Bombay High Court
Larsen And Toubro Limited vs Shree Ahuja Properties And Realtors ... on 22 March, 2017
Equivalent citations: AIR 2018 (NOC) 706 (BOM.)
Author: S.C. Dharmadhikari
Bench: S.C. Dharmadhikari, B.P. Colabawalla
COM.APPL6.17.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
COMMERCIAL APPEAL (LODG) NO. 6 OF 2017
IN
COMMERCIAL ARBITRATION PETITION (LODG) NO. 243
OF 2016
Larsen & Toubro Limited, a Company registered ]
under the Companies Act, 1956, having its ]
Registered Office at L&T House, Ballard Estate, ]
P.O. Box No. 278, Mumbai - 400 001. ]...Appellant
Versus
1 Shree Ahuja Properties & Realtors Private ]
Limited, a Company registered under the ]
Companies Act, 1956 having its Registered ]
Office at Rajpipla, Opp. Standard Chartered Bank, ]
Linking Road, Santacruz (West), Mumbai-400054]
2 Punjab National Bank, Maker Tower "E", ]
Ground Floor, Cuffe Parade, Mumbai-400005 ]...Respondents
Mr. Iqbal Chagla, senior counsel with Mr. Birendra Saraf, Mr.
Nimay Dave, Mr. Jehaan Mehta, Mr. Sachin Chandarana, Mr.
Rashid Boatwala, Ms. Lipsa U. and Mr. Sudarshan M. i/b M/s.
Manilal Kher Ambalal & Co. for the Appellant.
Mr. Feredun Devitre, senior counsel with Mr. Cyrus Ardeshir, Mr.
Kedar Desai, Mr. Aditya Raut, Mr.Bhuvneshwar Pathak and Ms.
Sujata More i/b M/s. Desai Desai Carrimjee & Mulla for the
Respondent No.1.
CORAM : S.C. DHARMADHIKARI &
B.P. COLABAWALLA, JJ.
Reserved on : 17TH MARCH, 2017
Pronounced on : 22ND MARCH, 2017
SRP 1/37
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COM.APPL6.17.doc
JUDGMENT :[Per S.C. Dharmadhikari, J.] 1 When this appeal was mentioned before this Bench on Thursday, i.e. 16th March, 2017, a request was made to continue the ad-interim order further as it was operative only till 16 th March, 2017. The request to continue it further was opposed by the contesting respondent No.1. Bearing in mind the nature of the order passed on 23rd January, 2017, we indicated to both sides that the impugned order refuses to restrain the encashment of the bank guarantee, and this appeal being directed to be disposed of finally, it would not be proper to go on granting such ad-hoc extensions. We, therefore, with the consent of both sides, placed the appeal itself for disposal at the admission stage on 17th March, 2017. As soon as it was called out, we indicated to both sides that one of us (B.P. Colabawalla, J.) holds the shares in the petitioner-appellant-company. If any party has objection, he would like to recuse himself. Both senior counsel, on instructions, stated that they have no objection to this Bench hearing and disposing of this appeal. On this understanding we have proceeded further. Hence, admit. Respondents waive service. By consent, heard finally. Paper-book dispensed with. SRP 2/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 :::
COM.APPL6.17.doc 2 This appeal under section 10 of The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015, (Act No.4 of 2015) is directed against the order passed by the learned single Judge on the above Commercial Arbitration Petition. By this order dated 9 th January, 2017, the learned Judge has dismissed a petition filed under section 9 of The Arbitration & Conciliation Act, 1996 by the petitioner-appellant.
3 Briefly stated, the facts are that this petition under section 9 of the said Act of 1996 was filed against one Shree Ahuja Properties & Realtors Private Limited (for short "respondent No.1") and Punjab National Bank (for short "respondent No.2") alleging that the petitioner-appellant, a company registered under the provisions of the Indian Companies Act, 1956, is the largest Engineering Company and, inter-alia, engaged in the business of construction, engineering, power development, power equipment manufacturing and related activities. The first respondent is a private limited company registered under the same Companies Act and, inter-alia, SRP 3/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc carrying on business of real estate development. The second respondent is a Nationalised Bank, carrying on banking business in terms of the Banking Regulations Act, 1949. 4 The parties shall hereafter be referred to as per their nomenclature in the Arbitration Petition.
