. The parties were ad idem in respect of contents of same. They were accordingly permitted to rely on the same in course of hearing of the appeal.
2. Respondent M/S. Transformers and Rectifiers India Limited- original plaintiff, institute Commercial Suit No.192 of 2020 against the appellant herein- defendant No.3. The suit was for declaration that letter dated 18.1.2020 issued by appellant in which conditional claim for the bank guarantees was lodged, was illegal. By the said letter dated 18.1.2020, the appellant instructed the bank to permit the proceeds of the bank guarantees to it treating as claim unless the period of bank guarantees were extended.
2.1 The said letter reads as under, Dear Sir, Sub:- Conditional Claim against the Bank Guarantee issued by you in favor of M/s. Vijai Page 2 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 Electricals Limited vide Bank Guarantee No.0403816BG0000189 dt.12.04.2016 The validity period of the following Bank Guarantee executed by you in our favour bearing Bank Guarantee Number 04038168G0000189, dt.12.04.2016 expiring on 28 January, 2020. We request for same to be extended for two year i.e. from 28.01.2020 to 28.01.2022 before expiry of the validity. In case the extension is not provided to us before expiry date, this may be treated as claim against this Bank Guarantee and the proceeds of the same shall be remitted to us by way of RTGS to the account details given in this letter.
Sl.No. Bank Guarantee Date BG Value As on date To be
Number valid upto extended
Amount in Rs.
upto
01. 04038168G0000 12.04.2016 11,00,77,500/- 28.01.2020 28.01.2022
189
2.2 The bank guarantees in question, in invocation for which was
sought were No.0403816BG0000189 dated 5.3.2019 and another No.2538IGPER003416 dated 6.3.2019.Both the bank guarantees were for the amount of Rs.11,00,77,500/- each and they were to expire on 28.1.2020.
3. The aforementioned suit had the reference to and the context of the supply agreement entered into between the parties. The dispute in the suit was relatable to the contract obligations between the parties. The said contract dated 28.3.2015 was executed between the appellant Vijai Electricals Limited and respondent M/s. Transformers and Rectifiers (India) Limited who were the purchasers and the suppliers respectively. The purchaser had entered into a contract dated 28.11.2013 with Compatoir Algerien Du Materiel et Electrique et Gazier (CAMEG). Under the agreement the supplier had agreed to provide equipments for the purpose of exporting to the CAMEG which was Page 3 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 the ultimate buyer customer to be benefitted under the Algerien Contract and also to provide the transformer related services. In other words the agreement was in respect of power supply, power transformers and transformer related allied services.
3.1 Under Clause 1 of the contract, certain terms were defined. 'Guarantee period' was ascribed the same meaning as stated in Clause 8 of the contract. The word 'performance guarantee' was also defined under Clause 6 of the contract and in the format of the performance guarantee of the equipment set forth in Schedule 3. The 'Supplier's Default' was given meaning as per Clause 26.1 and 'Supply Schedule' was set out in Clause 15.1 of the contract. Clause 6 of the contract was in respect of in terms of payment. Clause 8 was regarding performance bank guarantee. The arbitration clause was Clause 28.
3.2 At this stage, the terms and conditions in the supply agreement germane to the controversy may be looked into. The contract in question was amended thrice. Clause 6 dealing with the payment terms as stood in the original contract was as under.
"Clause 6: Payment Terms 6.1 The Supplier shall provide an unconditional and irrevocable bank guarantee of 10(ten percent) of the Contract Price, in the format acceptable to the Purchaser and as per the terms set out in Schedule VI, issued by an Indian scheduled bank to cover the performance obligations of the Supplier under this Contract (the "Performance Guarantee') within [15] (fifteen) Business Days of the execution date of this Contract. The Performance Guarantee shall be valid till the Guarantee Period is completed for all the Equipment. The Performance Guarantee shall have an initial validity period uptil January 28, 2019.If the Guarantee Period extends beyond January 28, 2019, then the Page 4 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 Purchaser shall furnish a fresh Performance Guarantee which shall be valid for the balance tenor of the Guarantee Period at least 2 (two) months prior to the expiry of the existing Performance Guarantee. Further, in the event the Contract Price Increases pursuant to Clause 11.2 due to an increase in the number of Transformers to be supplied, the Supplier shall within 30 (thirty) days from the date of receipt of the Quantity Variation Notice, furnish a Performance Guarantee for 10% of the increase in the Contract Price. In case there is a reduction in the quantity the guarantee requirement will be reduced to 10% of the reduce contract price. The Purchaser shall invoke the Bank Guarantee only in case CAMEG Invokes Bank Guarantee issued by the Purchaser to CAMEG, Invocation letter received from CAMEG / Bank Is required to be attached with the claim to substantiate the same.
