Madras High Court
P-1 M/S. Geodesic Techniques P Ltd Rep By ... vs R-1 M/S. Larsen & Toubro Limited ... on 30 April, 2015
Author: R.Mahadevan
Bench: R.Mahadevan
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 30.04.2015 CORAM The Hon'ble Mr.Justice R.Mahadevan OA.No.221/2014 and A.No 3737/14 P-1 M/S. GEODESIC TECHNIQUES P LTD REP BY ITS CONSTRUCTION MANAGER MR M TAMIZHARASAN NO.4 4TH CROSS PEENYA INDUSTRIAL ESTATE BANGALORE ... Petitioner Vs. R-1 M/S. LARSEN & TOUBRO LIMITED CONSTRUCTION BUILDING AND FACTORIES MOUNT POONAMALLEE ROAD MANAPAKKAM CHENNAI 89 ..Respondents OA.No.221/2014 and A.No 3737/14 R.MAHADEVAN, J.
The above Original Application has been filed for an injunction to restrain the Respondents, their men or agents, from, in any way, encashing the advance bank guarantee to the tune of Rs 4,05,72,091/-.
2. This court granted interim injunction on 28.03.2014 and the respondent has filed the above application in A.No 3737/14 to vacate the interim injunction. After hearing the learned counsel on either side, this court by an order dated 19.08.2014, allowed the original application. As against the same, an appeal was preferred by the Respondent in OSA 262/14, which was allowed by the Division Bench of this Court on 22.12.2014, remanding back the matter to this court, holding as follows:
On hearing the learned counsel for parties and in view of what we have recorded in our order dated 11.12.2014, it is agreed that the impugned order be set aside and the matter be remanded back to the learned Single Judge for consideration of the merits of the controversy including the aspect raised by us in the last order, the operative portion of which reads as under:-
''We have put the learned counsel for the respondent on notice that he will have to satisfy us, as to how firstly, Section 9 application under the Arbitration and Conciliation Act, 1996, is maintainable as bank guarantee is a separate contract. Secondly, prima facie the impugned order does not contain any reason for grant of interim order against encashment of the bank guarantee other than to state that Arbitration proceedings have been commenced (Consortium of DCIL - AIPL vs. Teestavalley Power Transmission Ltd., reported in 2014 (4) Arbitration Law Reporter 120 - propounding the requirement of satisfying the test for invocation of bank guarantee), and thirdly, such injunction has been made absolute till the conclusion of the arbitration proceedings without the option available under Section 17 of the said Act (even if such application under Section 9 of the Act is maintainable).
2. We are informed that the interim order against stay of bank guarantee has been operating before the learned Single Judge. That order would operate till the application is decided subject to the undertaking being given before us by the learned counsel for the appellant that the bank guarantee would be kept alive. We have no doubt that the learned Single Judge, taking into consideration it is a bank guarantee matter, will endeavour to conclude the proceedings as early as possible. This is how the matter is now before this court.
3. The brief facts of the case are as follows:
a. The case of the applicant is that they are engaged in the construction business. The contract for construction of Airport Hanger facility at Mihan, Nagpur was awarded to the respondent. The respondent awarded a sub-contract to the applicant by following tendering process. The respondent issued the Letter of Intent on 06.01.02 to the applicant for a provisional contract price of Rs 38.64 crores. As a part of performance guarantee, the applicant submitted various bank guarantees totalling to a sum of Rs 8,11,44,182/-. b. According to the applicant, the original design under the letter of intent had to undergo a considerable change with requirement of more steel and the amended design was also accepted by the respondent. The applicant progressed with the work and according to them, about 200 MT of structural steel was added due to the amendment to the design. Though the applicant was procuring materials, the respondent also supplied materials and debited the costs in the account of the applicant. The applicant had requested the respondent to revise the provisional contract price to Rs.41,45,86,621/- crores by their letter dated 10.05.2013. According to the applicant, though the main Hangar was completed in February 2013, at the request of the respondent, the applicant carried out additional works in the nature of fitting power Hanger Doors, cranes etc., for which the applicant incurred additional expenses for their overstay.
c. The further case of the applicant is that the applicant had to spend additionally on manpower, as the cranes were supplied much later after completion of the structural work. The case of the applicant is that the delay, if any, can be attributed only to the respondent and after under going many difficulties, the applicant completed the work and handed over the site in October 2013 to the satisfaction of the employer and the respondent. By a letter dated 21.11.2013, the applicant has made a claim of Rs 5,66,80,391/- towards compensation and additional cost. The respondent, revising the provisional contract value to Rs 40,21,44,924/-, arrived at the overall payments and debits made to account of the applicant at Rs 48,83,88,793/- and demanded the difference of Rs 8,62,43,869/- within 8 days, failing which proposed to encash the bank guarantees. It is, at this stage, citing their difficulties and hardships faced by them in their business and stating that the unilateral claim made by the respondent is illegal, against the principles of natural justice and tainted with mala fide intention to escape from their liability and to unjustly enrich themselves, causing irretrievable loss, the applicant has approached this Court.