5 The petitioner and the first respondent had a dispute arising out of alleged non-payment of the petitioner's dues in respect of the works carried out. The works were carried out as per the revised scope of work and activities mutually agreed between the petitioner and the first respondent in the year 2013. The petitioner claims that it is entitled to receive compensation for costs and additional expenses incurred due to the delay caused by the first respondent. The petitioner was prevented from completing the balance work within the agreed and extended period as set out in the contract agreement dated 2 nd March, 2010, read with the supplementary agreement dated 1 st August, 2013. There are various breaches alleged of the obligations under these agreements in paragraph 3 of the petition. It is common ground that this agreement contains an SRP 4/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc arbitration clause . This agreement was executed in the light of a tender floated by the first respondent in or about November, 2009, expressing its desire of constructing a world class residential complex at Prabhadevi, Mumbai. The petitioner participated in that tender and the contract was awarded to them. The contract involved execution of work such as procurement and construction of building and other facilities. The scope of the work was set out in the agreement. After mutual discussions, eventually a letter of acceptance was issued and a regular contract drawn up dated 2nd March, 2010. Then, the salient features of this contract are set out. In the Arbitration Petition itself it is stated that by clause 8.1 of the contract, a performance guarantee bearing a reference number specified therein in the sum of Rs.10 crores was issued on behalf of the petitioner by the second respondent-bank. Annexure-E to the petition is a copy of this performance guarantee. The performance guarantee dated 16th July, 2014, was valid till 31 st December, 2014, whereafter its validity came to be extended from time to time. It is alleged that as per the contract, the scope of work of the petitioner comprised procurement, construction and completion of the works and the facilities in accordance with the SRP 5/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc drawings and specifications, addendums and clarifications. The petitioner has stated as to how it commenced this work and endeavoured to complete it. However, it alleges that there were several changes and variations which resulted in delays. Delays were discussed and the issue sorted out at joint meetings and workshops held in the month of April, 2013. Relying upon these minutes and a supplementary agreement dated 1st August, 2013, the Revised Milestone Schedule, it is alleged there were several hurdles and obstacles resulting in delays. The petitioner alleges that the delays occurred only because of the manner in which respondent No.1 continued to directly deal with sub-contractors, changed material instructions, made direct payments to facade contractor, called upon the petitioner to shift focus of work to other spheres etc, including failing to make payment that fell due. 6 It is in these circumstances that several allegations are made by the petitioner and later on it is alleged that there were e-mails exchanged by them. The e-mails from the respondent No.1 sought to point out the alleged faults and defects, including in the plumbing work. Finally, alleging that there was no default on the part of the petitioner, but the delays were SRP 6/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc attributable only to the first respondent, the petitioner claims that a sum of Rs.115,80,88,257/- as on 30 th September, 2016, is due and payable. In the light of the denials by the respondent, these disputes and differences have been projected and sought to be brought within the purview of the arbitration agreement. The petitioner learnt that the first respondent has approached its banker and invoked the performance guarantee. 7 The petitioner, therefore, states that it is not permissible for the first respondent to invoke this bank guarantee for it has served its purpose and stands lapsed. The works have been completed, the possession of four units has been handed over to the end users, the occupation certificate received has also been handed in. Therefore, there is no occasion for invoking this performance agreement. In paragraph 12 of this petition, at running page Nos.77 and 78, the petitioner challenges the said invocation by alleging that the performance guarantee's purpose has been fully satisfied and served. All rights and obligations thereunder have come to an end and stood extinguished. It is, therefore, liable to be discharged and returned. The petitioner alleges that from the conduct of the first respondent, it is SRP 7/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc apparent that they have an ulterior motive of not making payment causing wrongful loss to the petitioners, yet proceeding to encash this performance guarantee. It is in these circumstances that the petitioners have claimed the following relief :
"a) that pending the commencement and hearing and final disposal of the proposed Arbitration proceedings, and the making and implementation of the Award therein, the Respondent No.1 and persons claiming through them be directed to furnish security for an amount of Rs.115,80,88,257/- (Rupees One Hundred Fifteen Crores Eighty Lakhs Eighty Eight Thousand Two Hundred Fifty Seven only being the outstanding amount due and payable by the Respondent No.1 to the Petitioner as per particulars of claim annexed as Exhibit 'T" to the Petition either by way of unconditional Bank Guarantee in favour of the Petitioner or depositing the said amount in this Hon'ble Court."
8 We are not concerned with the rest of the reliefs. The petition under section 9 was lodged on 26 th October, 2016. Upon being duly served, the first respondent filed written submissions. In the written submissions, the first respondent denied all the contentions and allegations in the petition. It was specifically contended that the contention that the performance guarantee was not a bank guarantee per se, but in the form of a contract of indemnity and, therefore, the well settled legal principles SRP 8/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc pertaining to encashment of a bank guarantee would not apply, is entirely erroneous and incorrect. That contention has been raised by way of an amendment which was tendered before the Court at the time of final hearing of the Arbitration Petition on 4 th November, 2016. This stand is clearly an after-thought. All throughout the parties have understood that the performance guarantee was a bank guarantee and nothing else. The amendment does not, therefore, change the picture at all. Apart therefrom, what is revealed from a perusal of the guarantee and as a whole is that Annexure-E to the Arbitration Petition is referred as a bank guarantee, is apparent. There is also a letter dated 25th October, 2016, addressed by the petitioner to the second respondent, inter alia, asking them to intimate the petitioner in the event of any invocation of the performance guarantee. Similarly, in the advocate's letter dated 19 th October, 2016, and some other documents, the petitioner referred to the guarantee as a performance guarantee and not an indemnity bond. The indemnity bond has been separately provided under the contract and cannot be confused with the performance guarantee. This is apparent from the pleadings in the petition itself. Else, the petitioner could not have argued, may be in the SRP 9/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc alternative, that the performance guarantee is a bank guarantee, but it is not unconditional and unequivocal. Hence, when this performance guarantee is clearly referable to clause 8.1(a) of the contract, then, it is apparent that there is no substance in the arguments now canvassed by way of an amendment and after- thought.