6.2 The Performance Guarantee shall, amongst others, specifically cover:
(a) any failure by the Supplier to deliver the Equipments in conformity of the terms of this Contract or failure to provide the Transformer Related Services;
(b) any defect or deficiency in the Equipments or the Transformer Related Services."
3.2.1 The above clause 6.1 indicated that the performance bank guarantee shall be valid till guarantee period is contemplated for all the equipment. It was further mentioned that if the guarantee period extends beyond January, 2019 a fresh performance bank guarantee shall be furnished by the guarantor to be valid for balance tenure of the guarantee period to be atleast two months prior to the expiry of the existing performance guarantee, in the eventuality in increase in price, it was contemplated that performance bank guarantee for 10% would be given. In other words it was indicated in this clause Page 5 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 that performance bank guarantee would be given to be extended to last till the entire contract period covering supply of all the equipments is over.
3.2.2 The first amendment made in the supply contract was dated 1.9.2015 whereas the second was carried out on 28.11.2015. The third amendment carried out was on 6.2.2016 is relevant, whereby clause 6.1 was replaced to become as under, "6.1 The Supplier shall provide unconditional and irrevocable bank guarantees in the manner set out hereinafter for an aggregate amount equal to 10% (ten percent) of the Contract Price, in the format acceptable to the Purchaser and as per the terms set out in Schedule VI, issued by an Indian scheduled bank to cover the performance obligations of the Supplier under this Contract (the "Performance Guarantees"):
(a) bank guarantee for 2.5% of the Contract Price shall be furnished simultaneously with the execution of this Third Amendment Agreement;
(b) bank guarantee for 2.5% of the Contract Price shall be furnished within 1 month of execution of this Third Amendment Agreement;
and
(c) bank guarantee for 5% of the Contract Price shall be furnished within 4 months of execution of this Third Amendment Agreement.
The Performance Guarantees shall be valid till the Guarantee Period is completed for all the Equipment. The Performance Guarantees shall have an initial validity period uptil January 28, 2019. If the Guarantee Period extends beyond January 28, 2019, then the Purchaser shall extend the validity of the Performance Guarantees for the balance tenor of the Guarantee Period at least 2 (two) months prior to the expiry of the existing Performance Guarantee. Further, in the event the Contract Page 6 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 Price increases pursuant to Clause 11.2 due to an increase in the number of Transformers to be supplied, the Supplier shall within 30 (thirty) days from the date of receipt of the Quantity Variation Notice, furnish an additional Performance Guarantee for 10% of the increase in the Contract Price. The Purchaser shall invoke the Performance Guarantee only in case CAMEG invokes Bank Guarantee issued by the Purchaser to CAMEG. Invocation letter received from CAMEG / Bank is required to be attached with the claim to substantiate the same. Clause 6.3.4 of the Agreement shall be deleted and replaced in its entirety by the new Clause 6.3.4 as is set out below: It is further agreed that the beneficiary shall limit the claims against either or both the guarantees subject to a maximum of 10% of the value of the Contract.
6.3.4. All payments specified in Clause [6.3] shall be made after receiving the correct invoices for payment from the Supplier and are subject to (a) deductions/ adjustments from the Contract Price as per this Contract and (b) the Supplier furnishing to the Purchaser, unconditional and irrevocable bank guarantees in accordance with Schedule VI."
3.2.3 As per the newly substituted clause 6.1 as above, the requirement of one bank guarantee for 10% of contract price was omitted and instead it was stipulated that three bank guarantees for 2.5%, 2.5% and 5% for the contract price would be needed to be furnished. The condition was there that the performance guarantee shall be valid till the guarantee period for supply of all the equipments is over.
3.3 Clause 8 of the contract agreement provided about performance representations and guarantee. This clause is reproduced below in its relevant part.
"CLAUSE 8 : PERFORMANCE Page 7 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 REPRESENTATIONS AND GUARANTEE
8.1 All the Equipments supplied under this Contract shall have a guarantee period of 37 (thirty seven) months from the date of issuance of provisional acceptance letter for the Equipments by CAMEG ("Guarantee Period"). If due to any defect in the Equipment(s) or in the Transformer Related Services or any other reason attributable to the Supplier, there is a total or partial immobilisation of the Equipment(s), then the Guarantee Period shall be extended by the period for which the Equipment(s) were not working. It is clarified that the provisional acceptance letter shall be issued for each Lot.
