Bombay High Court
Nuclear Power Corporation Of India Ltd, ... vs M/S Kay Bouvet Engineering ... on 27 September, 2021
Author: G. S. Patel
Bench: G.S. Patel
15-IAST-15566-2021 IN ARAST-15564-2021+.DOC
Arun
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
CIVIL APPELLATE JURISDICTION
INTERIM APPLICATION (ST) NO. 15566 OF 2021
IN
ARBITRATION APPEAL (ST) NO. 15564 OF 2021
IN
ARBITRATION APPLICATION NO. 52 OF 2021
Nuclear Power Corporation of India Ltd ...Applicant/
Appellant
Versus
Kay Bouvet Engineering Ltd & Anr ...Respondents
Mr Kevic Setalvad, Senior Advocate, with Arsh Mishra, i/b MV
Kini, for the Appellant.
Mr Prasad Dani, i/b Nikhil Wadikar, for the Respondent.
CORAM: G.S. PATEL, J
DATED: 27th September 2021
PC:-
1. By consent, the Arbitration Appeal itself is taken up.
Digitally
signed by
2. The Arbitration Appeal will have to be allowed right away. It
ARUN
ARUN RAMCHNDRA
RAMCHNDRA SANKPAL
is directed against a short ex parte ad-interim order of 6th July 2021
SANKPAL Date:
2021.09.28 made by the District Judge-2, Satara on a Section 9 application of
10:40:48
+0530
the Arbitration and Conciliation Act 1996 filed by the present
Page 1 of 12
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Respondent for an injunction against invocation of a Bank
Guarantee by the present Appellant.
3. I reproduce the order in full below.
"Order below Exh.7 in Arbitration Application No. 52
of 2021.
(CNR No: MHST01-001204-2021)
Read application. Heard Advocate for
applicant. Applicant and opponent No.1 entered into
contract for manufacture and supply of certain goods,
accordingly terms are settled. Advocate for applicant
pointed out Clause 14 of the agreement which speaks about
the settlement of dispute between the parties, as per said
Clause, if any dispute arose, it is to be settled by the
management of both and thereafter they have to move to
Arbitrator. Advocate for applicant pointed out the notice in
dispute by which it is informed that, opponent No.1 will
invoke the Bank Guarantee furnished by applicant which is
valid upto 21.05.2022. It is submitted that, since issuance of
first notice the management of applicant is in contact with
the opponent No.1 Corporation to settle the dispute, but in
vain, if Bank Guarantee is invoked applicant Company will
have to sustain huge loss and they will loose the contract
itself. It is also submitted that, if opponent Corporation
shows sufficient ground for invoking the Bank Guarantee,
then applicant Company will raise no objection, applicant
has sought statusquo in respect of Bank Guarantee
furnished by applicant till the appearance of opponent
Corporation which is a Government Undertaking.
02. I have gone through Clause 14 of the agreement
between parties. I agree that, it is agreed between parties
that, matter is required to be settled amicably at first
instance and if required they may move to Arbitrator. In
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view of notice issued by the opponent Corporation, said
Corporation may be ordered to maintain statusquo in
respect of Bank Guarantee furnished by applicant till their
appearance before this Court. Hence, following order.
ORDER
1. Opponent No.1 Corporation to maintain statusquo in respect of Bank Gurantee furnished by applicant M/s Kay Bouvet Engineering Ltd to them till their appearance in present proceeding.
2. Issue notice to opponent Corporation why this order should not be confirmed till disposal of application returanable on 22nd July 2021.
3. Service be effected through Special Bailiff and through e-mail.
4. Applicant to deposit required charges.
Sd/-
Satara (B.S. Wavre)
Date: 6th July 2021 District Judge-2, SATARA."
4. The order is, ex-facie, entirely unsustainable. It is contrary to decades of settled jurisprudence on the matter of invocation of Bank Guarantees and injunctions against them.
5. In Techno Unique Infratech Pvt Ltd v Gammon Infrastructure Projects Ltd,1 I had occasion to review the case law. Portions of that decision appear to me to be apposite to this case.