9 The first respondent has justified the invocation of this performance guarantee by contending that there is no pleading and proof of any fraud and special equities. It is in these circumstances that in the absence of governing principles which would enable seeking an injunction and restraint against encashment of such a guarantee, it can be invoked. There is no substance in the arbitration petition and it ought to be dismissed. 10 It is upon such pleadings that the learned Judge considered the petitioner's request and, though initially granted an ad-interim injunction, has subsequently vacated it by the impugned order.
SRP 10/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 :::
COM.APPL6.17.doc 11 It is this conclusion of the learned single Judge which is assailed in this appeal.
12 At the outset we must clarify that Mr. Chagla, learned senior counsel appearing in support of this appeal has stated before us that he will not raise any contentions on the point or issue of irretrievable injustice and special equities. Mr. Chagla would submit that he will raise two fold contentions only. 13 The first contention is that properly and completely read, the performance guarantee is not spelling out a contract of guarantee, but indemnity. Mr. Chagla submitted that on a perusal of the agreement and particularly clause 8 at page 173 of the paper-book, clause 19.5 at page 209 of the paper-book, it is evident that this guarantee purports to cover 2.5% of the contract sum. Clause 30 of the agreement sets out the default of the contractor. That clause appears at page 238 of the paper-book. Clause 32 which is at page 243 of the paper-book speaks of dispute resolution. Mr. Chagla would submit that some of the documents and appearing at pages 460, 461, 467 and 469 of the paper-book would indicate that it is true that this Court is not SRP 11/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc concerned with the dispute under the parent contract. In other words, the underlying contract is not the subject matter of the present proceedings. The disputes thereunder have to be left out of consideration and are not relevant. The advocate's notice would reveal as to how the petitioner-appellant has a claim against the respondents and which is spelt out in details at 479, 480, 482 and 486 of the paper-book. The letter of invocation dated 25th October, 2016, copy of which is at pages 79 and 80 of the paper-book would denote that the parties understood the subject clause as a provision for indemnity and not a contract of guarantee. It is true that a contract of guarantee, specially a bank guarantee, is independent in nature. However, on a true and proper construction of the subject document, it is clear that it falls within the purview of section 124 of the Contract Act, 1872. Our attention is invited to pages 341 and 342 of the paper-book to submit that the nomenclature is not decisive or relevant. If clause 3(i) at page 343 of the paper-book is read and perused carefully, it would be apparent that this is a contract of indemnity. In matters of interpretation of the contract and for understanding its true nature, wording of the other sub-clauses, namely, sub-clauses 3(ii) and (iii) would not be decisive and does SRP 12/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc not alter the above position. In other words, no reliance can be placed on these sub-clauses to contend that this is a bank guarantee. Our attention is also invited to the clause appearing at page 344 of the paper-book to submit that it is then not permissible for the first respondent to adjudicate upon the dispute itself. In other words, a third party independent adjudication is contemplated as to the losses suffered by the contractor. It is not a decision of the respondent No.1 and in that regard Mr. Chagla invites our attention to page 80 of the compilation. That is not a decision contemplated by a contract of indemnity. In such circumstances, Mr. Chagla would submit that this case is completely covered by the principles enshrined in the judgment of the Hon'ble Supreme Court in the case of State Bank of India vs. Mula Sahakari Sakhar Karkhana Limited , reported in (2006) 6 SCC 293, and the judgment of the Hon'ble Supreme Court rendered in the case of Hindustan Construction Company Limited vs. State of Bihar (1999) 8 SCC 436 . Alternatively, and without prejudice, so also assuming that this is a bank guarantee which can be invoked and encashed, still, it is not unconditional in nature. Clause 3(i) is an indemnity for losses under the contract and clause 3(ii) is subject to the decision of the first respondent SRP 13/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc as to the losses suffered thereunder. That is not again decisive. That does not mean that a unilateral demand by this first respondent would meet and satisfy the requirement in this sub- clause. Rather, it denotes a decision by a competent authority and with regard to such losses suffered. Therefore, the bank is not obliged to accept any demand and unilaterally raised by the first respondent. It is in these circumstances that this bank guarantee is not unconditional and unequivocal. 14 Looked at from any angle, therefore, Mr. Chagla would contend that the injunction should have been granted by the learned Judge. If it was initially granted, it should have been continued given all parameters necessary for grant of the same being satisfied. He would, therefore, submit that the appeal be allowed.