8.2 The Supplier hereby represents and warrants that the Equipments supplied under this Contract shall conform to the Technical Specifications and the terms of the Contract and that the Transformers shall perform in accordance with the Performance Guarantee. The Supplier shall also ensure that the Equipments delivered are new, and have never been used. If the transformers fail to perform as per the performance guarantee of the equipments as per Schedule III, then the Supplier shall pay liquidated damages] to the Purchaser.
8.3 It is agreed and acknowledged by the Parties that the liquidated damages specified in Clauses [7.2] and [8.2] shall be recoverable (a) from any payment due to the Supplier or (b) by encashment of the Performance Guarantee furnished by the Supplier. Further, payment of such liquidated damages shall in no way relieve the Supplier from its contractual responsibilities and obligations under this Contract. The Parties agree that the liquidated damages payable under Clauses [7.2] and [8.2] are a fair and reasonable pre-estimate of the damages likely to be sustained by the Purchaser as a result of the Supplier's failure to deliver the Equipments and provide services per the terms of this Contract. The payment of liquidated damages shall be Page 8 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 without prejudice to any other rights and remedies that the Purchaser shall have under this Contract."
3.3.1 The reading of the above clause show that it was contemplated that all the equipments supplied under this contract shall have guarantee period for the seven months from the date of issuance of provisional acceptance. It also contained the agreement as regards liquidated damages etc. Clause 26 was a default clause. Clause 27 dealt with termination of the contract.
3.4 The arbitration clause in the contract was Clause 28 which is extracted below, "Clause 28: Dispute Resolution 28.1 The Parties hereto shall endeavour to settle all disputes and differences relating to and/ or arising out of the Contract amicably.
28.2 In the event of the Parties failing to resolve any dispute amicably the same shall be refered to the arbitration of a sole arbitrator as mutually decided by the Parties and in case the Parties fall to mutually appoint the arbitrator within a period of 30 (thirty) days, the said sole arbitrator shall be appointed in accordance with te Arbitration and Conciliation Act, 1996 and the rules thereunder, as may be amended from time to time.
28.3 The place of arbitration shall be (Hyderabad) and the language of the arbitration shall be English, 28.4 The Parties further agree that any arbitration award shall be final and binding upon the Parties.
28.5 The Parties hereto agree that they shall be Page 9 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 obliged to carry out their obligations under this Contract even in the event a dispute is referred to arbitation."
3.4.1 Thus the arbitration clause provides that the parties shall settle all disputes and differences 'relating to and / or arising out of the contract' by way of arbitral process.
3.5 Also extracted herein below the relevant contents from the bank guarantee, similarly worded in both.
"This deed of guarantee is executed by for an amount not exceeding Rs. 11,00,77,500.00 (Rupees Eleven Crore Seventy Seven Thousand Five Hundred Only) at the request of Transformers and Rectifiers (India) Ltd. Its registered office at Survey No. 427 P/3-4, & 431 P/1-2, Sarkhej-Bavla Highway, Village: Moraiya, Tal. : Sanand, Dist.: Ahmedabad-382 213 (hereinafter called the "Supplier"). This Guarantee is issued subject to the condition that the liability of the bank under this guarantee is limited to a maximum of Rs.11,00,77,500.00 (Rupees Eleven Crore Seventy Seven Thousand Five Hundred Only) and the Guarantee shall remain in full force up to 25.01.2019 and can not be revoked otherwise than by a written demand or claim under this guarantee served on the bank on or before the 28.04.2019.
THIS DEED OF GUARANTEE made on the 10th day of February by Bank of Baroda having its registered office at Mandavi Baroda & among having branch at corporate financial Services st branch, 1 floor bank of Baroda towers opp. Law Garden, Ellisbridge, Ahmedabad-380006 herein after called (the Guarantor") of the one part in favor of the Vijal Electricals Limited, 6-3 648/1&2, Off, Rajbhavan Somajiguda, Hyderabad 500 082 (herein after called the "Purchaser") on the other part.
WHEREAS In accordance with the contract agreement dated the 28th March, 2015 and its Page 10 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 amendments executed subsequently. (hereinafter called "the said Contract") entered into between the supplier, Transformers & Rectifiers (India) Ltd. having its registered office at Survey No.427P/3-4 & 431P/1-2, Sarkhej-Bavla Highway, Moraiya, Sanand, Ahmedabad and Purchaser, the supplier agrees to supply to the purchaser 270 Nos. Power Transformers 60/31.5 KV 40 MVA, and 30 Power Transformers 60/10.5 KV 40 MVA, with spare parts, training, supervision of assembly works, trials and commissioning of transformers, as provided in the said contract.