4. The respondent has resisted the application, claiming that the injunction against invocation of a bank guarantee is permissible only under limited grounds of fraud and irretrievable injustice and in the present case, both the above elements are absent. The respondents have also claimed that they had promptly replied to the claim of the applicant in their letter dated 21.11.2013 and the same has been suppressed. The further case of the respondent is that on account of the inability of the applicant to meet out the expenses, the respondent has made the procurements on their behalf. Further, the delay in completing the project was because of the inability of the applicant to mobilise funds for materials, man power, plant and machinery. According to the respondent, the applicant only abandoned the project, but has not completed the project in October 2013. The claim made by the applicant was not accepted, as it was not based on any evidence and accounts. The respondent has also claimed that they are entitled to overhead charges at 20% of the costs and their claim is based on the entire expenses meted out by them till the completion of the project. The respondent, in their counter, have also denied the allegations of mala fide intentions, unjust enrichment and violations of natural justice and have sought for dismissal of the application.
5. It is not in dispute that as per Clause 24 of the Letter of Intent, the dispute has to be resolved through arbitration. The applicant has nominated the Honble Mr.Justice A.Venkatachalamoorthy, the retired Chief Justice of the Chatisgarh High Court and the respondent has nominated the Hon'ble Mr.Justice E.Padmanabhan, the retired judge of this Court and the third member of the Tribunal is yet to be appointed.
6. This Court heard the learned counsel on either side and perused the documents.
7. The learned senior counsel appearing for the applicant relied upon various communications in support of his contentions that the applicant had been demanding revised project provisional contract price and more materials were used. The learned senior counsel also contended that the demand of Rs 8,62,43,869/- by the respondent is not backed by any documents and the same has been raised only to deny the liability to the applicant. The learned senior counsel also submitted that without providing any opportunity to verify and tally the accounts, the respondent has straight away raised a demand and threatened to enforce the bank guarantee. According to the learned senior counsel for the applicant, this act of the respondent is tainted with mala fide intentions. The learned senior counsel also pointed out to the documents filed by the applicant to show their financial crisis and that the bank loans have been restructured to enable the applicant to come out of the crisis and in these circumstances, if the bank guarantee is encashed, the applicant would be put great hardship and irretrievable injustice would be caused to them. The learned senior counsel also contended that the e-mails of the respondent dated 28.11.2013 and 30.11.2013 are vague and cannot come in aid to the respondent. The learned senior counsel also contended that the bank guarantee was executed only in pursuance of the Letter of Intent and it is only a performance guarantee. The learned senior counsel also pointed out to the additional affidavit filed by the applicant, specifying the ramifications of the invocation of bank guarantee and undertaking to keep the bank guarantee alive, pending disposal of the arbitration proceedings. Under these circumstances, the learned senior counsel pressed for an injunction against invocation.
8. Per contra, the learned senior counsel for the Respondent has painstakingly contended that the application under Section 9 against invocation of bank guarantee is not maintainable, as the bank guarantee is a separate agreement between the bank and the respondent without any nexus to the arbitration agreement and unless there is a specific enabling clause in the bank guarantee to the effect of incorporating the arbitration agreement, the provisions of Section 9 cannot be invoked. The learned senior counsel also contended that the case of the applicant does not satisfy the requirements for granting injunction against invocation of bank guarantee. The learned senior counsel also contended that financial crisis can mean irretrievable injustice and the fact that the applicant itself would only be a reason to permit the respondent to invoke the bank guarantee. The learned senior counsel also contended that the applicant was fully aware that they are indebted to the respondent and that their claim is false. The learned senior counsel also pointed out to this court that the applicant has delayed the project and abandoned the project in October 2013, as a result of which, the respondent had met with certain losses. Under the circumstances, the learned senior counsel for the Respondent , relying upon the judgements reported in JT 1994 (1) SCC 240 (Svenska Handelsbanken and others Vs. Indian Charge Chrome Limited and another), 1997 CC (89) 619 (Dwarikesh Sugar Industries Limited Vs. Prem Heavy Engineering Works P Limited and others), 1997 (1) SCC 568 (UP State Sugar Corporation Vs. Sumac International Limited), AIR 2006 SC 1148 (BSES Limited (Now Reliance Energy Limited Vs. Fenner India Limited and another), 2009 7 SCC 696 (M.R.Engineers and Contractors P Limited Vs. Som Datt Builders Limited) and 2013 (3) CTC 414 BEFESA AGUA and another Vs. IVRCL Infrastructure and Projects Limited and others), in support of his contentions sought for dismissal of the application.
