Bombay High Court
Cipel vs Indian Oil Corporation Ltd. And 2 Ors on 5 November, 2020
Equivalent citations: AIRONLINE 2020 BOM 2277
Author: Milind N. Jadhav
Bench: Nitin Jamdar, Milind N. Jadhav
14.os.wpl.5594.20.doc
R.M. AMBERKAR
(Private Secretary)
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
O.O.C.J.
WRIT PETITION (L) NO. 5594 OF 2020
M/s. CIPEL .. Petitioner
Versus
1. Indian Oil Corporation Ltd
2. Bank of Baroda (Erstwhile Vijaya Bank)
3. Union of India .. Respondents.
Mr. Yogeshwar Bhate a/w Mr. Anil Bagwe for the Petitioner
Mr. Sunil Gangan i/by RMG Law Associates for Respondent No. 1
Ms. S.V. Bharucha for Respondent No. 3
CORAM : NITIN JAMDAR &
MILIND N. JADHAV, JJ.
DATE : 5 NOVEMBER 2020.
(Through Video Conferencing) JUDGMENT [PER MILIND N. JADHAV, J.]
1. Heard.
2. Rule. By consent of the parties, Rule is made returnable forthwith.
3. This Writ Petition has been filed by the Petitioner under the provisions of Article 226 of the Constitution of India for restraining Respondent No. 1 - Indian Oil Corporation Ltd (for short "IOCL") from invoking and encashment of Bank Guarantee No. 4085IBGIS180004 dated 17 September 2018 for a sum of Rs. 1,86,37,000.00 (briefly referred to as "Bank Guarantee").
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14.os.wpl.5594.20.doc Petitioner has also sought a restraint on termination of the Contract Work Order dated 18 September 2018 which has been terminated by letter dated 17 October 2020 and forfeiture of security deposit of Rs. 5,59,10,738.00.
4. It will be apposite to briefly refer to the relevant facts for adjudication of the case:-
(i) Petitioner is engaged, inter alia, in the business of development and construction of buildings and infrastructure. Petitioner submitted its bid in respect of Tender dated 31 May 2018 for various civil and development works at Atchutapuram, Andhra Pradesh.
Respondent No. 1 accepted Petitioner's bid and issued Letter of Acceptance dated 28 August 2018 for a total contract value of Rs. 74,54,55,380.87 and Contract Work Order dated 18 September 2018. Petitioner was called upon to pay Security Deposit in terms of the General Conditions of Contract (GCC) of Rs. 7,45,47,738.00 against the work contract equivalent to 10% of the Work Order value. Initially Security Deposit of a sum of Rs. 1,87,00,000.00 being equivalent to 2.5% of the Work Order value was paid by Bank Guarantee and the balance Security Deposit was to be recovered from the incoming running bills till such time the entire security deposit would be recovered.
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14.os.wpl.5594.20.doc
(ii) The tenure of the work was from 16 September 2018 to 14 March 2020. Despite difficulties from local farmers and villagers, Petitioner commenced the subject work. Petitioner was issued first Show Cause Notice on 19 March 2019 under the GCC for slow progress of the subject work achieved by the Petitioner. Petitioner was issued second Show Cause Notice on 30 January 2020 for slow progress of the subject work. On both occasions, Petitioner furnished its reply and remained present for hearing before Respondent No. 1. Petitioner was issued third Show Cause Notice on 16 June 2020 for slow progress of the subject work. Petitioner was granted extension of time due to COVID 19 pandemic till 31 August 2020. Petitioner was issued forth Show Cause Notice on 22 September 2020 once again for slow progress of the subject work.
(iii) According to Petitioner, delay was caused due to the reasons beyond the control of the Petitioner i.e disruption due to outbreak of COVID 19. By letter dated 6 July 2020, Petitioner requested further extension of time for completing the balance work by 31 December 2020.
(iv) According to Petitioner, Petitioner completed more than 71% of the total subject work till the 11th 3 of 14
14.os.wpl.5594.20.doc Running Account Bill and the total value of the completed subject work is Rs. 43,45,78,965.00. Value of unbilled work and the Petitioner's material at site is in excess of Rs. 5,00,00,000.00. Value of the balance i.e uncompleted work left to be completed by Petitioner is approximately Rs. 17,00,00,000.00
(v) On 17 October 2020, Respondent No. 1 issued letter terminating the Contact Work Order dated 18 September 2018. On 21 October 2020, Petitioner was called upon to remain present for joint measurement of work executed by the Petitioner in terms of the GCC.