15 Mr. Devitre, learned senior counsel for the contesting respondent supports the impugned order. Mr. Devitre would submit that there is no merit in any of the contentions of Mr. Chagla. The document was always understood as a performance guarantee. There was never any doubt or confusion about its SRP 14/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc nature. The first respondent has not relied upon only its nomenclature, but understood it as a bank guarantee which can be invoked by referring to clause 8.1 and other clauses of the contract. Mr. Devitre would reiterate the settled principle that the bank guarantee is an independent contract. It has nothing to do with the parent contract nor any of its terms can be linked to the parent contract unless and until there is any specific insertion in that regard. Further, he would submit that if this document is read as a whole, it clearly indicates that it is a guarantee and there is no question of terming it as an indemnity. More so, when both sides have never disputed or doubted its true nature. The petitioner, therefore, is estopped from contending otherwise. Similarly, the alternate contention has no merit given the clear wording of clause 3(ii) and (iii). In these circumstances, he would submit that both the judgments relied upon have no application on facts. The appeal, therefore, deserves to be dismissed.
16 With the assistance of Mr. Chagla and Mr. Devitre we have perused the Memo of Appeal. We have perused the impugned judgment and the decisions of the Hon'ble Supreme SRP 15/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc Court relied upon.
17 It is common ground and as pointed out by Mr. Chagla that grant of an injunction to restrain the encashment of an unconditional bank guarantee is an exception. Its encashment is the rule. The exception is only in established and proven cases of fraud and irretrievable injustice. Both of which are not highlighted before us are in the terms that the law demands. The fraud, if any, is in invoking this performance guarantee by allegedly terming it as a bank guarantee. In other words, if the document relied upon by the first respondent is not spelling out a contract of guarantee, then, its invocation is per se illegal. That is how the fraud is alleged. We do not think that such a pleading would suffice. The understanding of one of the parties about the nature of the contract in this case would not be conclusive and decisive. If there was a confusion that this is not a contract of guarantee, but an indemnity and still the first respondent has gone ahead and tried to derive any benefit or advantage under the same, then, dependent upon other circumstances, one can possibly agree with the appellant-original petitioner. However, it is only the appellants allegation that this is not a contract of SRP 16/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc guarantee, but a contract of indemnity.
18 For making good that argument or plea also, there are no materials. The appellant-petitioner in the petition itself states that the contract envisaged furnishing of a performance guarantee. The petition itself relies upon clause 8.1 of the contract in that behalf. That clause reads thus :
"8 BONDS Provision of Bonds 8.1 The Contractor undertakes to obtain and deliver to the Employer simultaneous with the Commencement Date:
(a) An unconditional and irrevocable on demand: (A) Performance Bond in the form attached to these Conditions of Contract as Annexure B: (the "Performance Guarantee"), which shall be issued by a reputed national or international bank in Mumbai approved by the Employer at its sole and absolute discretion for the purpose, for an amount of 2.5% (two point five per cent) of the Contract Sum; and (B) Performance Indemnity Bond, in the form attached to these conditions as Annexure AA (the "Performance Indemnity Bond ") for an amount of 2.5% (two point five per cent) of the Contract Sum. The Performance Guarantee and the Performance Indemnity Bond are collectively referred to as the "Performance Bond".
(b) An unconditional an irrevocable on demand:
(A) Advance Payment Guarantee in the form attached to these Conditions of Contract as Annexure B (the "Advance Payment Guarantee") which shall be issued by a reputed national or international bank in SRP 17/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc Mumbai approved by the Employer at its sole and absolute discretion for the purpose, for an amount equal to 5% (five percent) of the Advance Payment;
and (B) Advance Payment Indemnity Bond, in the form attached to these conditions as Annexure BB (the "Advance Payment Indemnity Bond") for an amount of 5% (five percent) of the Advance Payment. The Advance Payment Guarantee and the Advance Payment Indemnity Bond are collectively referred to as the "Advance Payment Bond".
If at any time the Contract Sum increases (whether because of one increase or multiple increases arising from Variation) by more than 5.0% (five point zero percent) the Contractor must provide an additional unconditional and irrevocable on demand bond which shall be issued by a reputed national or international in Mumbai approved by the Employer at its sole discretion for an amount equal to 5% (five percent) of the increase in the Contract Sum."
19 A perusal of this clause would reveal that the contractor undertakes to obtain and deliver to the employer simultaneously with the commencement date an unconditional and irrevocable on demand performance bond in the form attached to the conditions of the contract as Annexure B (the Performance Guarantee), which shall be issued by a reputed national or international bank in Mumbai approved by the Employer at its sole and absolute discretion, for an amount of 2.5% of the contract sum and Performance Indemnity Bond, in the form attached to these conditions as Annexure AA. Thus, SRP 18/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc these are the two distinct requirements and understood by the parties themselves. Clause 19.5 styled as Indemnity reads as under :
"Indemnity 19.5 In consideration of the Employer awarding the Works to the Contractor, (which the Parties hereby confirm is good, sufficient and valuable consideration), the Contractor agrees that, as a separate and independent contract and obligation from any other obligation under the Contract, and notwithstanding any (A) illegality; and/or (B) unenforceability of, or affecting, or relating to, any provision of the Contract in relation to payment of any damages by the Contract under the Contract, the Contractor shall at all times indemnify the Employer and keep the Employer indemnified for, hold the Employer harmless against any pay to the Employer, upon demand; (A) an amount equal to all costs, expenses, damages, liabilities and losses (whether direct or indirect) that are incurred or may be incurred by the Employer, suffered or may be suffered by the Employer and/or asserted or may be asserted against the Employer, in each case, arising in connection with and/or as a consequence of any delay in meeting the Time for Completion of any Section or Portion of the Works or the whole of the Works or for any delay or failure in meeting the Specifications or the environment, health and safety requirements under the Contract."