9. This court heard the learned counsel one either side and also perused the documents.
10. The first question, that arises for consideration, is as to whether, the application under Section 9 of the Arbitration and Conciliation Act is sustainable against invocation of bank guarantee, which is a separate contract.
11. The learned senior counsel for the Respondent, assailing the maintainability, has relied upon the following judgements.
(a) In the decision of the Honourable Supreme Court reported in 2009 7 SCC 696 (M.R. Engineers & Contractors Pvt. Ltd. Vs. Som Datt Builders Limited), it is held as under:-
13. The scope and intent of Section 7(5) of the Act may therefore be summarized thus:-
(i) An arbitration clause in another document, would get incorporated into a contract by reference, if the following conditions are fulfilled : (i) The contract should contain a clear reference to the documents containing arbitration clause, (ii) the reference to the other document should clearly indicate an intention to incorporate the arbitration clause into the contract, (iii) The arbitration clause should be appropriate, that is capable of application in respect of disputes under the contract and should not be repugnant to any term of the contract.
(ii) When the parties enter into a contract, making a general reference to another contract, such general reference would not have the effect of incorporating the arbitration clause from the referred document into the contract between the parties. The arbitration clause from another contract can be incorporated into the contract (where such reference is made), only by a specific reference to arbitration clause.
(iii) Where a contract between the parties provides that the execution or performance of that contract shall be in terms of another contract (which contains the terms and conditions relating to performance and a provision for settlement of disputes by arbitration), then, the terms of the referred contract in regard to execution/performance alone will apply, and not the arbitration agreement in the referred contract, unless there is special reference to the arbitration clause also.
(iv) Where the contract provides that the standard form of terms and conditions of an independent Trade or Professional Institution (as for example the Standard Terms & Conditions of a Trade Association or Architects Association) will bind them or apply to the contract, such standard form of terms and conditions including any provision for arbitration in such standard terms and conditions, shall be deemed to be incorporated by reference. Sometimes the contract may also say that the parties are familiar with those terms and conditions or that the parties have read and understood the said terms and conditions.
(v) Where the contract between the parties stipulates that the Conditions of Contract of one of the parties to the contract shall form a part of their contract (as for example the General Conditions of Contract of the Government where Government is a party), the arbitration clause forming part of such General Conditions of contract will apply to the contract between the parties.
(b) In 2013 (3) CTC 414 cited supra, it is held as under:-
48. Thereafter, the scope and intend of Section 7(5) of the Arbitration and Conciliation Act, was summarized by the Honourable Supreme Court as follows:-
(i)An Arbitration clause in another document, would get incorporated into a contract by reference, if the following conditions are fulfilled: (i) the contract should contain a clear reference to the documents containing Arbitration Clause, (ii) the reference to the other document should clearly indicate the intention to incorporate the arbitration clause into the contract, (iii) the arbitration clause should be appropriate, that is capable of application in respect of disputes under the contract and should not be repugnant to any term of the contract.
(ii)When the parties enter into a contract,making a general reference to another contract, such general reference would not have the effect of incorporating the arbitration clause from the referred document into the contract between the parties. The arbitration clause from another contract can be incorporated into the contract (where such reference is made), only by a specific reference to arbitration clause.
(iii)Where a contract between the parties provides that the execution of performance of that contract shall be in terms of another contract (which contains the terms and conditions relating to performance and a provision for settlement of disputes by arbitration), then the terms of the referred contract in regard to execution/ performance alone will apply, and not the arbitration agreement in the referred contract, unless there is special reference to the arbitration clause also.
(iv)Where the contract provides that the standard form of terms and conditions of an independent trade or professional institution (as for example the standard terms and conditions of a Trade Association or Architects Association) will bind them or apply to the contract, such standard form of terms and conditions including any provision for arbitration in such standard terms and conditions, shall be deemed to be incorporated by reference. Some times the contract may also say that the parties are familiar with those terms and conditions or that the parties have read and understood the said terms and conditions.
(v)Where the contract between the parties stipulates that the conditions of contract of one of the parties to the contract shall form a part of their contract (as for example the general conditions of contract of the Government where the Government is a party, the arbitration clause forming part of such general conditions of contract will apply to the contract between the parties.
Therefore, we will have to see, whether the arbitration clause mentioned in the ECC contract and supply contract and Memorandum of Understanding can be incorporated into the Bank Guarantee, in the light of the law laid down by the Honourable Supreme Court as stated above. In my opinion, having regard to the law laid down by the Honourable Supreme Court explaining the scope of Section 7(5) of the Arbitration and Conciliation Act, 1996, in these cases the Arbitration Clause cannot be incorporated in the bank guarantee.
