Allahabad High Court
M/S Drake And Scull Water And Energy ... vs Paschimanchal Vidyut Vitran Nigam Ltd. on 19 January, 2018
Author: Sudhir Agarwal
Bench: Sudhir Agarwal, Shashi Kant
HIGH COURT OF JUDICATURE AT ALLAHABAD AFR Court No. - 34 Case :- FIRST APPEAL FROM ORDER No. - 191 of 2018 Appellant :- M/S Drake And Scull Water And Energy India Pvt. Ltd. Respondent :- Paschimanchal Vidyut Vitran Nigam Ltd. Counsel for Appellant :- Nishant Mishra,Navin Sinha Counsel for Respondent :- Chandan Agarwal Hon'ble Sudhir Agarwal, J.
Hon'ble Shashi Kant, J.
1. This appeal under Section 37(1)(b) of Arbitration and Conciliation Act, 1996 (hereinafter referred to as "Act, 1996") has arisen from judgment and order dated 10.01.2018 passed by Sri Alok Saxena, District Judge, Meerut rejecting appellant's application registered as Misc. Case No. 153 of 2017 filed under Section 9 of Act, 1996 whereby appellant had sought an injunction restraining respondents from encashing Bank Guarantee.
2. Facts in brief, as pleaded and evident from record, are that respondent-Paschimanchal Vidyut Vitran Nigam Limited (hereinafter after referred to as "PVVNL"), a Company registered under Companies Act, 1956 (hereinafter referred to as "Act, 1956"), is a State Government Company owned by State of U.P. and engaged in distribution of electricity in western part of State of U.P. under the licence obtained from U.P. Electricity Regulatory Commission. PVVNL issued a tender notice for Rural Electrification Works of Villages/Mazras of Muzaffar Nagar District for electrification of 865 Villages and Mazras in Muzaffar Nagar District. Appellant participated in the said tender process and was awarded work in terms of tender documents. A Letter of Intent dated 12.03.2015 was issued by respondent to appellant for the aforesaid work of Rural Electrification of Villages/Mazras of Muzaffar Nagar district under RGGVY Phase-II. Initially tender was floated for an amount of 150 crores but in terms of Letter of Intent, Rural Electrification Corporation reduced and sanctioned only an amount of Rs. 90.87 crores for the said work. The said contracts/agreements of work were executed between appellant and respondents, i.e., Contract of Supply Order No. 1281 for Rural Electrification for an amount of Rs. 81,76,24,263.02 and another contract for erection work of Rs. 9,11,19,736.98/-. The said contracts were executed on 27.04.2015. In order to ensure execution of contract, appellant also submitted two bank guarantees as under:
(i) Performance Bank Guarantee bearing No. 0000115PBG140051 dated 17.04.2015 for an amount of Rs. 13,63,11,600/- issued through Abu Dhabi Commercial Bank, 75 Rahmatmanzil. Veernariman Road Mumbai-400020.
(ii) Advance Bank Guarantee bearing No. 0000115APG140016 dated 17.04.2015 for an amount of Rs. 9,99,61,840/- issued through Abu Dhabi Commercial Bank, 75 Rahmatmanzil, Veernariman Road Mumbai-400020 issued against the mobilization advance and for a value equivalent to 110% of the mobilization advance.
3. The work as per terms of contract had to be completed within 18 months from the date of issue of Letter of Intent, i.e., 12.03.2015. However, respondents claimed that work did not proceed as per terms. There appears to be some dispute about cause of delay in work. After some correspondence between parties, respondent-PVVNL vide letter dated 12.07.2017 terminated the contract and proceeded to encash performance bank guarantee of Rs. 13.63 crores.