20 A perusal of the same would indicate as to how the contract envisages two distinct arrangements. One is a bond and when that is made, it is styled as a performance bond in the form of a performance guarantee and a performance indemnity bond. SRP 19/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 :::
COM.APPL6.17.doc Two separate formats are devised by the parties for the purpose of the same. It is not as if the understanding is that it means one and the same. Annexure AA sets out the approved draft of the advance payment indemnity bond and Annexure A is the approved draft of the advance payment guarantee. That is also a bank guarantee. That bears a bank guarantee number. What is then material for our purpose is the document itself. The document appears at page 342 of the paper-book. It is a performance guarantee addressed to the first respondent. That is in the form of a bank guarantee. The first respondent is styled as the employer whereas the appellant is the contractor. The performance of civil construction works is the contract. Under the contract, the contractor has agreed to provide a performance guarantee in terms of clause 8.1 of the contract for an amount of Rs.10 crore in the form of a bank guarantee. Then clause 3, which is heavily relied upon and appearing at pages 343 and 344 reads as under :
"3. In consideration of the above, We Punjab National Bank, a banking company incorporated under the Banking Companies Act, 1970 and Head office at 7, Bhikaji Cama Place, Africa Avenue, New Delhi - 110066 and having a branch office at Large Corporate Branch, Make Tower "E", Ground Floor, Cuffe Parade, Mumbai - 400005 (the "Bank" which SRP 20/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc expression shall unless repugnant to the context or meaning thereof include its successors, administrators, executors and assigns) do hereby covenant and undertake as follows:
(i) We hereby undertake to indemnify and keep you indemnified to the extent of the sum of Rs.10,00,00,000/- (Rupees Ten Crores only) from and against all losses and damages that may be caused to or suffered by you by reason of any default or defaults on the part of the Contractor in performance of the Contract or carrying out any works under the Contract or otherwise in the observance and performance of any of the terms and conditions relating there to in accordance with the true intent and meaning thereof and in the event of any default or defaults on the part of the Contractor as aforesaid, we shall forthwith on demand pay to you any sum or sums not exceeding in the total of the said sum of Rs.10,00,00,000/- (Rupees Ten Crores only) as may be claimed by you from the Contractor as your losses and/or damages by reason of such default or defaults on the part of the Contractor as aforesaid without demur or without reference to the Contractor.
(ii) Notwithstanding anything to the contrary, we agree that your decision as to whether the Contractor has made any such default or defaults and the amount or amounts to which you are entitled by reasons thereof, will be binding on us and we shall not be entitled to ask you to establish your claim or claims under this Performance Guarantee but shall pay the same forthwith without any objection or excuse.
(iii) We undertake to pay to you any money so demanded from time to time notwithstanding any dispute or disputes raised by the Contractor in any suit or proceeding pending before any court or tribunal or arbitration relating thereto, our liability under these presents being absolute and unequivocal.
(iv) An assignment of the Contract to any third party by you shall not affect the terms of this SRP 21/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc Performance Guarantee and the benefit of this Performance Guarantee shall accrue to such assignee.
(v) Any amendment in the Contract between the Contractor and you shall not in any manner affect our obligations under this Performance Guarantee.
(vi) The Payment(s) so made by us under this Performance Guarantee shall be a valid discharge of our liability for payment hereunder. This Performance Guarantee will also be discharged upon return of the original to us.
(vii) This Performance Guarantee shall come into force from the date of this Performance Guarantee and shall not be revoked by us any time during its currency without your previous consent in writing.
(viii) Unless extended, this Performance Guarantee shall remain in force till 31/12/2014 provided however that, should it be necessary extend, we shall extend forthwith the period of this Performance Guarantee on your request till such time as may be required by you.
(ix) You will have fullest liberty without affecting this Performance Guarantee to postpone for anytime or from time to time any of your rights or power against the Contractor and either to enforce or forebear to enforce any of the terms of conditions of the Contract and we shall not be released from our liability under this Performance by the exercise of your liberty with reference to the Contractor any variation or modification of the Contract or any other act, matter, or think whatsoever which under the law relating to sureties would, but for the provisions hereof have the effect of so releasing us from our liability hereunder. Provided always that nothing herein contained will enlarge our liability hereunder beyond the limit of Rs.10,00,00,000/- (Rupees Ten Crores only).