NOW THIS DEED WITNESSES AS FOLLOWS:
1. In consideration of the premises, the Guarantor hereby undertakes that the supplier shall duly supply the aforesaid 270 and 30 Power Transformers, of the correct quantity and strictly in accordance with the said contract and shall not default or incompletely perform contractual obligations, falling which the guarantor shall pay to purchaser on demand such amount or amounts as the guarantor may be called upon to pay to the aggregate of Rs.11,00,77,500.00 (Rupees Eleven Crore Seventy Seven Thousand Five Hundred Only) being 2.5 % of the contract value."
3.5.1 Clause 2 of the bank guarantee is as under, "The Guarantor shall pay to the purchaser on demand the sum under clause 1 above without demur and without requiring the purchaser invoke any legal remedy that may be available to it to compel the guarantor to pay the same provided that the purchaser provides a written evidence of the State Bank of India, CAG Branch, Hyderabad, having received invocation of the Bank Guarantee by the ultimate buyer (CAMEG) of the bank guarantee number 13039FG0001352 dated 26.12.2013 of the purchaser and issued by them with respect to the transformers which are supplied to the ultimate buyer (CAMEG) Intimation letter of invocation by (CAMEG) or banker is to be attached with claim."
Page 11 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 3.5.2 The contents of the bank guarantee shows that it specifically refers to contract agreement dated 28.3.2015 and its amendments executed therein subsequently. In clause No.1, the contractual obligation between the supplier and the buyer are referred to. Clause 2 reproduced above provides that the guarantor shall pay to the purchaser the sum on demand. The bank guarantee cannot be looked into but interacting with the supply contract.
3.6 Now in the suit it was the case that the plaintiff in the capacity of guarantor, undertook the supply of power transformers as per the contract, in which it was agreed amongst other things that upon default, the plaintiff would pay to the defendant No.3- appellant herein the guaranteed amount. While the bank guarantees were executed, it was the mandatory condition, stated the plaintiff, that defendant No.3 would be required to provide written evidence to the bank receiving invocation of bank guarantees by the ultimate buyer- CAMEG. It was stated that the bank guarantees were not unconditional but to be invoked subject to the appellant- defendant No.3 providing evidence and that they were conditional bank guarantees.
3.6.1 It was pleaded that the contract was satisfactorily completed and Provisional Acceptance Certificate came to be issued by CAMEG- the ultimate buyer, the fact was confirmed by payment of 20% of the equipment contract price by the appellant. It was stated that defendant No.3, however issued conditional claim dated 18.1.2020 towards bank guarantees before the bank asking the bank to extend the bank guarantees for further two years. It was sought to be asserted that the plaintiff had not committed any default in respect of the agreement dated 28.3.2015.
Page 12 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 3.6.2 It was contended that in view of contractual obligation between the defendant No.3 and the plaintiff, the performance bank guarantees were required for thirty-seven months from the date of Provisional Acceptance Certificate. Plaintiff averred that defendant No.2 and Banks orally informed that they would be remitting amount of bank guarantees to defendant No.3. It was contended by plaintiff in that regard that such an act would be in direct violation of Clause 2 of the bank guarantee and that the bank guarantees could not be permitted to be invoked and that there was no cause available with the defendant No.3 for the same. According to the plaintiff, attempt on part of defendant No.3 in seeking to invoke the bank guarantees was fraudulent.
3.7 In the proceedings of the suit, the appellant filed application below Exhibit 3 under Section 8 of the Arbitration Act. It was pleaded that the bank guarantees had conspicuous features having nexus with the contract between the parties inter alia that the plaintiff has guarantor undertook the supply power transformers in accordance with the contract and upon default of the contractual terms the plaintiff would pay to the appellant the guaranteed amount. It was stated that as per the contemplation in order to pay the guaranteed amount, a mandatory condition was incorporate that defendant No.3 would require to provide written evidence of the State Bank of India having received invocation of the bank guarantees by the ultimate buyer.
3.7.1 According to the case of the appellant in the said application Exhibit 23, the supply contract between the plaintiff and defendant No.3 was satisfactorily completed. The ultimate Page 13 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 customer named CAMEG issued a provisional acceptance certificate also, which fact was confirmed by payment of 20% of the equipment contract price by defendant No.3 to the plaintiff as per the relevant clause of Letter of Award. It was thus that accordingly the bank guarantees were not unconditional and could be invoked subject to defendant No.3 producing particular evidence.
4. Learned advocate for the appellant Mr.Rohan Lavkumar submitted that the appellant is not as such interested in invoking the bank guarantee. In the letter addressed, the appellant wanted extension of bank guarantee and conformity with the stipulations in the contract. It was submitted that Clause 6.1 of the contract is directly attracted interacting with the issue whether the bank guarantee is required to be extended or not. He extensively took the court to the various terms and conditions contained in the contract.
