Allahabad High Court
B/S Beijing Spc Environment Protection ... vs M/S Uttar Pradesh Rajya Vidhyut Utpadan ... on 11 July, 2025
Author: Pankaj Bhatia
Bench: Pankaj Bhatia
HIGH COURT OF JUDICATURE AT ALLAHABAD, LUCKNOW BENCH Neutral Citation No. - 2025:AHC-LKO:39541 Reserved on 08.07.2025 Delivered on 11.07.2025 Court No. - 7 Case :- CIVIL MISC. ARBITRATION APPLICATION No. - 69 of 2025 Applicant :- B/S Beijing Spc Environment Protection Tech Co. Ltd. Thru. Operation Manager Lu. Jing Opposite Party :- M/S Uttar Pradesh Rajya Vidhyut Utpadan Nigam Ltd. Thru. Chief Engineer And Ors. Counsel for Applicant :- Abhinav Bhattacharya, Dhruv Duggal, Pramod Kumar Dwivedi Counsel for Opposite Party :- Puneet Chandra, Divyanshu Bhatt, Pritish Kumar Hon'ble Pankaj Bhatia,J.
1. Heard Sri Ranjit Prakash assisted by Sri Abhinav Raghuvanshi, Ms. Apasa Mahishi, Sri Abhinav Bhattacharya, Sri Dhruv Duggal, Sri Pramod Dwivedi, Sri Dvvarat Singh, Sri Utkarsh Singh, Sri Sandhesh Sinha and Sri Abeer, learned Counsel appearing on behalf of the applicant and Sri Pritish Kumar, learned Additional Advocate General assisted by Sri Divyanshu Bhatt and Sri Shashwat Singh, learned Counsel appearing on behalf of the respondent no.1.
2. The present application has been filed under section 9 of the Arbitration and Conciliation Act, 1966 read with section 10(1) of the Commercial Courts Act, 2005 seeking the following reliefs :
(1). Grant injunction restraining the Respondent No. 1 and/or Respondent No.2 and Respondent No.3 or their servants, agents, representatives and any other person acting for and on their behalf from invoking or claiming or demanding any amounts whatsoever under the Performance Bank Guarantees issued by Respondent No.2 and the Advance Bank Guarantees issued by Respondent No. 3 as detailed in Para 12 above.
OR In the event the Performance Bank Guarantees issued by Respondent No.2 and the Advance Bank Guarantees issued by Respondent No.3 as detailed in Para 12 above are encashed by the Respondent No.2 and Respondent No.3 respectively, during the pendency of this Application, the Respondent No.1 may be directed to secure the amount by way of depositing the same in an interest-bearing account.
AND
2. Direct Respondent No. 1 & 2 to release the Performance Bank Guarantees as mentioned above.
3. Direct Respondent No. 1 & 3 to release the Advance Bank Guarantees as mentioned above.
4. Pending hearing and disposal of the present application grant ex-parte ad interim reliefs in terms of the prayers (1), (2) and (3) above; and
3. The facts in brief are that the respondent no.1, being desirous of setting up a 2X500 MW Power Plant at Anpara Sonebhadra issued a notice inviting Tender for the project involving supply of Plant and Equipment for Flue Gas Desulphurisation (FGD) Package. In pursuance to the said tender, the applicant submitted its bid, which was accepted and a notification of the Award was passed by the respondent no.1. In terms of the said, the applicant was obligated to complete the work within a period of twenty four months under Contract -I; twenty seven months under the Contract -II; and thirty months under Contract -III. In view of the said tender, it was incumbent that the applicant supplies Performance Guarantees, as such, the applicant procured three Performance Bank Guarantees from the respondent no.2 to secure its obligation under Clause 13.3 of the General Conditions of Contract (GCC), which were later on submitted before the respondent no.1. In addition to the said, the parties entered into three contracts with respect to designing, manufacturing, testing and delivering the plant and equipments for the project.