(vi) Petitioner apprehends that Respondent No. 2 i.e Bank of Baroda (erstwhile Vijaya Bank) at the instance of Respondent No. 1 IOCL will invoke and / or encash Bank Guarantee dated 17 September 2018 for a sum of Rs. 1,86,37,000.00 as the said Bank Guarantee is valid till 30 June 2021. Petitioner also apprehends that Respondent No. 1 will forfeit the Security Deposit of Rs. 5,59,10,738.00 which was recovered by Respondent No. 1 at the rate of 10% of the gross certified value of work from the Incoming Running Bills issued by the Petitioner for the subject work executed.
(vii) Being aggrieved, Petitioner has filed the present 4 of 14
14.os.wpl.5594.20.doc petition to challenge the termination order dated 17 October 2020 and seek injunction against invocation of the Bank Guarantee No. 4085IBGIS180004 dated 17 September 2018 for a sum of Rs. 1,86,37,000.00.
5. Mr. Yogeshwar Bhate, learned counsel appearing for the Petitioner submitted that the Petitioner could not complete the balance subject work to the extent of Rs. 17,00,00,000.00 due to COVID 19 pandemic and various other difficulties and had specifically sought for extension of time until 31 December 2020. According to the Petitioner, extension of time ought to be granted on humanitarian grounds and as per the Force Majeure clause provided in GCC in view of COVID 19 pandemic. The aspect of Security Deposit has been inbuilt in the contractual terms and conditions wherein Security Deposit has played a significant role in securing the interest of Respondent No. 1. Bank Guarantee issued as initial Security Deposit in terms of GCC secured Respondent No. 1 even otherwise. Respondent No. 1 was retaining and holding a substantial Security Deposit amount and therefore it would be extremely arbitrary, unjustified and fraudulent if Bank Guarantee is invoked and encahsed in the facts and circumstances of the present case. In so far as the special equities are concerned, it was argued that lockdown due to COVID 19 pandemic affected the entire economic activity and had brought all activities to a standstill including that of the Petitioner. Attention was drawn to Grounds (d), (e) and (f) in the petition which are reproduced below for the sake of ready reference:-
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14.os.wpl.5594.20.doc "(d) The Respondent No.1 has failed to appreciate the fact that due to the Covid-19 pandemic, world over, people are facing problems and the commercial activities are at stand still due to lockdown. The Petitioner was also one of the victims of the Covid-19 pandemic, which caused grave prejudice, monetary loss and inconvenience and loss of valuable time to the Petitioner.
(e) The Respondent No.1 has failed to appreciate the fact that now, the lockdown due to Covid-19 pandemic is also being lifted in India, and the commercial activity is restoring to normalcy, therefore, the Petitioner will be in a position to complete the subject work as per the Tender, dated 31-05-2018 by the end of December, 2020 as effectively, the remaining subject Work left to be completed by the Petitioner is approximately of an Value of Rs.17,00,00,000/-. The Petitioner's Material lying at the site is more than Rs.5,00,00,000/-. Moreover, the Bank Guarantee of Rs.1,86,37,000/-, which was drawn in favour of the Respondent No.1 payable at Mumbai and issued by the Respondent No.2 viz. Bank of Baroda (Erstwhile Vijaya Bank) is valid till 30-06-2021; and the Respondent No.1 had already recovered the Balance Security Deposit of a sum of Rs.5,59,10,738/- from incoming Running Account Bills issued by the Petitioner for the work executed towards the entire Security Deposit out of a total sum of Rs.7,45,47,738/- towards the Security Deposit as per Clause No.5 of the Special Conditions of Contract against the subject work contract equivalent to 10% of the work order value. Thus, effectively, no loss would be caused to the Respondent No.1.
(f) In the aforesaid circumstances, the Respondent No.1 ought to have granted Extension of Time to the Petitioner for completing the subject work as per the Tender, dated 31-05-2018 till 31-12-2020 on account of humanitarian grounds and as per the "Force Majeure"
Clause provided in its GCC, the natural circumstances which are identical in today's case."