(x) In order to give full effect to the Performance SRP 22/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc Bind you shall be entitled to act as if we were your principal debtors in respect of your claims against the Contractor under the Contract and we expressly waive all our suretyship and other rights if any, which are in any way inconsistent with the above or any other provisions of the Performance Guarantee.
(xi) Subject to the maximum limit of our liability as aforesaid this Performance Bind will cover all your claim or claims against the Contractor under this Contract from time to time arising out of or in relation thereto and in respect of which your demand or notice in writing be issued to us before the date of this guarantee mentioned above.
(xii) This Performance Guarantee is in addition to and not by way of limitation of or substitution for any other guarantee or guarantees hereto given to you by us (whether jointly with or alone) and that this Performance Guarantee is not intended to and shall not revoke or limit such guarantee or guarantees.
(xiii) This Performance Guarantee shall be a continuing guarantee and shall not be discharged by any chance in the constitution of the Contractor or ourselves, nor shall it be affected by any change in your constitution or by any amalgamation or absorption thereof or therewith but will ensure for and be available to and enforceable by the absorbing or amalgamated company or concerns. We shall not revoke this Performance Guarantee during its currency, except with your prior consent in writing or upon such return of this Performance Guarantee in original."
21 Mr. Devitre is right in contending that this clause would have to be read in its entirety and it is not permissible to single out and read out of context sub-clause (i). It is clear that, that clause employs the words "indemnify" and "indemnified". SRP 23/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 :::
COM.APPL6.17.doc However, if the opening part of clause 3 is read and perused carefully, it is apparent that it is in consideration of the contract or agreement to provide a performance guarantee in terms of clause 8.1 of the contract for an amount of Rs.10 crore in the form of a bank guarantee, that the second respondent - Punjab National Bank covenants and undertakes firstly to indemnify and keep the first respondent indemnified to the extent of the sum of Rs.10 crores from and against all losses and damages that may be caused or suffered by the first respondent for any default or defaults on the part of the contractor in performance of the contract or carrying out any works under the contract or otherwise in the observance and performance of any of the terms and conditions relating thereto. The Punjab National Bank on demand shall pay to the employer the sum of Rs.10 crore as the losses and/or damages by reason of such default or defaults on the part of the contractor. The amount would be paid without demur or without reference to the contractor. Notwithstanding anything to the contrary Punjab National Bank agrees that the employer's decision as to whether the contractor has made any such default or defaults and the amount or amounts to which the employer is entitled by reason thereof will be binding on the SRP 24/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc Punjab National Bank. The bank shall not be entitled to ask the employer to establish the claim or claims under the Performance Guarantee but shall pay the same without any objection or excuses. By clause (iii) it has undertaken to pay the money as demanded from time to time notwithstanding any dispute or disputes raised by the contractor in any suit or proceeding pending before any court or tribunal or arbitration relating thereto, the liability of Punjab National Bank under these presents being absolute and unequivocal.
22 We do not see how clause 3 read with the preceding clause 2 and with all the sub-clauses and further parts of the contract, the parties desired a provision for indemnity, as alleged by Mr. Chagla, to be incorporated. The contract of indemnity and guarantee are understood by Chapter VIII of The Indian Contract Act, 1872. Section 124 defines a contract of indemnity by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person. The illustration below the section makes the matter more clear by which it is, for example, stated that A contracts to indemnify B against the consequences of any proceedings which SRP 25/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc may take against B in respect of a certain sum of rupees. This is a contract of indemnity. The rights of the indemnity holder when sued are, therefore, spelt out in section 125. 23 Section 126 defines a contract of guarantee and that is a contract to perform the promise or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the surety; the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor. 24 The consideration for guarantee and the surety's liability as clarified by sections 127 and 128 make the position clear further. It is well settled that bank guarantee is an autonomous contract. It is an independent contract by which, as in the present case, the banker agrees and undertakes to pay, as in the instant case, on demand and without any demur or protest, the sum guaranteed. The unconditional and unequivocal nature of the obligation, as in this case, is also spelt out when irrespective of any dispute between the employer and the contractor, its pendency in any court or tribunal, the moment the SRP 26/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:30 ::: COM.APPL6.17.doc demand is raised, the bank would make the payment. It would not question the parties like an employer in this case in any manner with regard to the nature of the dispute. The demand would not be questioned or disputed. The satisfaction, based on which the demand is raised by the employer, will be decisive and conclusive. It is the employer who will determine whether there is a breach committed of the terms and conditions of the contract (the underlying or parent contract) and so long as this independent or autonomous contract is not linked or made dependent upon the parent or underlying contract, the obligation to honour the demand, and by the bank in this case, is absolute. We do not see how this position in law is altered by the present arrangement.
25 We are not in agreement with Mr. Chagla that clause 3(i) and its wording would indicate that this is not a performance guarantee in the form of a bank guarantee and, therefore, a contract of guarantee itself. It is a contract of indemnity. By relying on the words employed and namely "indemnify" and "indemnified", we cannot spell out a distinct contract as is attempted by Mr. Chagla. Mr. Chagla also sought to draw support SRP 27/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:31 ::: COM.APPL6.17.doc from the contents of the advocate's notice and the letter of invocation dated 25th October, 2016, and the withdrawal thereof by the first respondent.