4. It is argued that the respondent no.1 engaged M/s National Thermal Power Corporation Ltd. (NTPC) as its nodal project consultant for discharging the obligations of review and acceptance of designs and drawings in which, according to the applicant, there was a delay of almost eighty seven days. It is further stated that in pursuance to the contract, the respondent no.1 released first advance payment of Contact -I after a delay of five months. Similarly in respect of Contact-II, there was a delay in advance payment by four months, which resulted in postponement of the project's date from 04.07.2019 to 12.12.2019. The applicant aggrieved by the delay being caused by the respondent no.1 and citing force majeure due to Covid-19 pandemic, moved an application for grant of first extension on 26.07.2021. Similarly the applicant requested for five extensions, the fifth extension was granted on 12.07.2022.
5. It is also brought on record that on account of the delay caused in the project, a notice was issued by the applicant invoking clause 6.1 of the GCC for dispute resolution through mutual settlement vide notice dated 05.06.2023. Thereafter multiple reminders were sent in furtherance of the letter dated 05.06.2023. In the said letter, it was also stated that the respondent no.1 continued to obstruct the completion of works. On 24.02.2024, the applicant once again requested for sixth extension of time, allegedly on account of the delays caused by the respondent no.1, which was also granted in respect of Unit No.7 till 30.06.2024 and in respect of Unit 6 till 22.09.2024. On 07.06.2024, the applicant once again requested for seventh extension for additional twelve months, on account of the reasons as stated, however, instead of accepting the request as made by the applicant, the respondent stated that the project has been delayed over three years, allegedly according to the respondent no.1, because of the applicant with a request to complete the projects within the timeline. The said communication of the respondent dated 12.09.2024 was rebutted by the applicant on 14.09.2024. As nothing was being done with regard to the request for grant of extension of time for the seventh time, on 23.09.2024 the applicant issued a consolidated notice of invitation for conciliation in pursuance to the provisions contained in Clause 6.2.1.1 of the GCC. On 21.09.2024, the respondent formally rejected the request of the applicant for grant of extension for the seventh time. As per the applicant, several efforts were made for reconciliation and expressing the intent that the applicant was desirous of completing the project, ultimately the applicant formally invoked Arbitration Clause by issuing a notice invoking arbitration on 16.12.2024.
6. It is argued that in retaliation to the said notice, the notices issued by the applicant were termed as 'unlawful' and, the claim of the applicant was also rejected as is evident from the letter dated 13.12.2024. The respondent also formally rejected the applicant's extension of time request and also dismissed the proposal to continue the project by the applicant out of its own funds. It is also argued that the personnel of the applicant were restrained from entering the site since September 2024, despite request, they have not been permitted. Ultimately, the respondents invoked the Bank Guarantees executed in their favour, details whereof are indicated in para 12. Aggrieved against the action of the respondents in invoking Bank Guarantees, the present application has been filed.
7. The counsel for the applicant Sri Ranjit Prakash extensively argues that on the one hand, despite the communications of the applicant indicating the intent, to execute the project finally, which according to them was delayed on account of the actions of the respondents coupled with the fact that no efforts have been made by the respondents for dispute resolution or conciliation, the respondents have invoked the bank guarantees which according to the applicant is arbitrary and illegal. He draws my attention to the terms of the contract contained in the GCC with regard to the settlement of disputes which are as under :
6. Settlement of Disputes 6.1. Mutual Consultation.
If any dispute of any kind whatsoever shall arise between the Employer and the Contractor in connection with or arising out of the Contract, including without prejudice to the generality of the foregoing, any question regarding its existence. validity or termination, or the execution of the Facilities, whether during the progress of the Facilities or after their completion and whether before or after the termination, abandonment or breach of the Contract, the parties shall seek to resolve any such dispute or difference by mutual consultation. If the parties fail to resolve such a dispute or difference by mutual consultation, then the dispute maybe settled through Conciliation/Arbitration.
6.2. Resolution of Dispute through Conciliation Where the disputed amount is within Rs.250 crores (to be arrived at considering the claim and counter claim of the parties to the dispute) and in case the parties fail to resolve such a dispute or difference by mutual consultation, the dispute may be referred to Conciliation.
6.2.1. Invitation for Conciliation:
6.2.1.1 A party shall notify the other party in writing about such a dispute it wishes to refer for conciliation within a period of 30 days from the date of failure to resolve the dispute through mutual consultation. Such Invitation for conciliation shall contain sufficient information as to the dispute to enable the other party to be fully informed as to the nature of the dispute, amount of the monetary claim, if any, and apparent cause of action.