4. Appellant preferred an application being Arbitration Petition No. 153 of 2017 under Section 9 of Act, 1996 before District Judge, Meerut on 18.07.2017 seeking following reliefs:
"a) Pass ad-interim ex-parte measure of protection restraining the respondent from encashing the bank guarantee bearing numbers as under:
(i) Performance Bank Guarantee bearing No. 0000115PBG140051 dated 17.04.2015 for an amount of Rs. 13,63,11,600.00 issued through Abu Dhabi Commercial Bank, 75 Rahmatmanzil. Veernariman Road Mumbai-400020.
(ii) Advance Bank Guarantee bearing No. 0000115APG140016 dated 17.04.2015 for an amount of Rs. 9,99,61,840.00 issued through Abu Dhabi Commercial Bank, 75 Rahmatmanzil, Veernariman Road Mumbai-400020.
b) Pass ad-interim measure of protection appointing local commissioner to inspect the sites of District Muzaffar Nagar and Shamli covered under the contract between the applicant and respondent company further directing him to submit a report of works done.
c) direct the respondent by way of interim measure of protection securing the amount of Rs. 20 crores of the applicant by depositing the said amount in this Hon'ble Court; and
d) pass such or further order/s as may be deemed fit and proper in the interest of justice."
5. When the application was pending, PVVNL encahsed Performance Bank Guarantee of Rs. 13.63 crores from Bank concerned. Thereafter respondents issued an Office Memorandum dated 03.11.2017 to forfeit Advance Bank Guarantee dated 17.04.2015 amounting Rs. 9,99,61,840/- and sent a letter to concerned Bank at Mumbai for its encashment. Appellant also invoked Arbitration Clause of Contract, being Clause 48 and sent notice dated 24.11.2017 to respondent for appointment of Arbitrator but PVVNL failed to do so.
6. In the meantime, District Judge, Meerut vide order dated 10.01.2018 rejected appellant's Petition filed under Section 9 of Act, 1996, hence this appeal.
7. The execution of unconditional bank guarantee and authority to encash the same by respondent in terms of contract is not in dispute. Appellant, however, contended that he has performed substantial work, incurred huge expenses and submitted bills which have not been paid, therefore, it was wholly unjust, illegal and arbitrary on the part of respondent to encash bank guarantee and District Judge concerned committed manifest error in rejecting appellant's application for staying encashment of bank guarantee.
8. Heard Sri Navin Sinha, learned Senior Advocate, assisted by Sri Nishant Mishra and Sri Vasanth Rajaskaran, Advocates, for appellant and Sri Shashi Nandan, learned Senior Advocate, assisted by Sri Chandan Agarwal, Advocate, for respondents.
9. Conditions of contract contemplate, besides others, Contract Performance Guarantee under Clause 11 of "Special Conditions of Contract Volume-IA" as under:
"11.0 Contract Performance Guarantee 11.1 As a Contract Performance Security, the successful Bidder, to whom the work is awarded, shall be required to furnish a Performance Guarantee from (a) a Public Sector Bank or (b) a Scheduled Indian Bank having paid up capital (net of any accumulated losses) of Rs. 100 crore or above (The latest annual report of the Bank should support compliance of capital adequacy ratio requirement) or (c) any foreign Bank or subsidiary of a foreign Bank having branch office in Meerut, UP with overall international corporate rating or rating of long term debt not less than A- (A minus) or equivalent by reputed rating agency, in the form attached as Annexure-II to this Volume-I in favour of Pashimanchal Vidyut Vitran Nigam Ltd. The guarantee amount shall be equal to fifteen percent (15%) of the Contact price and it shall guarantee the faithful performance of the Contract in accordance with the terms and conditions specified in these documents and specifications. The guarantee shall be valid up to 90 days after the end of Warranty Period with a claim period of 3 months thereafter."