4.1 Learned advocate for the appellant relied on the Gauhati High Court in Hindustan Anti-Biotics Limited and Others Vs. Candida Enterprises and Another. In that case the plaintiff was appointed by agent of the defendant for warehousing, forwarding etc. and agreement was executed between n the parties, in terms of which bank guarantee was furnished by the plaintiff. The defendant wanted to invoke the bank guarantee without settling the dues of the plaintiff. The trial court granted ad-interim injunction restraining the invocation of bank guarantee. Application was filed under Section 8(1) of the Arbitration and Conciliation Act for referring the dispute to the arbitration on the ground that the agreement between the plaintiff and defendant contained arbitration clause, it was held that the bank guarantee cannot be said to be outside Page 14 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 the scope of agreement between the parties and the contents of the agreement will have to be considered in its widest amplitude. The order passed by the trial court was set aside by the high court holding that arbitration clause would squarely apply and the dispute was liable to be referred to the arbitration.
4.1.1 The Gauhati High Court observed that claim was made by the plaintiff regarding outstanding dues arising out of service rendered as agent of petitioners. The bank guarantee was executed in terms of agreement. The demand was made by the petitioner to invoke the bank guarantee on that basis and the suit was instituted by the plaintiff challenging the said demand. It was held that the arbitration clause would squarely apply for deciding the dispute in the suit.
4.1.2 The following observations from para 10 from the above judgment were pressed into service, "10. It is already noted that the only ground for filing of the suit is that the petitioner/ defendants have not paid the outstanding dues payable to the plaintiff / respondents. Such a condition is not incorporated in the bank guarantee, the bank guarantee in question is an unconditional one. The said bank guarantee cannot be said to be outside the scope of the agreement arrived at between the parties which also contained the arbitration clause. In such a matter, the agreement is to be considered in its widest amplitude and contents and also would include the question of existence and effect of arbitration agreement and, thus, going to the root of the dispute raised in the suit. The said agreement between the parties cannot be ignored including the suit, rather the whole basis of the claim of the plaintiff is their right that flows from the said agreement. In view of the statements made in the pleadings wherein Page 15 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 no allegation is made against the bank, it would cause no hindrance for the court in exercising the power under Section 8(1) of the Act."
4.1.3 Further reliance was placed on behalf of the appellant on Sreetel Vs. Managar, Federal Bank, [(2017) SCC Online Mad 3666], wherein the plaintiff's suit was for decree of permanent injunction to restrain the defendant bank from allowing the second defendant to withdraw the guaranteed amount by the plaintiff as per the bank guarantee deed dated 30.3.2004. There was a franchise agreement entered into between the plaintiff and defendant for distribution of sim-cards and pre-paid coupons.
4.1.4 Following observations were highlighted by learned advocate for the appellant, "As regards the issue i.e., whether the bank guarantee issue covers under the arbitral jurisdiction, as determined by the court below, the same should be determined only by the Arbitrator and not otherwise. When the parties have agreed for the settlement of the issues between them by way of arbitration, it is found that as provided under Section 8 of the Act, unless the court finds that prima facie no valid arbitration agreement exists, the court has no other option except to refer the parties for arbitral jurisdiction and it should not proceed with the matter to settle the issues arising between the parties as the court would be doing the same at its own risk without any jurisdiction over the matter. It is this, found that as rightly determined by the court below, the agreement entered into between the plaintiff and the second defendant provides for the arbitration clause, which in turn enjoins the parties concerned to go for arbitration for the settlement of all and any of the issues arising out of the agreement between them, it is found that the civil court would not have jurisdiction to Page 16 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 proceed with the matter and the civil court is bound to refer the parties only to the arbitral jurisdiction."
4.2 Learned advocate for the respondent Ms.Aishwarya Reddy in support of the impugned order submitted that the bank guarantees are separate and independent contracts entered into by the respondent with the banks. It was next submitted that the Arbitration Clause contained in the supply agreement between the parties cannot be imported to the contract of bank guarantee. It was argued that Section 7(4)(c) of the Arbitration Act does not support the ground raised by the appellants.
4.2.1 Relying on the decision of the Supreme Court in M R Engineers Vs. Som Dutt [(2009 7 SCC 696], it was submitted that the Apex Court brought out in the said decision the intention behind Section 7(5) of the Arbitration Act. It was submitted that there is difference between mere reference in a contract to honour document on one hand and on the other hand incorporation of another document in a contract by reference. Also relied on another decision in Reckitt Benckiser (India) Pvt. Ltd. v. Reynders Label Printing India Pvt. Ltd., 2019 (7) SCC 62] for canvassing the similar contention.