49. According to me, a mere reference to ECC contract or supply contract or the execution of the bank guarantees, pursuant to the requirement as per the ECC contract and Supply contract will not make the arbitration clause to be read into bank guarantee. According to me, the bank guarantees, which are subject matter of the interpretation in these cases fall under the category 3 of paragraph 13 as stated above. Therefore, unless a special reference to arbitration clause is mentioned in the bank guarantee, the same cannot be read into the bank guarantee and when there is no arbitration clause in the bank guarantee, the application under Section 9 of the arbitration and Conciliation Act, 1996 is not maintainable.
50. Further, it has been held by the Honourable Supreme Court, in all the cases, referred to above, that Bank Guarantee are separate and distinct agreement and the terms of the bank guarantee alone should be considered and therefore, in the light of the principles laid down by the Honourable Supreme Court in judgement reported in M.R.Engineers and Contractors P Limited Vs. Som Datt Builders Limited (2009-7-SCC-696), in my opinion, the arbitration clause cannot be read into bank guarantee, and when the arbitration clause cannot be read into bank guarantee and when the bank guarantees do not contain an arbitration clause, the applications filed under Section 9 of the arbitration and Conciliation Act, are not maintainable. When I hold that the applications are not maintainable, there is no need to decide to other issues, whether the bank guarantees are unconditional or irrevocable or conditional.
51. Hence, the applications are not maintainable under Section 9 of the Arbitration and Conciliation Act, 1996 and accordingly, the same are dismissed. Consequently, connected applications are closed. No costs.
12. The above judgements lay down a preposition that the Bank Guarantee is a separate contract, unless the requirement of Section 7 (5) of the Arbitration and Conciliation Act, 1996 is satisfied. For the purpose of clarity, Section 7 (5) is extracted as under:-
7. Arbitration agreement:-
(5). The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.
13. It cannot be disputed that the bank guarantee is a separate and distinct contract. When the bank guarantee is invoked, the banker has no option, but to disburse the amount. However, it is to be noted that the origin of the bank guarantee is based on the contract between the two parties, to which bank is not a party. For the purpose of deciding as to whether the terms of the main contract including the arbitration clause are applicable to the bank guarantee, it is necessary to refer to the main contract, that is the Letter of Intent entered into between the parties and the bank guarantees.
14. Clause 13.3 of the Letter of Intent reads as under:-
13.3. Performance Guarantee:- You shall furnish performance guarantee of 10% of contract value in the form of bank guarantee as per the format and bank approved by L&T within seven days from the date of Letter of Intent. This guarantee shall be valid till final completion and acceptance of your scope of work by clients in all respects.
15. Upon perusal of the original bank guarantee dated 03/04/2012 and the subsequent amendment, it is evident that the guarantee has been furnished by the applicant based on his duty under the Letter of Intent; that the guarantee is a performance guarantee and that the bank is bound to make the payment once the guarantee is invoked without raising any disputes, even if there is a dispute between the applicant and the respondent herein. There is a reference only to the Letter of Intent. Though the terms of the guarantee make look as if it is unconditional, upon perusal of the entire terms and Clause 13.3 of the Letter of Intent, it can be invoked only if there is failure in the performance of the contract. Therefore, the bank guarantee is a conditional bank guarantee.
16. In the case of (1999) 8 SCC 436, reported in Hindustan Construction Co.Ltd. v. State of Bihar and Others, the Honourable Supreme Court considered the scope of unconditional as well as conditional bank guarantees and held in paragraph 14 as under:-
"14. This condition clearly refers to the original contract between HCCL and the defendants and postulates that if the obligations, expressed in the contract, are not fulfilled by HCCL giving to the defendants the right to claim recovery of the whole or part of the "advance mobilisation loan", then the Bank would pay the amount due under the guarantee to the Executive Engineer. By referring specifically to clause 9, the Bank has qualified its liability to pay the amount covered by the guarantee relating to "advance mobilisation loan" to the Executive Engineer only if the obligations under the contract were not fulfilled by HCCL or HCCL has misappropriated any portion of the "advance mobilisation loan". It is in these circumstances that the aforesaid clause would operate and the whole of the amount covered by the "mobilisation advance" would become payable on demand. The bank guarantee thus could be invoked only in the circumstances referred to in clause 9, whereunder the amount would become payable only if the obligations are not fulfilled or there is misappropriation. That being so, the bank guarantee could not be said to be unconditional or unequivocal in terms so that the defendants could be said to have had an unfettered right to invoke that guarantee and demand immediate payment thereof from the Bank. This aspect of the matter was wholly ignored by the High Court and it unnecessarily interfered with the order of injunction, granted by the Single Judge, by which the defendants were restrained from invoking the bank guarantee."