6. Hindustan Steelworks Construction Ltd v Tarapore & Co & Anr 2 was a case that came up before the Supreme Court against an order 1 2020 SCC OnLine Bom 42.
2 (1996) 5 SCC 34.
Page 3 of 1227th September 2021 15-IAST-15566-2021 IN ARAST-15564-2021+.DOC granting an injunction. Reviewing the previous law on the subject, the Supreme Court re-stated the applicable principles. There can be no interference with an unconditional bank guarantee except when fraud is established or an apprehension of irretrievable injustice is demonstrated: UP Cooperative Federation Ltd v Singh Consultants & Engineers (P) Ltd.3 This principle, well-settled in English law, could not be distinguished in Indian law, and, importantly for our present purposes, in the case of a performance bank guarantee. 4 It was next argued before the Hindustan Steelworks court that fraud was not the only ground for interference. Exceptional circumstances creating special equities would also justify an interference. This was countered by relying on the 1988 decision in UP Cooperative Federation to say that special equities or exceptional circumstances had to be shown to be a result of that fraud. Hindustan Steelworks rejected that submission, and said it was an incorrect reading of UP Cooperative Federation. Correctly read, UP Cooperative Federation held that interference is warranted only in cases of fraud or irretrievable injustice. Fraud is not the only exception.5 Hindustan Steelworks explicitly recognized two layers or levels of fraud: a fraud by one of the parties to the underlying contract vitiating it entirely, or a fraudulent demand by the beneficiary unrelated to any fraud at the time of execution but because of subsequent events or circumstances. Neither is true in this case. It is in this background that Hindustan Steelworks stated the position in law thus:
23. We are, therefore, of the opinion that the correct position of law is that commitment of banks must be
3 (1988) 1 SCC 174.
4 Hindustan Steelworks, supra, paragraph 13. 5 Hindustan Steelworks, supra, paragraph 18.
Page 4 of 1227th September 2021 15-IAST-15566-2021 IN ARAST-15564-2021+.DOC honoured free from interference by the courts and it is only in exceptional cases, that is to say, in case of fraud or in a case where irretrievable injustice would be done if bank guarantee is allowed to be encashed, the court should interfere.
(Emphasis added)
7. There is no fraud shown in (i) the underlying power plant construction contract; or (ii) the issuance of the bank guarantees; or
(iii) the invocation.
8. The next decision is UP State Sugar Corporation v Sumac International Ltd,6 where the Supreme Court laid out the fundamental principles. In commercial dealings, an unconditional bank guarantee will be realized irrespective of any pending disputes. The bank must honour it according to its terms; else its purpose is lost. Injunctions are not to be readily granted. The law admits of only two exceptions: a fraud vitiating the very foundation of the bank guarantee, or a resultant irretrievable harm or injustice. In this context, the Sumac International court explained what irretrievable injustice means, and, more importantly, what it does not: a payout adversely affecting the bank and the customer who furnished the bank guarantee is not within the frame. The injustice must be so exceptional and so utterly irretrievable that it would, in the words of the Supreme Court, 'override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country'. This tells us that while a bank guarantee's encashment or realization has a localized adverse effect on the bank and its 6 (1997) 1 SCC 568.
Page 5 of 1227th September 2021 15-IAST-15566-2021 IN ARAST-15564-2021+.DOC customer (the entity at whose instance the bank guarantee was provided) -- as alleged in this case -- this must be set against, and weighed against, the larger adverse effect on country-wide commerce of the grant of an injunction itself. Therefore, to successfully obtain an injunction, the localized injustice to the bank and its customer must be shown to be so grave, so monumental and so catastrophic, that the ill-effects or wider ramifications of an injunction would pale in comparison. There is no such averment. There could not be.