6.2.1.2 Upon acceptance of the invitation to conciliate, the other party shall submit its counter claim, if any, within a period of 30 days from the date of the invitation to conciliate. If the other party rejects the invitation or if disputed amount exceeds Rs 250 crores, there will be no conciliation proceedings.
6.2.1.3. If the party initiating conciliation does not receive a reply within thirty days from the date it sends the invitation, or within such other period of time as specified in the invitation, it shall treat this as a rejection of the invitation to conciliate from the other party.
6.2.2 Conciliation:
6.2.2.1 Where Invitation for conciliation has been furnished under GCC sub clause 6.2.1, the parties shall attempt to settle such dispute through a Committee which shall be constituted by UPRVUNL.
6.2.2.2 The Committee will be formed from experts comprising three members from the panel of conciliators maintained by UPRVUNL. However, there will be single member conciliation for disputes involving claim and counter claim (if any)-up to Rs. 1 crore. Managing Director, UPRVUNL will have authority to reconstitute the Committee to fill any vacancy.
6.2.2.3 The eligible persons for consideration for empanelment in the panel of conciliators shall be amongst Retired Civil Servants of Govt. of India not below the rank of Additional Secretary, Retired Judges, Retired Directors/ Chairman of any Maharatna/Navratna company in India/UP other than UPRVUNL, Retired Independent Directors who have served on the Board of any Maharatna/ Navratna company in India other than UPRVUNL and Independent experts in their respective fields preferably registered with the Indian Council of Arbitration or Delhi International Arbitration Centre or Federation of Indian Chambers of Commerce and Industry or SCOPE Arbitration Forum.
6.2.3 Proceedings before Committee:
6.2.3.1 The claimant shall submit its statement of claims along with relevant documents to Committee members, and to the party(s) indicated in the appointment letter within 30 days of the issue of the appointment letter. The respondent shall file its reply and counter claim (if any) within 30 days of the receipt of the statement of claims. Parties may file their rejoinder/additional documents, if any in support of their claim/counterclaim within next 15 days. No documents shall be allowed thereafter, except with the permission of Committee.
6.2.3.2 The parties shall file their claim and counterclaim in the following format a. Chronology of the dispute b. Brief of the contract c. Brief history of the dispute d. Issues Sl.
No. Description of Claims/Counter Claims Amount (in foreign currency/ equivalent INR) Relevant Contact Clause e. Details of Claim(s)/Counter Claim(s) f. Basis/Ground of claim(s)/counter claim(s) (along with relevant clause of contract Statement of claims shall be restricted to maximum limit of 20 pages.
6.2.3.3. In case of 3 members Committee, 2 members will constitute a valid quorum and the meeting can take place to proceed in the matter after seeking consent from the member who is not available. However, Committee recommendations will be signed by all the members.
6.2.3.4. The parties shall be represented by their in house employees. No party shall be allowed to bring any advocate or outside consultant/advisor/agent to contest on their behalf Ex officers of UPRVUNL who have handled the disputed matter in any capacity shall not be allowed to attend and present the case before Committee on behalf of contractor However ex-employees of parties may represent their respective organizations. Parties shall not claim any interest on claims/counter-claims from the date of notice invoking conciliation till execution of settlement agreement, if so arrived. In case, parties are unable to reach a settlement, nо interest shall be claimed by either party for the period from the date of notice invoking conciliation till the date of Committee recommendations and 30 days thereafter in any further proceeding.
6.2.3.5 Committee will conclude its proceedings in maximum 10 meetings, and give its recommendations within 90 days of its first meeting Committee will give its recommendations to both the parties recommending possible terms of settlement. UPRVUNL may extend the time/number of meetings, in exceptional cases, if Committee requests for the same with sufficient reasons.
6.2.3.6 Depending upon the location of Committee members and the parties, the venue of the Committee meeting shall be either Lucknow or any other city whichever is most economical from the point of view of travel and stay etc. All the expenditure incurred in Committee proceedings shall be shared by the parties in equal proportion.