The above judgement would be squarely applicable to the present facts of the case.
17. Para 2 of the performance guarantee reads as under:-
We hereby undertake to indemnify you and keep you indemnified to the extent of the sum of Rs.3,30,00,000/- (Rupees three crores thirty lakhs only) from and against all losses and damages that may be caused to you or suffered by you in relation to the performance/execution under the said letter of intent by the Contractor as aforesaid by reason of any default or defaults on the part of the contractor in due performance of the said Letter of Intent, we shall unconditionally without demur and forthwith on demand pay to you a sum or sums not exceeding Rs.3,30,00,000/- (Rupees three crores thirty lakhs only) as may be claimed by you to be due from the Contractor as your losses and/or damages, costs, charges or expenses.
18. It is clear from the above condition that the guarantee can be invoked only if there is default in the performance of the contract. The respondent has raised certain disputes only in their letter dated 11.03.2014, i.e. after the claim was made by the applicant on 21.11.2013. This court also finds force in the contention of the learned senior counsel for the applicant that though a claim of Rs 2,09,08,581/- was made by an e-mail dated 03.10.2013, the same was disputed and without any evidence, the respondent has escalated the claim. Even in the e-mails sent by the respondent on 28.11.2013 and 30.11.2013, there is no whisper about any defect in the performance or a pending claim. Therefore, this court could only hold that prima facie, the applicant has performed its contract. It is also pertinent to mention here that the old guarantee expired on 31.12.2013 and the same was extended till 31.03.2014. The extensions are titled as Bank Guarantee Amendment and the applicant is found to be the applicant there also. Logic only specifies that if there was already a claim of Rs 8,62,43,869/-, the applicant would not have made the request for extension. However, the validity of the claim could only be agitated before the Tribunal.
19. In the judgement reported in AIR 2007 SC 2563 (Adhunik Steels Ltd. Vs. Respondent: Orissa Manganese and Minerals Pvt. Ltd.) , the Honourable Supreme Court has held as follows;
10. It is true that Section 9 of the Act speaks of the court by way of an interim measure passing an order for protection, for the preservation, interim custody or sale of any goods, which are the subject matter of the arbitration agreement and such interim measure of protection as may appear to the court to be just and convenient. The grant of an interim prohibitory injunction or an interim mandatory injunction are governed by well known rules and it is difficult to imagine that the legislature while enacting Section 9 of the Act intended to make a provision which was de hors the accepted principles that governed the grant of an interim injunction. Same is the position regarding the appointment of a receiver since the Section itself brings in, the concept of 'just and convenient' while speaking of passing any interim measure of protection. The concluding words of the Section, "and the court shall have the same power for making orders as it has for the purpose and in relation to any proceedings before it" also suggest that the normal rules that govern the court in the grant of interim orders is not sought to be jettisoned by the provision. Moreover, when a party is given a right to approach an ordinary court of the country without providing a special procedure or a special set of rules in that behalf, the ordinary rules followed by that court would govern the exercise of power conferred by the Act. On that basis also, it is not possible to keep out the concept of balance of convenience, prima facie case, irreparable injury and the concept of just and convenient while passing interim measures under Section 9 of the Act.
14. In Nepa Limited v. Manoj Kumar Agrawal MANU/MP/0019/1999 : AIR1999MP57 , a learned judge of the Madhya Pradesh High Court has suggested that when moved under Section 9 of the Act for interim protection, the provisions of the Specific Relief Act cannot be made applicable since in taking interim measures under Section 9 of the Act, the court does not decide on the merits of the case or the rights of parties and considers only the question of existence of an arbitration clause and the necessity of taking interim measures for issuing necessary directions or orders. When the grant of relief by way of injunction is, in general, governed by the Specific Relief Act, and Section 9 of the Act provides for an approach to the court for an interim injunction, we wonder how the relevant provisions of the Specific Relief Act can be kept out of consideration. For, the grant of that interim injunction has necessarily to be based on the principles governing its grant emanating out of the relevant provisions of the Specific Relief Act and the law bearing on the subject. Under Section 28 of the Act of 1996, even the arbitral tribunal is enjoined to decide the dispute submitted to it, in accordance with the substantive law for the time being in force in India, if it is not an international commercial arbitration. So, it cannot certainly be inferred that Section 9 keeps out the substantive law relating to interim reliefs.