4.2.2 It was thereafter submitted by learned advocate for the respondent that only if the parties intended to make application under arbitration clause to sub contract, in such circumstances only it will be applicable. It was further submitted that conditions of bank guarantees were separate agreement and the bank guarantees were executed by the bank which were conditional bank guarantees, the invocation and encashment of which was subject to happening of event. It was submitted that the bank could not permit the release of the amount without Page 17 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 application of mind.
4.2.3 It was the next submission that as the bank guarantees were separate contract and not the sub-contract to the supply agreement, reference to the arbitration under Section 8 of the act was a misconceived prayer in law. It was submitted that prayers made were outside the scope of supply agreement that they are limited to the terms and conditions of the bank guarantees. According to learned advocate the dispute sought to be referred to the arbitration was not covered by arbitration clause. It was also contended that failure on part of the defendant No.3 to provide evidence of invocation of bank guarantee was indicative that it was coloured invocation, in suppression of mandatory requirement of Clause-2 of the bank guarantees.
4.3 Learned advocate Mr.Bhatt for the Banks submitted that the bank guarantees were separate and independent contract. He relied on the decisions of the Supreme Court, in Standard Chartered Bank Vs. Heavy Engineering Corporation Limited being Civil Appeal No.9228 of 2018 decided on 18.12.2019 and in Shri K. Jayram and Others Vs. Bangalore Development Authority being Civil Appeal No.7550-7553 of 2021 decided on 8.12.2021.
4.4 Dealing with at the outset, the aforesaid contention on behalf of the respondent Nos.2 and 3. Admittedly, there are no allegations raised against the banks. Therefore submitted that the banks are only formal parties. The principal prayers are not sought against the said parties. The reliefs against Defendant Nos.1 and 2 are only consequential in nature. In any case, the Arbitration and Conciliation Act, 1996 being a complete code in Page 18 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 itself, the Plaintiff could always file proceedings under Section 9 of the said act seeking the same relief.
5. The centripetal question is whether the bank guarantee and requirement of extension period thereof is having linkage with the stipulations in the contract and whether the dispute on that count could be considered as an arbitrable dispute. The issue is not on the consideration that bank guarantee is an independent contract separate from the parent contract. It is also not the question to be addressed as in what circumstances in law the encashment of the bank guarantee can be permitted or restrained. It is to be noticed that the case of the respondent is also that the bank guarantee is conditional bank guarantee. The moot question to be addressed is the interlinkage and inseparability of supply agreement covenants and the bank guarantee contents interacting with each other.
5.1 By letter dated 18.1.2020, the appellant requested for extension of bank guarantee for a period of two years and in the event the extension is not provided for, then the bank guarantee may be allowed to be claimed and proceeds may be paid. Appellant's case is specific that dispute regarding extension or non extension of bank guarantee has arisen in light of the compliance or otherwise of Clause 6.1 of the supply agreement.
6. As already noticed, the arbitration clause 28 in the agreement between the parties uses the phrase 'relating to' and 'arising out of contract' these words are held to be of wide import. In Renusagar Power Co. Ltd. Vs. General Electric Company and Another [(1984) 4 SCC 679], it was with reference to the arbitration clause that the group of words such as, 'arising out of', 'in connection with', 'in relation to' or 'in Page 19 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 respect of', the contract, fell for consideration for the Supreme Court. It was held that the scope of such expressions which are normally used in the arbitration clause confers wide powers and they operate to cover the questions as to the existence, validity, effect and scope of the arbitration agreement itself. They are the basis of wide import.
6.1 It was observed by the Apex Court that the test to determine whether a claim fell within the phrase, it becomes necessary to have recourse to the contract by which the parties are bound to settle the dispute one way of other. It was also observed that if so than it could be said that it is a dispute arising out of the contract. What was under consideration in that case was the question whether on merits the three claims referred by the G.E.C. to the court of Arbitration of ICC on merits. The claims preferred by the G.E.C. court of Arbitration of ICC were beyond the scope and purview of arbitration clause.
6.1.1 The following was observed by the Supreme Court, "From the terms of the contract it is clear that the contract contains the obligation to pay future interest from June, 30, 1967 onwards till payment and therefore, it cannot be said that the first two claims do not "arise out of"
the contract, or that they are not "in relation thereto", but arise under the promissory notes. The execution of the promissory notes also cannot be said to be in complete discharge of obligation to pay price and interest thereon under the contract. The execution of those notes clearly intended to operate as conditional payments. The various factors and circumstances and particularly the fact these notes were as between the seller and the purchaser subject to several conditions leading to variation and adjustment and replacement and the default Page 20 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 clause contained in each, clearly indicate that these were not intended to constitute independent or separate contracts by themselves but that they were a part and parcel of one integrated transaction embodied in the contract."