6.2.4 Fees & Facilities to the Members of the Committee:
It shall be decided by UPRVUNL from time to time and subject to government guidelines on austerity measures, if any. All the expenditure incurred in the Committee proceedings shall be shared by the parties in equal proportions. The Parties shall maintain the account of expenditure and present to the other for the purpose of sharing on conclusion of the Committee proceedings.
6.2.5 If decision of UPRVUNL is acceptable to the contractor, a Settlement Agreement under section 73 of the Arbitration and Conciliation Act 1996 will be signed within 15 days of contractor's acceptance and same shall be authenticated by all the Committee members. Parties are free to terminate conciliation proceedings at any stage as provided under the Arbitration and Conciliation Act 1996.
6.2.6 The parties shall keep confidential all matters relating to the conciliation proceedings. Parties shall not rely upon them as evidence in arbitration proceedings or court proceedings.
6.3. Arbitration 6.3.1 In case the parties fail to settle the dispute through the process of mutual consultation and/or conciliation as per GCC Sub-Clause 6.1 & 6.2 above, either party may give a notice to the other party, of its intention to commence arbitration, as hereinafter provided, as to the matter in dispute, and no arbitration in respect of this matter may be commenced unless such notice is given. Such notice of intention to commence arbitration shall be given within a period of thirty (30) days from the date of failure to settle the matter through mutual consultation or thirty (30) days from the date of termination of Committee proceedings (applicable only in case where Committee has been constituted).
6.3.2 Any dispute in respect of which a notice of intention to commence arbitration has been given, in accordance with Sub-Clause 6.3.1 above, shall be finally settled by arbitration. Arbitration may be commenced prior to or after completion of the Facilities.
6.3.3 Any dispute submitted by a party to arbitration shall be heard by an arbitration panel composed of three arbitrators, in accordance with the provisions set forth below.
6.3.4 The Employer and the Contractor shall each appoint one arbitrator, and these two arbitrators shall jointly appoint a third arbitrator, who shall chair the arbitration panel. If the two arbitrators do not succeed in appointing a third arbitrator within twenty eight (28) days after the latter of the two arbitrators has been appointed, the third arbitrator shall, at the request of either party, be appointed by the Appointing Authority for arbitrator designated in the SCC.
6.3.5 If one party fails to appoint its arbitrator within forty-two (42) days after the other party has named its arbitrator, the party which has named an arbitrator may request the Appointing Authority to appoint the second arbitrator.
6.3.6 If for any reason an arbitrator is unable to perform its function, the mandate of the Arbitrator shall terminate in accordance with the provisions of applicable laws as mentioned in GCC Clause 5(Governing Law) and a substitute shall be appointed in the same manner as the original arbitrator.
6.3.7 Arbitration proceedings shall be conducted (i) in accordance with the rules of procedure designated in the SCC, (ii) in the place designated in the SCC, and (iii) in the language in which this Contract has been executed.
6.3.8 The decision of a majority of the arbitrators (or of the third arbitrator chairing the arbitration, if there is no such majority) shall be final and binding and shall be enforceable in any court of competent jurisdiction as decree of the court. The parties thereby waive any objections to or claims of immunity from such enforcement.
6.3.9 The arbitrator(s) shall give reasoned award.
6.4 Notwithstanding any reference to the Conciliation or Arbitration herein,
(a) the parties shall continue to perform their respective obligations under the Contract unless they otherwise agree.
(b) the Employer shall pay the Contractor any monies due to the Contractor"
8. He argues that in terms of the said provision, despite the applicant indicating its intent and appointing its arbitrator, no steps have been made by the respondents and thus, the applicant would suffer irreparable hardship and injury in case, they are permitted to invoke the bank guarantees. During the course of the argument, it was argued that the applicants are ready and willing to extend the bank guarantees subject to the respondents agreeing for dispute resolution. It is also argued that the applicant in good faith want to conclude the project and are even ready to infuse their funds and the respondents stand is wholly arbitrary and contrary to the spirit of the agreement in between the parties. In nut shell, the argument is that the invocation of bank guarantee, would cause irreparable injustice to the applicant and special equity exists in favour of the applicant.