6. Petitioner submitted that considering substantial work having been completed and the remaining subject work left to be completed was of an approximate value of Rs. 17,00,00,000.00, Petitioner was ready and willing to complete the same if extension of time was considered and granted until 31 December 2020. Petitioner's material lying at the site was of an approximate value 6 of 14
14.os.wpl.5594.20.doc of Rs. 5,00,00,000.00 and most importantly Respondent No. 1 had recovered the entire Security Deposit of Rs. 5,59,10,738.00 from the Incoming Running Account Bills, thereby causing no prejudice to it whatsoever and hence, a case for injunction against invocation of the Bank Guarantee is pleaded.
7. Mr. Sunil Gangan, learned counsel appearing on behalf of Respondent No. 1 in his counter submitted that it is settled law that Bank Guarantee is an independent contract between the Bank and the beneficiary. He submitted that Bank Guarantee in question is an unconditional and irrevocable Bank Guarantee and therefore on invocation, the Bank is required to honour the same without any condition. Invocation / encashment of Bank Guarantee can be restrained only if there is a prima facie case of fraud or in the case special equities in the form of preventing irretrievable injustice between the parties. There was no element of fraud pleaded by Petitioner. There was gross delay and laches on the part of the Petitioner which could be ascertained from the four Show Cause Notices issued to the Petitioner for completion of the subject work. Reasons given in the Termination Letter dated 17 October 2020 were fully justified, inter alia, considering gross delay on the part of the Petitioner and the resultant status. Alternate efficacious remedy was available to Petitioner and it was not remediless if any breach of contract is alleged between the parties. It was submitted that if fraud is alleged, then such fraud in connection with the Bank Guarantee should be of such a consequence and nature which ought to vitiate the very foundation 7 of 14
14.os.wpl.5594.20.doc of the Bank Guarantee. However, in the present case, no such case has been made out by Petitioner. It was submitted that it is settled law that fraud, if any, pleaded should be of such a nature which the issuing Bank ought to have notice thereof and in the present case, no such case has been made out. Once the contract between the parties was terminated by the answering Respondent, grievance of the Petitioner was governed by the GCC and there was effective and efficacious alternate remedy available to the Petitioner. Reliance was placed on a Division Bench judgment of this Court in identical facts in the case of Shaarc Projects Limited Vs. Indian Oil Corporation Ltd & Anr.1 wherein in paragraphs 23 to 26, it was observed as under:-
"23. Thus, it brings to us to the arguments of fraudulent invocation of the two Bank Guarantees. It is stated that both the Bank Guarantees are issued as Security Deposit and were unconditional in nature. We need to consider whether the attempt by Indian Oil Corporation Ltd to invoke and encash the two Bank Guarantees is a fraudulent demand in the facts of the present case. As seen herein above, it is a well established principal that unless there is fraud, special circumstances of equities in existence the beneficiary cannot be restrained from encashing and invocation of the Bank Guarantee even if there are disputes between the parties. The element of fraud pleaded by Shaarc Project Ltd in the present case is that Indian Oil Corporation Ltd was completely secured with the amount of Security Deposit and more specifically was holding in excess of the amount as against the Security Deposit required and therefore the act on the part of the Indian Oil Corporation Ltd to invoke and encash the two Bank Guarantees was fraudulent. If that be the case, then the same can be determined only on crystalisation of their respective claims. We do not agree with the allegation of fraud made out by Shaarc Projects Ltd in the present case. It is only and in exceptional cases that Courts will interfere with the machinery of irrevocable obligation assumed by Banks considering that such obligations are recorded as collateral to the underlying rights and obligations between the parties. Unless and until a clear case of fraud of which the Bank is aware or as notice thereof is established, the parties are required to be left unto 1 Judgment dated 17 September 2020 in OS WP LD VC NO. 379 of 2020 8 of 14
14.os.wpl.5594.20.doc themselves for settlement of their disputes under the contracts by litigation or arbitration as available to them or as stipulated in the contract.
24. In the present case, Shaarc Projects Ltd has not been able to establish any clear case of fraud of which the Punjab National Bank was aware of leading to invocation and encash of the two Bank Guarantees. The case of fraud pleaded by Shaarc Projects Ltd is intertwined with the rights and obligations between the parties in terms of the principal contract and is in fact required to be settled separately.
25. The submission of special equities made on behalf of Shaarc Projects Ltd cannot be built into and considered as Indian Oil Corporation Ltd has raised several breaches and disputed the completed project works. We are unable to agree with the submissions advanced on behalf of the Petitioner on the basis of special equities namely that the business of the Petitioner has suffered terribly due to the ongoing COVID 19 pandemic leading to depletion of the Petitioner's construction activity, cash flow etc and increasing the burden on the Petitioner. If the Petitioner has any claim, the same is subject to readjustment, measurement and reconciliation process under the general terms and conditions of the contract and it is open for the petitioner to agitate its claim therein also it is not the case that Respondent is not financially solvent.