18. It is true that the intention behind Section 9 of the Act is the issuance of an order for preservation of the subject matter of an arbitration agreement. According to learned Counsel for Adhunik Steels, the subject matter of the arbitration agreement in the case on hand, is the mining and lifting of ore by it from the mines leased to O.M.M. Private Limited for a period of 10 years and its attempted abrupt termination by O.M.M. Private Limited and the dispute before the arbitrator would be the effect of the agreement and the right of O.M.M. Private Limited to terminate it prematurely in the circumstances of the case. So viewed, it was open to the court to pass an order by way of an interim measure of protection that the existing arrangement under the contract should be continued pending the resolution of the dispute by the arbitrator. May be, there is some force in this submission made on behalf of the Adhunik Steels. But, at the same time, whether an interim measure permitting Adhunik Steels to carry on the mining operations, an extraordinary measure in itself in the face of the attempted termination of the contract by O.M.M. Private Limited or the termination of the contract by O.M.M. Private Limited, could be granted or not, would again lead the court to a consideration of the classical rules for the grant of such an interim measure. Whether an interim mandatory injunction could be granted directing the continuance of the working of the contract, had to be considered in the light of the well-settled principles in that behalf. Similarly, whether the attempted termination could be restrained leaving the consequences thereof vague would also be a question that might have to be considered in the context of well settled principles for the grant of an injunction. Therefore, on the whole, we feel that it would not be correct to say that the power under Section 9 of the Act is totally independent of the well known principles governing the grant of an interim injunction that generally govern the courts in this connection. So viewed, we have necessarily to see whether the High Court was justified in refusing the interim injunction on the facts and in the circumstances of the case.
20. It is relevant to consider the scope and ambit of Section 9 of the Arbitration and Conciliation Act, 1996 which reads as follows:-
9. Interim measures etc. by Court.
A party may, before, or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with section 36, apply to a court-
i. for the appointment of a guardian for a minor or person of unsound mind for the purposes of arbitral proceedings; or ii. for an interim measure of protection in respect of any of die following matters, namely:-
a. the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement;
b. securing the amount in dispute in the arbitration;
c. the detention, preservation or inspection of any property or thing which is die subject-matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any part) or authorising any samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence;
d. interim injunction or the appointment of a receiver;
e. such other interim measure of protection as may appear to the Court to be just and convenient, and the Court shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it.
21. As held by the Honourable Supreme Court, the Section empowers the court to grant such interim measures of protection, by use of the words Just and Convenient. It is to be noted here that the courts, while hearing an application under Section 9 of the Arbitration and Conciliation Act, are empowered to grant prohibitory orders against a garnishee, even though the third party, against whom the relief is sought for, is not a party to the arbitration agreement, as the relief is in the nature of securing the claim of the applicants, if the requirements under Civil Procedure Code for grant of interim orders are satisfied. It is also pertinent to mention here that the applicant has approached this court before the invocation.
22. In the present case, as already held by this court above that the bank guarantee is conditional, this court is of the view that the application under Section 9 is maintainable.
23. Now the next question is as to whether the applicant has satisfied the tests for granting injunction.
24. The learned senior counsel for the applicant has contended that the respondent has threatened to invoke the bank guarantee with mala fide intentions. The learned senior counsel also has relied upon paragraph 9 of the additional affidavit to contend that the applicant would be put to irretrievable loss and injustice.
25. Per contra, the learned senior counsel for the Respondent has relied upon the following judgements to contend that unless it is established that fraud and irretrievable injustice would be caused, there cannot be any injunction.
(a) In JT 1994 (1) SCC 240 (Svenska Handelsbanken and others Vs. Indian Charge Chrome Limited and another), it is held as under:-
87. In the present case, the Plaintiff has not repudiated the contract. In fact, it is working with the power plant and therefore, the breach of condition has been treated by the Plaintiff as a breach of warranty and in view of Section 12(3) of the Sale of Goods Act, the breach of warranty gives a right to claim for damages but not to a right to reject the goods and treat the contract as repudiated. Even the prayer in the plaint if for dimunition of the price of the power plant and the relief is based on Section 59 of the Sale of Goods Act.
88. We have already held that the contracts between the lenders and the borrower are not vitiated by any fraud much less established fraud and there is no question of irretrievable injury, therefore, there was no reason for the High Court to set aside the order of the trial court.
89. Against there is no case of any irretrievable injury either of the type as held in the case of Itek Corporation (supra) as there is no difficult in the judgement of this country being executable in the courts in Sweden.
90. The High Court was not right in working on mere suspicion of fraud or merely going by the allegations in the plaint without prima facie case of fraud being spelt out from the material on record.