9. In terms of the application filed, this court had directed the issuance of notices to the respondents vide order dated 02.07.2025. In terms of the notices issued, the respondents have put in appearance and had filed a short counter affidavit, mainly containing case laws to say that the contact of bank guarantee is a contact which is a separate and distinct from the main contact and according to the respondents irrespective of the nature of the dispute in between the parties in the main contract, no injunction can be granted for encashing bank guarantees for which, according to the respondents, the law is clearly well settled that except in the cases of fraud of egregious nature so as to vitiate the entire underline transaction, this court cannot grant an injunction.
10. Sri Pritish Kumar learned Additional Advocate General appearing on behalf of the respondents, extensively argues that despite granting extension for sixth time, no steps have been taken for completion of the project and thus, left with no other alternative, the respondents invoking the provisions contained in the Bank Guarantees invoked the same. He argues that from the perusal of the Bank Guarantee, which is on record, it is clear that the same is irrevocable and is not linked with any default with either of the parties and being a irrevocable Bank Guarantee not linked with any of the conducts of the parties, no injunction can be granted and as such, the application is liable to be rejected. Both the parties agree that the arbitrator panel, as envisaged under the Act, has not yet been constituted.
11. In the light of the arguments raised by the parties and recorded above, it is to be seen whether any injunction can be granted, against the invocation of the Bank Guarantee. A perusal of the Bank Guarantee on record, makes it clear that the bank had agreed to pay the amount as indicated in the bank guarantee without any demur, reservation, contest, recourse or protest and/or without any reference to the contractor or any dispute pending before any court, tribunal, arbitrator etc. Thus, the bank guarantee was unequivocal. There is no allegation in the entire application with regard to there being any fraud played by the respondents in either obtaining the bank guarantee or otherwise. Thus, the entire argument is to be seen whether the exceptions to the general rule of non-intervention against invocation of bank guarantees being the existence of special equities, exist in favour of the applicant and 'irretrievable injury' or 'irretrievable injustice' would occur if the injunction was not granted.
12. In support of the arguments, the counsel for the respondents has placed extensive reliance on the Division Bench judgment of this court in the case of U.P. Express-ways Industrial Development Authority vs. Sahakar Global Ltd. 2022 SCC Online All 782 with emphasis on observations made in paragraph 38 to 41 and paragraph 45 to 50 to the following effect :
38. Thus, the law on the subject is clear, a fraud in the execution of the Bank Guarantee has to be pleaded and not the Main contract or the subsequent events as has been argued by the Learned Senior Counsel. Fraud, as an exception to the rule of non-interference with encashment of BGs, is not any fraud but a fraud of an egregious nature, going to the root i.e. to the foundation of the bank guarantee and an established fraud. The entire case of the Respondent, we are afraid, fails to qualify so and we are not able to subscribe to the views contended by the Learned Senior Counsel for the respondent.
39. As far as the argument of the senior counsel for the Respondent, relating to special equities is concerned, the same is but a facet of the second exception aforesaid of irretrievable injury or injustice. Needless to state that from the entire arguments of the senior counsel for the respondent, no case of fraud of egregious nature in the matter of making/obtaining of the BGs is made out. All that emerges is that there are some disputes between the appellant and the respondent, relating to the grant of relief under the force majure clause and it is not even whispered that the Appellant built the entire façade of entering into the contract, only to obtain BGs and to profiteer from the Respondent.
40. The Respondent has stated that the issue relating to Force Majure has not been decided and in case the same is decided in their favour, the amount sought to be appropriated by invoking the present Bank guarantees would not be recoverable from the appellant. However, this court finds that the Appellant is a Public Sector Undertaking and the monies, if ultimately found due to the Respondent from the appellant, can always be recovered by the Respondent from the Appellant. There is no pleadings on record that the Appellant are running away from the Jurisdiction of this court or are closing their operations, so as to adversely affect the recovery of the Respondent. In fact the Appellant have filed a document on record, showing a total short remittance till 10.10.2022 to the tune of Rs. 49,97,14,399/- after giving relief of force majeure for Rs. 11,38,11,932/- and as such it is the case of the appellant that even after invocation of the Bank guarantee in question, there would be substantial amount left to be recovered from the respondent. However, this court does not wish to enter into the arena of any figure at this nascent stage as the rights and contention of the parties are still to be decided in a Arbitral Proceedings and any findings returned, may adversely impact the case of the concerned party.