9. Explaining the two exceptions, on the question of fraud, the Sumac International court emphasized that the issuing bank is wholly unconcerned with any contractual disputes or relations between its customer and the customer's contracting opposite party. The bank is bound by the tenor of the bank guarantee it issues. If fraud is invoked, it must be so egregious as to vitiate the entire underlying transaction.7 As to the second exception, of irretrievable injustice, Sumac International referenced the American decision in Itek Corporation v First National Bank of Boston,8 a case perhaps positioned at an extremity, for the context there was a contractual dispute between an American exporter and the Government of Iran at the time of the Iranian hostage crisis. I do not read Sumac International to suggest, as a matter of law, that it is only the legal question of 'impossibility of performance' that falls within the 7 For our present purposes, I will take it that this statement of law was positioned at the broader level, but did not address the second level or layer of fraud noticed in Hindustan Steelworks, i.e. a fraud in invocation by subsequent events or circumstances.
8 566 Fed Supp 1210; a decision of the US District Court for the District of Massachusetts, 28th June 1983.
Page 6 of 1227th September 2021 15-IAST-15566-2021 IN ARAST-15564-2021+.DOC second exception. The reliance on Itek Corporation was perhaps to illustrate just how exceptional the circumstances must be, and must be shown to be, to justify or warrant an injunction. 9 But what is important is the following observation in paragraph 14, that:
14. ... To avail of this exception, therefore, exceptional circumstances which make it impossible for the guarantor to reimburse himself if he ultimately succeeds, will have to be decisively established. Clearly, a mere apprehension that the other party will not be able to pay, is not enough.
(Emphasis added) As we shall immediately see, these words were reaffirmed by a later decision of the Supreme Court.
10. Sumac International is important for another reason: it directly addressed the question of financial incapacity of the party invoking the bank guarantee, and a resultant unlikelihood of the party seeking the injunction (who had got the bank guarantee issued) being unable to recover in restitution. The party invoking the bank guarantee in that case (the appellant) had a reference pending against it before the Board of Industrial and Financial Reconstruction under the then Sick Industrial Companies (Special Provisions) Act, 1985. The precise contention was that even if the respondent succeeded in arbitration, it would not be able to realize its claim. This is what the Supreme Court said:
17. ... The respondent contends that even if it succeeds before the Arbitrator it will not be able to realise its claim from the appellant. The mere fact that a reference under 9 That is why Sumac International says the irretrievable injury has to be 'of the nature noticed in the case of Itek Corp'.Page 7 of 12
27th September 2021 15-IAST-15566-2021 IN ARAST-15564-2021+.DOC the Sick Industrial Companies (Special Provisions) Act, 1985 is pending before the Board, is, in our view, not sufficient to bring the case in the ambit of the "irretrievable injustice" exception. ... There can, therefore, be no presumption that the company will, in no circumstance, be able to discharge its obligations.
(Emphasis added)
11. The third decision in sequence is Dwarikesh Sugar Industries Ltd v Prem Heavy Engineering Works (P) Ltd & Anr. 10 The Supreme Court noted the previous decisions, including Hindustan Steelworks and Sumac International, quoting from the latter, and also reaffirming the statement of law in UP Cooperative Federation. Then, in paragraph 22, Dwarikesh Sugar paraphrased the ratio of Sumac International on the question of irretrievable injustice:
22. The second exception to the rule of granting injunction, i.e., the resulting of irretrievable injury, has to be such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately succeeds. This will have to be decisively established and it must be proved to the satisfaction of the court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution.
(Emphasis added)
12. In order to invoke these special equities, that is to say, that the person against whom invocation is made would never be able to recover the amount under the bank guarantees, it must be shown decisively to the satisfaction of the Court that there is no possibility 10 (1997) 6 SCC 450.
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-- i.e. not the slightest possibility at all -- of restitution in this amount. Again, showing that Cethar is in a precarious financial condition, or that it is in liquidation is insufficient for this purpose. What must be demonstrated must be something far more clear than a mere apprehension. That is Sumac International. That is Dwarikesh Sugar. And that, therefore, is the law.11
13. Not one aspect of any of this law has been considered. There is not even a mention of fraud or irretrievable prejudice of the kind contemplated by the settled law.