91. The High Court was also in error in considering the question of balance of convenience. In law relating to bank guarantees, a party seeking injunction from encashing of bank guarantee by the suppliers has to show prima facie case of established fraud and irretrievable injury. Irretrievable injury is of the nature as noticed in the case of Itek Corporation (supra). Here there is no such problem. Once the Plaintiff is able to establish fraud against the suppliers or suppliers cum lenders and obtains any decree for damages or dimunition in price, there inspection o problem for affecting recoveries in a friendly country where the bankers and the suppliers are located. Nothing has been pointed out to show that the decree passed by the Indian Courts could not be executable in Sweden.
92. The High Court totally ignored the irretrievable injury which will be caused to the Defendant no.12 in not honouring the bank guarantee in international market which may cause grievous and irretrievable damage to the interest of the country as opposed to the loss of money to the borrower/plaintiff. There was no question of the Defendant 4, not making any demand. The installments for repayment of the loans had already been fixed and liable to be paid without demand by the Defendant no.4, Defendant no.12 is under a duty to pay the installments regularly on a fixed date without any demand to the Defendant no.4.
(b) In 1997 CC (89) 619 (Dwarikesh Sugar Industries Limited Vs. Prem Heavy Engineering Works P Limited and others), it is held as under:-
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.
(c) In 1997 (1) SCC 568 People's Union of Civil Liberties (PUCL) Vs. Union of India and another), it is held as under:-
12. The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may co-exist in some cases.
In the case of U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd.1988 [1] SCC 174), which was the case of works contract where the performance guarantee given under the contract was sought to be invoked, this Court, after referring extensively to English and Indian cases on the subject, said that the guarantee must be honoured in accordance with its terms. The bank which gives the guarantee is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the suppler has performed his contractual obligation or not, nor with the question whether the supplier is in default or not. The bank must pay according to the tenor of its guarantee on demand without proof or condition. There are only two exceptions to this rule. The first exception is a case when there is a clear fraud of which the bank has notice. The fraud must be of an agregious nature such as to vitiate the entire underlying transaction. Explaining the kind of fraud that may absolve a bank from honouring its guarantee, this Court in the above case quoted with approval the observations of Sir John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank NA (1984 [1] AER 351 at 352):
"The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear both as to the fact of fraud and as to the bank's knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank's credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it charged".
This Court set aside an injunction granted by the High Court to restrain the realisation of the bank guarantee.
14. On the question of irretrievable injury which is the second exception to the rule against granting of injunctions when unconditional bank guarantees are sought to be realised the court said in the above case that the irretrievable injury must be of the kind which was the subject-matter of the decision in the Itek Corporation case (supra). In that case an exporter in the U.S.A. entered into an agreement with the Imperial Government of Iran and sought an order terminating its liability on stand by letters of credit issued by an American bank in favour of an Iranian Bank as part of the contract. The relief was sought on account of the situation created after the Iranian revolution when the American Government cancelled the export licences in relation to Iran and the Iranian Government had forcibly taken 52 American citizens as hostages. The U.S. Government had blocked all Iranian assets under the jurisdiction of United States and had cancelled the export contract. The court upheld the contention of the exporter that any claim for damages against the purchaser if decreed by the American Courts would not be executable in Iran under these circumstances and relisation of the bank guarantee/Letters of credit would cause irreparable harm to the plaintiff. This contention was upheld. To avail of this exception, therefore, exceptional circumstances which make it impossible for the guarantor to reimburse himself if the 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. In the Itek case (supra) there was a certainty on this issue. Secondly, there was good reason, in that case for the court to be prima facie satisfied that the guarantors i.e. the bank and its customer would be found entitled to receive the amount paid under the guarantee.
(d) In AIR 2006 SC 1148 (BSES Limited (Now Reliance Energy Limited Vs. Fenner India Limited and another), it is held as under:-
24. As we have stated repeatedly, the 1st Respondent can succeed only if the case can be brought under the two accepted exceptions to the general rule against intervention. Evidently, there is no 'egregious fraud so as to fall within the first exception. Hence, only one more point remains: whether encashment of the guarantees will create special equities (in particular, irretrievable injury) in favour of the 1st Respondent? We are not satisfied on facts that such is the present situation.
25. There is no dispute that arbitral proceedings are pending. In fact, we were shown that one of the disputes referred to arbitration is whether the bank guarantees are null and void. Further, one of the substantive prayers in the arbitration made on behalf of the 1st Respondent, is to make an award declaring the four bank guarantees unenforceable, illegal, void and liable to be discharged. Further, there is also a prayer for permanent injunction to restrain the Appellant from encashing the bank guarantees. Therefore, since this prayer is already pending before the arbitral Tribunal, we see no situation of irretrievable injustice if at the present moment the Appellant is allowed to encash the bank guarantees. For justice can always be rendered to the 1st Respondent, if he succeeds before the arbitrators. Nor do we see any special equity in favour of the 1st Respondent, when there is in fact a dispute that performance was prima facie not satisfactory, which enabled the Appellant to encash all or any of the four bank guarantees.