41. Further, this court cannot lose sight of the fact that Irretrievable injustice, as an exception to the rule of non-interference with encashment of BGs, is again not a mere loss, which any person at whose instance bank guarantee is furnished, suffers on encashment thereof, because it is always open to such person to sue for recovery of the amount wrongfully recovered. Thus, what has to be proved and made out to obtain an injunction against encashment, is that it will be impossible to recover the monies so wrongfully received by encashment. On the facts of the present case, this court holds that the said contention is a mere apprehension only and not on the basis of any material on record. In any case, the appellant is a public sector undertaking and a ground of not able to recover from a PSU has to be grounded on strong footings and not merely on apprehension or pleadings.
.......
45. Another issue, which has been agitated by the Counsel for the Respondent is that a mere interim order of status quo has been passed by the Learned Commercial court and since the matter is engaging the attention of the said commercial court, this court should lay its hands of the present matter as the said petition filed under section 9 of the Arbitration & Conciliation Act would be rendered infructuous. Unfortunately, we are not able to subscribe to the view of the Learned Senior Counsel for the Respondent. It may be mentioned herein that section 9 of the Act, itself bears the heading "Interim measure etc. by court", which sufficiently means that the power of the court has been given for interim measure only as the substantial dispute has to be decided in an Arbitration proceeding. The said interim measure is of special importance as it intends to give immediate succour to a party as the very first line of the section mentions that the party may approach the court, before or during arbitral proceedings or at any time after the making of the arbitral award. Thus, the proceedings by its very nature is interim in nature under section 9 of the Arbitration & Conciliation Act and thus by that analogy as is being proposed by the Respondent, the impugned order seems to be an interim order of an interim relief. However, we find that the Learned Commercial court, lucknow has extensively dealt with all the allegations and counter-allegation of the parties to arrive at a lengthy order of fourteen pages to arrive at a conclusion that if the benefit of the force majoure clause is given to the respondent during the Covid-19 period, there would not be any amount payable to the Appellant. The Learned Commercial court in its pursuit to grant a status quo order has recorded that the respondent was ready to keep the BG live during the arbitration proceedings to hold that there was a prima-facie case in favour of the respondent and that in case the BG is invoked the respondent would suffer irreparable loss. Thus, the commercial court on the triple test of prima-facie case, irreparable loss and balance of convenience granted status quo order, thereby interdicting the invocation of BG. Having recorded so, this court cannot agree to the contention of the Learned Senior Counsel that an interim order has been only passed by the commercial court. Infact, there was nothing left in the petition under section 9 of the Arbitration & conciliation Act to be adjudicated any further. Thus, the commercial court has passed the interim order in the nature of final order as far as section 9 of the Arbitration & Conciliation Act is concerned and as such there was no occasion for the commercial court to keep the matter pending.
46. Mr. Mathur has also placed reliance on the judgment of Continental Construction Ltd. v/s Sutluj Jal Vidyut Nigam Ltd. 2006 SCC Online Del 56, passed by the Hon'ble Delhi High Court to buttress his submission that a beneficiary is not vested with an unquestionable or unequivocal legal right to encash the bank guarantee of demand. This court finds that the said judgment was passed in the peculiar facts of that case, wherein the Delhi high Court returned a categorical finding that the BG was not invoked as per the terms of the Bank guarantee itself. The Learned Counsel has also relied on the Single Bench judgment passed by the Delhi high court in Hindustan Construction Co. Ltd & Anr. Vs. Sutlej Jal vidyut Nigam Ltd. 2005 SCC Online Del 1249 and order of the Division Bench of the Delhi high Court in FAO(OS) 77/2006 (Satluj Jal Vidyut Vikas Nigam Ltd v. Hindustan Construction Co Ltd), which was passed noticing the order, dated 3rd April, 2006, of the Supreme Court in SLP (C) 5456/2006 (Satluj Jal Vidyut Nigam Ltd v. Jai Prakash Hyundai Consortium. Pertinently, the Supreme Court order, dated 3rd April, 2006, merely dismissed the SLP, preferred by Satluj Jal Vidyut Vikas Nigam Ltd. against the judgement of the Division Bench and did not, therefore, declare any law within the meaning of Article 141 of the Constitution of India.