14. The impugned order in fact rests on a solitary observation that if the Bank Guarantee is invoked, the Respondent will suffer huge losses and will lose the contract. It is settled law that this is no ground to restrain or interdict the invocation of an unconditionally bank guarantee. There is no ground made out that the four bank guarantees in question were conditional or were vitiated by one of the limited ways accepted under this branch of the law.
15. Perhaps this is not surprising because in the Application itself, from page 231, there is also no mention of fraud by the Appellant or any case of irretrievable prejudice.
16. But that is not all. The Section 9 Application does not contain any averments as to jurisdiction.
11 I noted some of this law again in SKS Power Generation (Chattisgarh) Ltd v Canara Bank, Summons For Judgment No. 42 of 2021 in Commercial Summary Suit No. 234 of 2020, decided on 11th August 2021.
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17. The contract between the parties had an arbitration clause 14 (page 108 to 109). It also had a jurisdiction clause 1.6 that gave exclusive jurisdiction to Courts in Mumbai. Under the settled law of jurisdiction, the Satara Court could not have had any jurisdiction. No part of any cause of action arose there. I will proceed on the basis that the arbitration agreement does not specify a venue or a seat so as to confer jurisdiction on the court within whose jurisdiction that seat or venue is situated. 12 Therefore, even if the Section 20 Code of Civil Procedure, 1908 principles are to apply, the District Court at Satara must be shown to be one where some part of the cause of action has arisen.13
18. Thus, even on a reading of the general law of jurisdiction, a civil suit would have had to be brought only in Mumbai where the Defendant is and where a part of the cause of action has certainly arisen. Under no circumstances, therefore, whether under the arbitration jurisdiction law or in the general law of jurisdiction, could the Satara District Court have had any jurisdiction at all.
19. There is no averment as to jurisdiction in the Section 9 Application itself. But this does not mean that the Court does not on its own check whether it has jurisdiction or not. A jurisdictional bar goes to the root of the matter. It will determine whether the Court has the authority at all to make any order.
12 See BGS SGS Soma JV v NHPC Ltd, (2020) 4 SCC 234; Indus Mobile Distribution (P) Ltd v Datawind Innovations (P) Ltd, (2017) 7 SCC 678. 13 Swastik Gases (P) Ltd v Indian Oil Corporation Ltd, (201) 9 SCC 32; ABC Laminart (P) Ltd v AP Agencies (1989) 2 SCC 163; RSDV Finance Co (P) Ltd v Shree Vallabh Glass Works Ltd, (1993) 2 SCC 130.
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20. Mr Dani submits that since the impugned order has been operative since 6th July 2021, it should be continued for a few days to enable the Respondent either to apply in a fresh Section 9 Application before a Court of competent jurisdiction, or to apply before the sole Arbitrator. When Mr Setalvad for the Appellant points out that the Appellant has filed a reply before the same court and raised this objections, all that has happened is at least five adjournments, Mr Dani submits that the Judge may be directed to hear the Section 9 Application immediately.
21. I do not see why I should continue the order for a single minute. This practice of going to a Court without jurisdiction and obtaining an ex parte order, entirely against the settled law, and then asking for a continuance only because the order has been allowed to continue is a practice that has to be deprecated in the strongest possible terms.
22. There is no question of continuing the impugned order. It has to be set aside, and it is.
23. The Section 9 Application is dismissed.
24. A copy of this order is to be sent to the District Judge-2, Satara by the Registrar General, at the earliest possible.
25. If I am not imposing costs on the Respondent today for what appears to me nothing but a gross abuse of the process of the Court, is only because of Mr Dani's submission that the Respondent was Page 11 of 12 27th September 2021 15-IAST-15566-2021 IN ARAST-15564-2021+.DOC ill-advised in approaching the District Court in Satara with such an application.
26. In view of the this, the Interim Application does not survive and is disposed of.
27. All concerned will act on production of a digitally signed copy of this order.
(G. S. PATEL, J) Page 12 of 12 27th September 2021