26 In that regard, if we peruse page 469 of the paper- book, that is a letter dated 20th October, 2016. That advocate's letter addressed to the first respondent would spell out the version of the appellant and the petitioner. It would spell out how there are disputes and differences and though the petitioner- appellant would claim that it has made compliance with all the terms and conditions of the contract and, therefore, there is no question of the bank guarantee being invoked, that is the version of the petitioner-appellant. Mr. Chagla has invited our attention to the other documents following this communication. He has also relied upon the e-mail, copy of which is at page 460. He would submit that the disputes between the parties being set out and the nature of the demand being raised denotes that it was an indemnity which was insisted upon. We are unable to agree with him. Even if one does not go by the nomenclature, still, on a complete reading of this document and as a whole, we do not think that the ingredients of section 124 of the Contract Act, SRP 28/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:31 ::: COM.APPL6.17.doc 1872, can be held to be satisfied. This is a document and contract clearly referable to and falling under section 126 of the Contract Act, 1872. Mr. Chagla would submit that it is a contract of indemnity and merely because the further clauses, clauses 3(ii) and 3(iii) refer to certain obligations based on a demand of respondent No.1 by relying upon the interpretation thereof, we cannot spell out a contract of guarantee. We are unable to agree with this either. Mr. Chagla would like the document not to be read as a whole, but by reading one of its clause and rather a sub- clause thereof in isolation. He relies upon the wording of clause 3(ix). However, the wording of that clause instead of assisting the petitioner-appellant, would belie their contentions as raised before us. It states that in order to give full effect to the performance bond, the bank understands the employer proceeding against it as if it is a principal debtor in respect of the claims of the employer against the contractor under the contract and bank expressly waives the suretyship and other rights, if any, which are, in any event, inconsistent with the above or any other provisions of the performance guarantee. This will clearly indicate as to how the bank understood this to be a performance guarantee in the form a bank guarantee and to be furnished by it. SRP 29/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:31 :::
COM.APPL6.17.doc Once this is an independent and autonomous contract which must be construed on its own and its interpretation is not controlled by the parent or the underlying contract, then, Mr. Chagla's reliance on clause 3(ix) is misplaced and, in fact, further fortifies our view that the document in question is nothing but a bank guarantee given by respondent No.2.
27 Mr. Chagla then submits that the communication at page 80 of the compilation is not a decision contemplated by a contract of indemnity. We do not think that this contention should detain us. This is a letter dated 27 th October, 2016, addressed by the first respondent to the Punjab National Bank. It only informs the bank that the performance guarantee has already been invoked by it on 25 th October, 2016. However, the first respondent stated before this Court that it would be withdrawing its invocation letter of 25th October, 2016, and issuing a fresh one. Therefore, the bank need not act upon the earlier demand or invocation contained in the letter dated 25 th October, 2016. There is a substantive demand raised on 27 th October, 2016. It was entirely upon the first respondent to alter the contents of its invocation letter or letter of demand. That is SRP 30/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:31 ::: COM.APPL6.17.doc why on 27th October, 2016, it addresses a comprehensive invocation letter. It refers to the contract. It refers to clause 8.1 and states that the unconditional, irrevocable and unequivocal bank guarantee is being invoked and a demand is raised on the bank in terms thereof. We do not think that the contents of this letter denote that there is any linking of the obligations under the parent contract with this performance guarantee in the form of a bank guarantee. There may be a reference to it in this letter of invocation, but its terms and conditions have not been incorporated in any manner in the performance guarantee. Therefore, based on the contents of this letter, the bank was obliged to pay the sums. It was not open for the bank to question the contents of this letter. There is a clear demand because the contractor has been accused of not completing the work required under the contract. There are numerous deficiencies which are committed in performance of the contract. There is delay on the part of the contractor in performing it. The work already done is defective. Therefore, the contractor has failed to observe and perform the terms and conditions of the contract which has resulted in the first respondent suffering huge losses and damages in excess of Rs.140 crores. That is why the bank is SRP 31/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:31 ::: COM.APPL6.17.doc called upon to make payment of the full guarantee amount of Rs.10 crore.
28 We do not think, therefore, that there is any scope to read a distinct contract and as attempted by the petitioner in this letter.
29 The alternate contention also need not detain us. Given the wording which is clear and unambiguous this is an unconditional, unequivocal and irrevocable bank guarantee. It is not an indemnity for losses. It cannot be said to be conditional merely because one sentence of clause 3.1 employ the words "indemnify the losses". Merely because it seeks to indemnify the losses under the contract and the first respondent has to raise a demand by alleging such losses, will not empower the second respondent-bank to question the demand or the contents of the letter of invocation. It cannot, in any manner, call upon the employer, namely, the first respondent to satisfy it about the quantum of the loss or the manner in which the same was suffered or whether that was indeed suffered at all. The demand by the first respondent and in terms of the above clauses is SRP 32/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:31 ::: COM.APPL6.17.doc decisive. It has been so raised and by the letter of invocation dated 27th October, 2016. Once the demand is raised, the bank cannot question it. It is an unconditional performance guarantee in the form of a bank guarantee. The bank cannot call upon the employer to satisfy it as to how the appellant has failed to perform its terms and obligations under the parent contract. In the absence of any linking and of the above nature, even the alternate contention must fail.