26. We need not advert to the allegations of breaches committed by either party for the purpose of deciding the present petition, though we have narrated the same at the outset. We would like to restrict ourselves to the issue of invocation and encashment of the two Bank Guarantees only. Strictly speaking in terms of Clause 2.1.1.0 of the general terms and on the basis of the principal contract the two Bank Guarantees were issued. We hold that IOCL was absolutely within its rights to invoke the two Bank Guarantees independently on the basis of the settled law which we have discussed herein above. "
8. We have heard the submissions advanced by the learned counsel for the respective parties and considered the same thoroughly.
9. In so far as the reliefs prayed for in prayer clauses (a) and (c) are concerned, Petitioner seeks quashing of the letter of 9 of 14
14.os.wpl.5594.20.doc Termination of Contract dated 17 October 2020 on the grounds stated in the petition. In so far as these reliefs are concerned, the same can only be determined on crystallization of the respective claims between the parties. We are not inclined to accept the allegation of fraud pleaded by the Petitioner in the present case, inter alia, resulting in issuance of the Letter of Termination especially in view of the fact that Respondent No. 1 had issued four Show Cause Notices to the Petitioner for causing delay in achieving completion of work at various stages after the same had commenced. Replies of the Petitioner to the four Show Cause Notices, hearings held thereafter and the resultant Letter of Terminated dated 17 October 2020 would all be disputed questions of facts between parties and parties are required to be left unto themselves for settlement of their disputes under the contract by litigation or arbitration as available to them or as stipulated in the contract. We do not find the present case as an exceptional case wherein interference of this Court is warranted with respect to the allegation of fraud. There is no clear case of fraud pleaded or established of which Respondent No. 2 Bank is aware and / or notice thereof is established.
10. This, therefore, brings us to the second question namely relief sought for in prayer clause (b) wherein Petitioner seeks permanent injunction restraining Respondent Nos. 1 and 2 from invocation of the Bank Guarantee and forfeiture of the balance Security Deposit. A perusal of the Bank Guarantee issued by Respondent No. 2 Bank shows that the said Bank Guarantee is 10 of 14
14.os.wpl.5594.20.doc fully unconditional, containing an independent obligation to pay irrespective of any dispute between parties in the underlying contract. The Bank Guarantee is in unequivocal terms, it is unconditional and recites that the amount would be paid thereunder without demur or objection and irrespective of any dispute that might have arisen between the beneficiary and the person on whose behalf the guarantee is furnished. The Bank Guarantee, therefore, amounts to an unconditional promise on the part of the bank to pay. So long as the invocation itself is in accordance with the terms of the Bank Guarantee, there is nothing for Respondent No. 2 bank to be forbiddened from making payment. The relevant Clauses in the Bank Guarantee are reproduced below for reference:-
"2. We VIJAYA BANK do hereby undertake to p ay the amounts due and payable under this guarantee without any demur, merely on a demand from the Corporation stating that the amount claimed is due by way of loss or damage caused to or would be caused or suffered by the Corporation by reason of breach by the said Contractor(s) / Supplier(s) / - Seller(s) of any of the terms and conditions contained in the said Agreement or by reason of the Contractor(s) / Supplier(s)' failure to perform the said Agreement. Any such demand made on the bank shall be conclusive as regards the amount due and payable by the bank under this guarantee. However, our liability under this guarantee shall be restricted to an amount not exceeding Rs. 1,86,37,000.00 (Rupees One Crore Eight Six Lakhs Thirty Seven Thousand Only.)
3. We undertake to pay to the Corporation any money so demanded not exceeding Rs. 1,86,37,000.00 (Rupees One Crore Eight Six Lakhs Thirty Seven Thousand Only.) notwithstanding any dispute..."
11. In view of the above, it is discernible that the Bank Guarantee given is wholly unconditional, containing an independent 11 of 14
14.os.wpl.5594.20.doc obligation to pay irrespective of any dispute between the parties in the underlying contract, the beneficiary of the Bank Guarantee being the sole judge of fulfillment of conditions for its invocation. In other words, there is no case made out of fraud whatsoever for restraining Respondent No. 1 IOCL from invocation of the Bank Guarantee or restraining Respondent No. 2 Bank from making any payment thereunder. Therefore, the relief claimed in prayer clause
(b) fails in view of the settled position of law governing unconditional Bank Guarantees.