26. Relying upon the above judgements, the learned senior counsel for the Respondent contended that the respondent has not any committed fraud and the applicant, in case they succeed, can recover the amount from the respondent and therefore, the invocation would not cause irretrievable injustice. This court is unable to accept the above contentions. This court has already held that the respondent has made a claim only on 11.03.2014 after the claim of the applicant. The applicant has written numerous letters demanding revision of provisional contract price and demanding payments. The applicant has also pleaded malafideness on the part of the respondent. Fraud is an act. Mala fide intention is a state of mind. Every act of fraud would have malafideness attached to it. In view of the above, this court is, prima facie, satisfied that the respondent has not acted in good faith.
27. Coming to the next point of irretrievable injustice, it is not only the feasibility of recovery that is to be considered, but also irretrievable injustice is different from irretrievable loss. Para 9 of the additional affidavit filed by the applicant reads as follows:-
9. It is submitted that the potential losses from bank guarantees invocation by the Respondent in the above MRO and BIAL TIE projects would wipe out the networth given the debilitating losses already faced by the applicant in MIAL T2B. It is submitted that as it stands now, bank guarantees worth Rs.8.1 crores in the above MRO Boeing Project, Nagpur, held by the Respondent, where the Applicant have fulfilled their obligations long back and the Bank Guarantee are due to be returned. It is submitted that the invocation of these bank guarantees would have the following implications:-
a. The bankers would over draw the existing cash credit limits and pay the Respondents Rs.8.1 crore upon invocation.
b. The Applicant being a restructured account, the invocation of bank guarantees by the Respondent would be seen as a materially adverse event and the bankers would cancel the restructuring package granted for revival of the Company.
c. The bankers would consequently freeze the bank accounts and demand mobilisation of funds of 17 crore by the promotors within thirty days failing which the Applicant's account would be declared as a non performing asset (NPA) by all the banks forcing them to go for recovery of securities.
d. This would result in great loss to the banks as well as they would not be able to realise full value of their debt given the weak networth position of the Company.
e. Applicant would be branded as a sick Company with negative networth and would be forced to be referred to BIFR thereby losing all future business prospects.
f. This would also have a bearing on the mobilisation of funds with respect to several ongoing projects of the Applicant herein.
28. Upon perusal of the above contents, it is evident that the applicant would be pushed to a point where their survival itself would be impossible. The cascading effect of actions of the bank would cause more hardships. Therefore, even if the applicant succeeds in the arbitration, irretrievable injustice would be caused to them.
29. In the judgement reported in 2007 (8) SCC 110 (Himadri Chemicals Industries Ltd. Vs. Coal Tar Refining Company), the Honourable Supreme Court has held as follows:-
4. 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.
30. The facts of the present case would be covered by the ratio laid down by the Honourable Supreme Court in the above said case. This court has already held that the applicant has established a prima facie case. It is also evident that the balance of convenience and irreparable loss is also in favour of the applicant. Therefore this court is of the view that the applicant is entitled to interim protection.
31. The next question is the period upto which the applicant is entitled to a protection.
32. Section 17 of the Arbitration and Conciliation Act reads as under:-
17. Interim measures ordered by arbitral tribunal:-
1. Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, order a party it) take any interim measure of protection as the arbitral tribunal may consider necessary in respect of the subject matter of the dispute.
2.The arbitral tribunal may require a party to provide appropriate security in connection with a measure ordered under sub- section (1).
33. As per Section 17, the applicant is entitled to approach the arbitral tribunal for interim protection. In the present case, both the parties have appointed their arbitrator and the third arbitrator is yet to be appointed. Therefore, this court in the facts and circumstances of the case, is entitled to grant interim protection for a period of three months. In the meantime, the parties shall take steps to appoint the third arbitrator, at the earliest and the applicant shall approach the Tribunal for interim protection within the period of three months. Also the applicant shall keep the bank guarantee alive for a period of a year or until the conclusion of 150 days after the passing of the award, whichever is later and furnish proof of the same to the respondent within two weeks from the date of receipt of this order. The respondents are free to invoke the bank guarantee if the applicant fails to obtain any orders from the Tribunal or fails to furnish proof of extension.
34. With the above directions, OA.No.221/2014 is allowed and A.No.3737/14 is dismissed. No costs.
30.04.2015 Index:Yes/No Web:Yes/No Srcm Note to Office:-
Issue on 22.05.2015 R.MAHADEVAN, J.
Srcm Pre-Delivery Order in OA.No.221/2014 and A.No 3737/14 30.04.2015