47. The judgement of the Division Bench of the Delhi High Court in Satluj Jal Vidyut Vikas Nigam Ltd is prior, in point of time, to the decision of the Supreme Court in Mahatma Gandhi Sahakra Sakkare Karkhane case, as well as the latter decision in Vinitec Electronics case , which clearly held that an injunction, from enforcement of a bank guarantee, cannot be granted on the ground that the condition for enforcement of the bank guarantee in terms of the agreement between the parties has not been fulfilled. This court therefore differs with the view taken by the Division Bench of the Delhi High Court in Satluj Jal Vidyut Vikas Nigam Ltd.
48. A Division Bench of the Delhi High Court while giving a very exhaustive Judgment on the aspect of invocation of Ban guarantee held in the case of Consortium of Deepak Cable India Limited & Abir Infrastructure Private Limited (DCIL-AIPL) v. Teestavalley Power Transmission Limited 2014 SCC Online Del 4741 that a plea of lack of good faith and/or enforcing the guarantee with an oblique purpose or that the bank guarantee is being invoked as a bargaining chip, a deterrent or in an abusive manner are all irrelevant and hence have to be ignored. There are only two well recognized exceptions to the rule against permitting payment under a bank guarantee.
49. In view of the facts & the authoritative law on the subject, this court finds that the law on interdicting an unconditional Bank Guarantee is settled, however the impugned order has been passed dehors these authoritative judgment and as such the same is unsustainable in the eyes of law. This court finds its bounden duty to quote an observation made by a three Judge Bench of the Supreme Court in Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engineering Works (P) Ltd. (1997) 6 SCC 450, relevant to the context, wherein their lordship inter-alia observed;
"It is unfortunate, that notwithstanding the authoritative pronouncements of this Court, the High Courts and the courts subordinate thereto, still seem intent on affording to this Court innumerable opportunities for dealing with this area of law, thought by this Court to be well settled."
Similarly, in the present case, when the law on interdicting an unconditional Bank guarantee, although stands settled by a series of consistent judgments by the Hon'ble Supreme Court since the last more than four decade, the courts are still flooded with Bank guarantee matters, which take substantial time in adjudicating the issue, which this court thought to be well-settled.
50. Thus, for all the aforesaid reasons, this court is inclined to allow the present Appeal. Accordingly, the impugned order dated 12.09.2022 passed by the Commercial court, Lucknow in Arbitration Case No. 57/2022 (M/s Sahakar Global Company Ltd. Vs U.P Expressway Industrial development Authority) is set-aside. There shall be no order as to cost.
Reliance is also placed upon the judgment of the Supreme Court in the case of U.P. State Sugar Corporation vs. Sumac International Ltd., AIR 1997 SC 1644 with emphasis on para 11, which is quoted herein below :
"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."
13. On the other hand, the counsel for the applicant has placed reliance on an interim order passed under Order 39 Rule 1, by the High Court of Calcutta in the case of Rahee GPT (JV) & Ors. vs. The Union of India & Ors. 2017 SCC Online Cal 17244 and laid emphasis on paragraphs 14, 15, 17, 18 and 19, which reads as under :
14. There cannot be any doubt that the bank guarantee is unconditional in terms and on demand the bank is obliged to pay the aforesaid sum. However, the special equity would come in since it appears prima facie that injustice would be caused at this stage without the issue being decided as to whether the contract was impossible to perform by allowing the defendant no. 1 to appropriate the said amount during the pendency of the suit. The Courts in India exercise jurisdiction both in equity as well as at law but exercise of equity jurisdiction is always subject to the provisions of law. Equity jurisdiction can be exercised only when no law operates in the field. Injunction is a discretionary and equitable remedy intended to prevent injustice. The exercise of the jurisdiction must be principled, but the criterion is injustice.