30 Both the judgments relied upon by Mr. Chagla have no application to the facts and circumstances of the present case. In the case of Mula Sahakari (supra) the Hon'ble Supreme Court had before it an appeal of the bank. It is the bank which was questioning the nature of the independent contract it had to perform. It was the bank's case that what it executed was not a bank guarantee which could have been encashed, but it was a performance guarantee. The bank was alleging a fraud on the part of the beneficiary in seeking to encash such an instrument or derive any benefit from it. That is how the co-operative society which had set up a sugar factory had executed a contract for installation of a paper plant on turnkey basis. That was with one SRP 33/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:31 ::: COM.APPL6.17.doc M/s. Pentagon Engineering Pvt. Ltd.. Pentagon furnished a performance guarantee in regard to the machinery supplied by it. That contract contained a clause for retention of ten per cent of the contract price by M/s. Pentagon. Pentagon suggested for a modification as regards the payment clause enabling the co- operative society to waive its rights to retain the ten per cent of the contract price and in its turn to have a letter of credit so that they can furnish appropriate bank guarantee. The co-operative society accepted it. Pentagon responded to it and opened a letter of credit for the ten per cent retention and as soon as that letter of credit is opened, Pentagon will give a bank guarantee for the retention money within ten or fifteen days thereafter. The bank guarantee/indemnity was thereafter furnished by the State Bank of India and its clauses were peculiar. That is why when that bank guarantee was invoked, the bank took the stand that it cannot honour the demand raised on it by Mula Sahakari. That is how the co-operative society-respondent filed a suit. An application was made therein for a direction to the bank to deposit a sum of Rs.34 lakhs. The High Court directed the bank to retain the sum subject to the condition that in the event the suit is decreed, it would be paid with interest at 12%. The suit was SRP 34/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:31 ::: COM.APPL6.17.doc dismissed. The appeal was preferred against that by Mula Sahakari. The High Court construed that agreement to be a bank guarantee and decreed the suit.
31 After referring to these facts, the pleadings, the contract itself, the Hon'ble Supreme Court reproduced the relevant clauses in paragraphs 13, 14, 15 and 16 of the judgment. The High Court further read into the contract the words such as "unequivocal" and "unconditional" "without any demur or protest". That is how the High Court committed a gross error in terming the operative portion of the document as a preamble. The High Court was wrong in inserting terms and expressions which did not find place in the document in question. That is how the further observations are made in paragraph 23 to 26 relied upon by Mr. Chagla and eventually paragraph 34. 32 To our mind, the facts and circumstances of this case are completely distinguishable and do not apply to the matter before us.
33 Even in the case M/s. Hindustan Construction SRP 35/37 ::: Uploaded on - 22/03/2017 ::: Downloaded on - 23/03/2017 01:12:31 ::: COM.APPL6.17.doc Company Limited (supra) it was apparent that the bank guarantee itself contained a stipulation linking its invocation to the terms and conditions in the parent contract which are required to be fulfilled. That is why the obligations expressed in the said clause having not been fulfilled by the contractor that the employer derives the right for recovery of whole or part of the advance mobilisation loan from the contractor under the contract. That is why the bank guarantee and to secure the same could have been invoked only on the satisfaction as above. That is how Hindustan's case is distinguishable from the present matter. 34 We, therefore, do not think that any advantage can be derived from the judgment of the Hon'ble Supreme Court in the case of Hindustan (supra) either.
35 We are of the firm opinion that the bank guarantee before us is unequivocal and unconditional. It is not a conditional bank guarantee and, therefore, the beneficiary has an unfettered right to invoke it.
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COM.APPL6.17.doc 36 As a result of the above discussion, we find that the only two contentions raised before us by Mr. Chagla have no merit. Consequently, the appeal fails. It is, therefore, dismissed. In the circumstances, there shall be no order as to costs. 37 We clarify that the disputes and differences proposed to be referred to arbitration shall be decided, uninfluenced by any tentative and prima facie findings in the impugned order and our order on this appeal. All contentions of both sides are expressly kept open.
38 At this stage, Mr. Saraf prays for continuation of the ad-interim order dated 26th October, 2016, and which is continued till date. The request is opposed by the respondent No.1. 39 Having noted Mr. Saraf's request, we find that the bank guarantee is unequivocal and unconditional. Further, it is a bank guarantee as ruled by us. In such circumstances, as a independent obligation of the banker is flowing from the same, that cannot be interfered with. The request is, therefore, refused. B.P. COLABAWALLA, J. S.C. DHARMADHIKARI, J.
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