10. Copies of two guarantees, furnished by appellant, are also on record on page- 301 and 304. Since contents of both the documents are similar, we reproduce the condition of one of such guarantee dated 17.04.2015 as under:
"In consideration of Paschimanchal Vidyut Vitran Nigam Ltd, (hereinafter referred to as the 'employer', which expression shall, unless repugnant to the context or meaning thereof include its successors administrators and assigns) having awarded to M/s Drake and Scull Water and Energy India Private Limited (hereinafter referred to as the 'contractor' which expression shall unless repugnant to the context or meaning thereof, include its successors, administrators, executors and assigns), a contract by issue of employer's letter of award no. 16103/PVVNL/MT/RCCVY-II/212(s)/LOI/2014-15 dated 12.03.2015 and the same having been acknowledged by the contractor resulting in A Contract/loi baring no. 16103/ PVVNL/ MT/ RCCVY-II/212(s)/LOI/2014-15 dated 12.03.2015 valued at INR 90,87,44,000 (Rupees Ninety Crore Eighty Seven Lakhs Forty Four Thousand only) for rural electrification work of village/ Majre of Muzaffarnagar district in Uttar Pradesh under RGGVY phase-2 (scope of work) (hereinafter called the contract) and the Employer having agreed to make an advance payment to the Contractor for performance of the above contract amounting INR 9,99,61,840.00 (Rupees Nine Crore Ninety Nine Lakhs Sixty One Thousand Eight Hundred and Forty only) as an advance against Bank Guarantee to be furnished by the contractor.
We, Abu Dhabi Commercial Bank, 75 Rehmat Manzil, Veer Nariman Road, Mumbai 400020, having its Head Office at P.O. Box 939, Abu Dhabi, UAE (hereinafter referred to as the 'bank', which expression shall, unless repugnant to the context or meaning thereof, include its successors, administrators, executors and assigns) do hereby Guarantee and undertake to pay the employer, immediately on demand any or, all monies payable by the Contractor to the extent of INR 9,99,61,840.00 (Rupees Nine Crore Ninety Nine Lakhs Sixty One Thousand Eight Hundred and Forty only) as aforesaid at any time up to 28 February 2017 (including claim of six months) without any demur, reservation, contest, recourse or protest and/or without any reference to the contractor. Any such demand made by the employer on the bank shall be conclusive and binding notwithstanding any difference between the employer and the contractor or any dispute pending before any court, tribunal, arbitrator or any other authority. We agree that the Guarantee herein contained shall be irrevocable and shall continue to be enforceable till the employer discharges this.
Guarantee.
The employer shall have the fullest liberty without affecting in any way the liability of the bank under this guarantee, from time to time to vary the advance or to extend the time for performance of the contract by the contractor. The employer shall have the fullest liberty without affecting this guarantee, to postpone from time to time the exercise of any thing, whatsoever, which under the law would, but for this provision have the effect of relieving the bank.
The bank also agrees that the employer at its option shall be entitled to enforce this guarantee against the bank as a principal debtor, in the first instance without proceeding against the contractor and notwithstanding any security or other Guarantee that the employer may have in relation to the contractor's liabilities.
This guarantee shall be governed and construed in all respect in accordance with the laws of India and will be subject to the jurisdiction anywhere in India.
Notwithstanding anything contained hereinabove out liability under this guarantee is limited to INR 9,99,61,840.00 (Rupees Nine Crore Ninety Nine Lakhs Sixty One Thousand Eight Hundred and Forty only) and it shall remain in force up to 28 February 2017 and including claim of six months and shall be extended from time to time for such period (not exceeding one year), as may be desired by M/s Drake and Scull Water and Energy India Private Limited on whose behalf this guarantee has been given. We shall be liable to pay any amount under this bank guarantee or part thereof only if we receive a written claim or demand under this guarantee on or before 28.02.2017 at Mumbai, India."
11. The documents clearly shows that employer in its option may enforce guarantee against the bank as a principal debtor, in the first instance, without proceeding against Contractor and notwithstanding any security or other Guarantee. Therefore encashment of bank guarantee was unconditional and at the option of respondent-PVVNL.