12. From the pleadings, we do not find any evidence relating to fraud as alleged so as to restrain Respondents from invocation of the Bank Guarantee. The nature of fraud that the Courts have ruled is fraud of an 'egregious nature so as to vitiate the entire underlying transaction', a fraud in which the beneficiary would be claiming payment to which he knew he had no entitlement. The evidence of fraud must be clear, both as to the fact of fraud and as to the Bank's knowledge that the demand for payment is, or will be fraudulent. The fraud which is contemplated is one which should be in direct connection with the contract of guarantee, in respect of its coming into existence, continuance etc. If there are disputes between the parties relating to the underlying transaction as is found to be in the present case, it does not make the invocation of the guarantee fraudulent. The harm or injustice contemplated for refusing enforcement of a Bank Guarantee of an exceptional and irretrievable nature would override the terms of the guarantee and the adverse effect of such an injunction would be on commercial 12 of 14
14.os.wpl.5594.20.doc dealings in the country. Both the parties would be entitled to price adjustment as well as reconciliation of accounts on the basis of the completed project work in terms of the GCC. Therefore, it is clear that the rights of the parties in so far as their respective claims are concerned, would otherwise be governed by the terms of the principal contract.
13. In the case of Mercator Oil & Gas Limited vs. Oil & Natural Gas Corporation Limited and Anr. , in O.S. Appeal No.318 of 2019 in Arbitration Petition (L.) No.1085 of 2018, the Division Bench of this Court in paragraph Nos.22, 26 and 27 has held as follows :
"22. Foremost, a case of fraud cannot be orally made. It must find a foundation in the pleadings. The evidence must be clear and mere assertion without strong corroborative evidence is not enough. This is more so in the cases of bank guarantees as a grant of injunction restraining invocation of bank guarantee is in an exceptional case. The exception cannot be taken lightly.
26. The learned Counsel have cited various decisions governing invocation of bank guarantee. We do not deem it necessary to reproduce them in this decision as on basic principles there is no dispute at the bar. The dispute is about applying the law to the facts, and the finer nuances. Thus we have referred to only those decision closest to the facts of the present case. Before we proceed further to comment on the rival contention, we will briefly recapitulate the legal position.
27. The basic principles are these: The contours of the powers of the Court to grant an injunction against the invocation of bank guarantee are narrow. The bank issuing the guarantees takes the obligation to repay the amount on demand and without questioning the legal relationship between the parties in whose favour the guarantee is given and who has given the bank guarantee. The bank is 13 of 14
14.os.wpl.5594.20.doc not concerned with the relationship between the supplier and buyer nor where the supplier has performed his contractual obligation. The bank must pay according to guarantee. This is because the bank raises its credit involving its reputation. The purchaser is a sole judge to decide as to when the bank guarantee has become recoverable, or the seller or other parties has committed a breach. Only in rare circumstances that the Court will issue an order of injunction restraining the bank in performance of bank guarantee. Of the two known exceptions to otherwise embargo are: Fraud and Special equity. If however there is fraud committed by the parties and that the bank has notice of the fraud, then the Court may issue an order of injunction. The fraud in such cases is not the one spoken in general terms. It us such fraud where the person in whose favour the bank has issued the bank guarantee fraudulently represents the bank expressly or by implication of a fact untrue to his knowledge. The nature of the fraud should be egregious as to vitiate the entire transaction. The word egregious generally means extraordinary, very noticeable, conspicuous, glaring, flagrant bad conduct. The fraud should be such that vitiates the underlying foundation of the main contract. Thus, the grant of an injunction against the invocation of bank guarantee would depend upon as to whether any case of fraud destroying the very foundation of the contract is made out. The case at hand, thus, must be decided based on its facts keeping the basic principles enunciated."
14. In view of the above discussion, there is no merit in the Writ Petition. Writ Petition is dismissed. Rule is discharged. No order as to costs.
15. This order will be digitally signed by the Private Secretary of this Court. All concerned to act on production by fax or email of a digitally signed copy of this order.
[ MILIND N. JADHAV, J. ] [ NITIN JAMDAR, J. ] Digitally signed by Ravindra M. Ravindra Amberkar M. Date: 2020.11.06 Amberkar 16:54:08 +0530 14 of 14