6.2 In Mansukhlal Dhanraj Jain Vs. Eknath Vithal Ogale [(1995) 2 SCC 665], the Supreme Court emphasised comprehensively nature and wide swip of the term 'relating to' in the context and with reference to the words 'relating to recovery of possession' found in section 41(1) of the Small Causes Court Act. In the decision earlier than that, in Doypack Systems (P) Ltd. Vs. Union of India [1988) 2 SCC 299], the following observations were made, "The expression "in relation to" (so also "pertaining to"), is a very broad expression which presupposes another subject-matter. These are words of comprehensiveness which might have both a direct significance as well as indirect significance depending on the context. Assuming that the investments in shares and in lands do not form part of the undertakings but are different subject- matters, even then these would be brought w ithin the purview of the vesting by reason of the above expressions. In this connection, reference may be made to 76 Corpus Juris Secundum at pp. 620 and 621 where it is stated that the term "relate" is also defined as meaning to bring into association or connection w ith. It has been clearly mentioned that "relating to" has been held to be equivalent to or synonymous w ith as to "concerning w ith" and "pertaining to". The expression "pertaining to" is an expression of expansion and not of contraction."
(para 50) Page 21 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 6.3 Therefore, the expression 'in relation to' is held to be broad and equivalent to expression 'concerned with' and 'pertaining to' which are wide in themselves by their very nature. In Doypack System (P) Ltd. (supra), the Supreme Court even observed that the broadness of the expression even presupposes another subject matter.
6.4 In recent decision in Gujarat Urja Vikas Nigam Ltd. Vs. Amit Gupta [(2021) 7 SCC 209], the Supreme Court had an occasion to consider the scope and ambit of the phrase 'arising out of' in relation to and in the context of section 16(5)(c) of the Insolvency Bankruptcy Code, 2016, after referring to several decisions including the above, it was held that these words are to be given expansive interpretation and will have different meanings depending upon the subject or context. It was stated that the words are after all a vehicle for communicating ideas, thoughts and concepts and they should be construed in their widest amplitude of content.
6.5 The law and the interpretation of the phrase was reiterated by the Supreme Court in a more recent decision in Executive Engineer, Gosikhurd Project Ambadi, Bhandara, Maharahstra Vidarbha Irrigation Development Corporation vs. Mahesh and Others [(2022) 2 SCC 772], highlighting the width of the scope of the expression 'relating to' in the context of section 24(1)(a) of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, observing as under, "The expression "relating to" when used in legislation normally refers to "stand in some relation, to have bearing or concern, to pertain, to refer, to bring into association w ith Page 22 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 or connection w ith". Therefore, the expression "relating to" when used in legislation has to be construed to give effect to the legislative intent when required and necessary by giving an expansive and w ider meaning. Given this trend in interpretation, the words "all the provisions of this Act relating to the determination of compensation", must not be imputed a restricted understanding of the word "relating" only to the substantial provisions on calculation of compensation, that is, Sections 26 to 30 of the 2013 Act.
Rather, the expression should be given an expansive meaning so as to include the provision on limitation period for calculation of compensation, that is, Section 25 of the 2013 Act."
(para-23) 6.6 In Giriraj Garg Vs. All India Limited [(2019) 5 SCC 192], the phrase arising out of' , 'in relation to' were again came within the scanner of the Supreme Court. In that case, the arbitration clause was thus, "All disputes arising out of this scheme or in relation thereto in any form whatsoever shall be dealt exclusively by way of arbitration in terms of the Arbitration and Conciliation Act, 1996."
6.6.1 The Supreme Court quoted Russell on Arbitration (24th Edition, 2015- Sweet & Maxwell) interpreting such phrases in which it was stated that these wide phrases are sufficient to bring within their fold the dispute arising into another contract.
"Disputes "in connection w ith", "in relation to", "regarding" a contract. These words, which are frequently encountered and are to be given the same meaning, were at once time given a restricted interpretation, but are not well established as having a broad meaning... They may also be sufficient to catch disputes arising under another contract related to the contract containing the Page 23 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 arbitration clause".