12. It is in this backdrop, we may examine exposition of law on the question, whether encashment of bank guarantee can be stopped or checked or obstructed by taking recourse to legal proceedings and filing an application for injunction when in the contract between parties, there is no restriction or obstruction; and encashment of bank guarantee is within the option of party executing contract with Contractor.
13. The back guarantees were furnished, irrevocable in nature, and payable to the respondent on demand. No condition was imposed as to when respondent would not be able to encash bank guarantee. Record on the contrary shows that encashment would be at the option of respondents and whenever demand is raised, it has to be paid.
14. In U.P. State Sugar Corporation Vs. Sumac International Ltd. (1997) 1 SCC 568 Court said that law relating to invocation of such bank guarantees is well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. Bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. Any other view would frustrate and defeat the very purpose of such unconditional bank guarantee furnished by party concerned. Court also observed that when an injunction is sought, Court should be slow in granting an injunction to restrain the realization of such a bank guarantee. There are two exceptions recognized, (1) a fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee and (2) where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. This view has been reiterated by a Three-Judge Bench in Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engineering Works (P) Ltd., and another (1997) 6 SCC 450 and it has further said:
"If the bank could not in law avoid the payment, as the demand had been made in terms of the bank guarantee, as has been done in the present case, then the court ought not to have issued an injunction which had the effect of restraining the bank from fulfilling its contractual obligation in terms of the bank guarantee. An injunction of the court ought not to be an instrument which is used in nullifying the terms of a contract, agreement or undertaking which is lawfully enforceable."
(emphasis added)
15. In Himadri Chemicals Industries Ltd. Vs. Coal Tar Refining Company (2007) 8 SCC 110, Court has crystallized the principles which should be followed in the matter of injunction to restrain encashment of a Bank Guarantee or a Letter of Credit and in para-14 of judgment, it has said:
"14. From the discussions made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement of a Bank Guarantee or a Letter of Credit, we find that the following principles should be noted in the matter of injunction to restrain the encashment of a Bank Guarantee or a Letter of Credit:
(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional Bank Guarantee or Letter of Credit is given or accepted, the Beneficiary is entitled to realize such a Bank Guarantee or a Letter of Credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.
(ii) The Bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.
(iii) The Courts should be slow in granting an order of injunction to restrain the realization of a Bank Guarantee or a Letter of Credit.
(iv) Since a Bank Guarantee or a Letter of Credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of Bank Guarantees or Letters of Credit.
(v) Fraud of an egregious nature which would vitiate the very foundation of such a Bank Guarantee or Letter of Credit and the beneficiary seeks to take advantage of the situation.
(vi) Allowing encashment of an unconditional Bank Guarantee or a Letter of Credit would result in irretrievable harm or injustice to one of the parties concerned."
16. In Adani Agri Fresh Ltd. Vs. Mahaboob Sharif and others (2016) 14 SCC 517, Court said that bank guarantee is an independent contract between bank and the beneficiary thereof. Bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance bank has given guarantee is immaterial and of no consequence.
17. In Mahatama Gandhi Sahakra Sakkare Karkhane Vs. National Heavy Engineering Corporation Ltd. and another (2007) 6 SCC 470, Court said that if bank guarantee furnished is an unconditional and irrevocable one, it is not open to the bank to raise any objection whatsoever to pay the amounts under the guarantee. The person in whose favour guarantee is furnished by the bank cannot be prevented by way of an injunction in enforcing the guarantee on the pretext that the condition for enforcing the bank guarantee in terms of the agreement entered between the parties has not been fulfilled. Such a course is impermissible.
18. Learned Senior Advocate, could not show that here is a case which falls within either of the exceptions recognized as noticed above i.e. fraud or irretrievable harm or injustice to one of the parties concerned, therefore we find no error on the part of Court below in rejecting appellant's application seeking injunction under Section 9 of Act, 1996.
19. In view of discussion made above, we find no merits in the appeal. Dismissed at the stage of hearing under Order 41 Rule 11 C.P.C.
Dt. 19.01.2018 PS