(emphasis supplied)
7. Having noticed the principle that the phrase 'relating to' or 'arising out of' whenever occurs in the arbitration clause in any contract, would attract wide area and import for its interpretation, the question to be considered is whether the question of extension of bank guarantee or invocation thereof bear the relation to the conditions contained in the supply agreement. Now referring to the conditions in the supply agreement with contents of the bank guarantees in question, juxtaposed with one another, and the other attendant stipulations in the contract, what emerges is that the bank guarantee was issued pursuant to the contract dated 28.3.2015 as amended from time to time and the same was issued by the guarantors to ensure the compliance of the contractual obligation by the supplier- the plaintiff.
7.1 In order to appreciate the nexus, it may be recollected that the amended clause No. 6.1 in the contract reproduced in para No.3.2.2 above, inter alia contemplates that the plaintiff shall provide unconditional irrevocable bank guarantee equal to 10% of the contract price. Further contemplation therein is that the performance guarantee shall be valid till the guarantee period is completed "for all the equipments". The providence in that is that the plaintiff shall extend the validity of the performance guarantee for the balance guarantee period at least two months prior to the expiry of the existing performance guarantees. Clause 6.1 further says about the manner of invocation of the bank guarantees in question. Clause 26 and 27 of the contract mentions about the right to invoke the bank guarantees. The contents of the bank guarantees, in particular condition No.2 in Page 24 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 the bank guarantee are not segregable from the conditions of the supply agreement.
7.2 The phrase 'in relation to' in clause No. 28 in the contract would indeed comprehend within its compass the aspects of extension or invocation of the bank guarantees, which is not possible to be viewed unconnected to or unconcerned with the contractual obligations between the parties. Necessarily, a dispute pertaining to validity, extension and invocation of the bank guarantee is necessarily one involving the application, consideration and appreciation together with the clauses of the contract. Therefore, the dispute relating to the extension of the validity and invocation of the guarantee would be a dispute covered under 'relating to' and/or "arising out of the contract" in clause No. 28.
7.3 Even when the averments in the plaint and the frame of the suit are considered, it could be seen that the plaintiff himself pleaded the interwovenness of the supply agreement and the bank guarantees in the operation of their respective relevant terms. The attention of the court was invited to para Nos.7, 8, 9, 11 and 12 of the plaint. Reproduced is para 12, which reads as under, "12. The plaintiff at no point of time had even breached any of the terms and conditions of the contract dated 28.3.2015 nor had acted in contravention of any such terms and conditions, such encashment should not be allowed. The plaintiff states that in the present case, there was nothing to even remotely suggest that the plaintiff had not performed the contract as per the specifications and conditions of the contract. The plaintiff further states that no such statement or averment could be found in the letters invoking bank guarantees."
Page 25 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 7.4 In letter dated 18.1.2020 seeking extension of bank guarantees addressed by the defendant No.3-the appellant herein reproduced in para 2.1 above, extension was sought in respect of the period of bank guarantees in compliance of clause 6.1 of the contract. These clauses would have interplay as discussed above. On 25.1.2020, the plaintiff replied to the aforementioned letter of the appellant herein stating that "there was no further requirement for further extension of this guarantee". Upon a conjoint reading of the clauses 6.1, 8, 26 and 27 in the supply contract read with the contents and the conditions of the bank guarantee with contractual terms, the dispute could well be said to have arisen which is 'in relation to' the contract.
8. The contention of the respondent so as to place reliance on Section 7(5) of the Arbitration Act is not well conceived in the context of fact situation of the case. The case of the defendant is not that the arbitration agreement to be exported to the bank guarantee contents to read into it, rather, the case is that the dispute relating to extension or invocation of the bank guarantee falls within the ambit of arbitration clause. It clearly becomes an arbitrable dispute, since they have to be read in conjunction with the various terms in the contract terms highlighted above read with the bank guarantee issued in that connection.
9. The prayer of the appellant in Exhibit 3 application for referring the parties to the arbitration and consequentially dismissing the suit, which was rejected by the court below, ought to have been considered by it in all above factual consideration and legal position.
10. In view of above reasons and discussion, the appeal deserves to be allowed. Impugned order dated 17.2.2021 below Page 26 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022 C/FA/1691/2021 CAV JUDGMENT DATED: 25/03/2022 application Exhibit 23 passed by the Commercial Court, City Civil Court, Ahmedabad in Commercial Civil Suit No.192 of 2020 is hereby set aside.
11. The prayer made by the appellant in its application under Section 8 of the Arbitration and Conciliation Act, stands granted. The dispute is liable to be referred to the arbitration. The court below shall pass the necessary orders. This appeal stands allowed.
No order is required to be passed in the Civil Application in view of the disposal of the main appeal. Accordingly, it is disposed of.
(N.V.ANJARIA, J) (SANDEEP N. BHATT,J) Manshi Page 27 of 27 Downloaded on : Sat Dec 24 13:35:49 IST 2022