15. The bank giving a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of use a bank guarantee is otherwise be defeated. The Courts, therefore, are extremely cautious and slow in granting an injunction to restrain the realization of a bank guarantee. The Courts, however, have carved out two exceptions, namely, fraud and irretrievable harm or injustice as grounds on which the encashment and/or enforcement of bank guarantee may be refused. A fraud in connection with a bank guarantee would vitiate the very foundation of such bank guarantee and, accordingly, if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. 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 the head of irretrievable harm or injustice must be of such an exceptional and irretrievable nature as would override the terms of the bank 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.
16. .........
17. The limited categories on which the Court may refuse encashment of a bank guarantee or a performance guarantee are summarized below:--
(i) If there is a fraud in connection with the bank guarantee which would vitiate the very foundation of such guarantee and the beneficiary seeks to take advantage of such fraud.
(ii) The applicant, in the facts and circumstances of the case, clearly establishes a case of irretrievable injustice or irreparable damage.
(iii) The applicant is able to establish exceptional or special equities of the kind which would prick the judicial conscience of the Court.
(iv) When the bank guarantee is not invoked strictly in its terms and by the person empowered to invoke under the terms of the guarantee. In other words, the letter of invocation is in apparent violation to the specific terms of the bank guarantee.
18.The exceptional cases would be few but it could never be stated as an absolute proposition of law that under no circumstances the Court would injunct encashment/invocation of a bank guarantee which might have been furnished by a party as an independent contract. A beneficiary is not vested with an unquestionable or unequivocal legal right to encash the bank guarantee on demand. The obligation of the bank furnishing the bank guarantee to pay would be subject to a limited exceptional circumstance afore-noticed. As a matter of rule, the bank would be under obligation to encash the bank guarantee, once it is invoked in its terms. The exceptions afore noticed are merely indicative of the kind of cases where the Court may injunct encashment of a bank guarantee. It is neither possible nor permissible to exhaustively classify the cases where the Court would not interfere and where the Court would judicially intervene in such matters.
19. The factual exposition of the present litigation demonstrates, prima facie, that the plaintiffs proceeded on the basis of the soil investigation report furnished by the railways and on such basis drawings were prepared. The defendant admits of such fact. What follows next is the extreme difficulty faced by the plaintiff to negotiate such hard rocks not within its contemplation and knowledge. It may so happen that the defendant No. 1 was also taken by surprise and may not have been at all aware of existence of such hard rocks. The subsequent tender shows that the procedure was completely changed. If ultimately at the trial it is established that plaintiff was not at fault at all and the contract is impossible to perform the plaintiff would get all the reliefs. The plaintiffs have been able to make out a strong arguable case on merits. In a matter relating to enforcement of an unconditional bank guarantee, the plaintiff is required to establish a higher degree of equity rather than equity alone. Special equity would mean special features in a matter of this kind which would persuade the Court to rely upon equity, justice and good conscience to present irretrievable damage and prejudice. The features consisting special equity in the instant case has already been discussed. It would be unconscionable at this stage to allow the defendant No. 1 to realize the said amount."
14. In view of the law as cited, it is clearly well settled that the bank guarantee is a separate and distinct contract from the main contract and, the invocation of the bank guarantee, flows from the terms and conditions of the contract of bank guarantee interse in between the parties. It is also equally well settled that for restraining one of the parties from invoking bank guarantee, it is incumbent to establish that there is a fraud played with regard to the issuance of bank guarantee, which is of such nature, which would vitiate the entire contract of bank guarantee, or there exist special equities, which would result in 'irreparable harm' or 'injustice' to one of the parties as held by the Supreme Court in the case of U.P. State Sugar Corporation vs. Sumac International Ltd. (supra).
15. In the present case there being absence of any allegation with regard to fraud, no material exists to demonstrate that if the bank guarantee is encashed, the same would result in 'irretrievable injustice' or 'irretrievable injury' which cannot be compensated in terms of damages, which naturally have to be assessed after the arbitral proceedings commence. The judgment cited by the counsel for the applicant in the case of Rahee GPT (JV) (supra) would be of no avail for two reasons - firstly because the interim order, does not have any presidential value and secondly, the same was passed in the context of the facts of the said case, which are absent in the present case.
16. It is clarified that this court has not gone into the merits of the contention of both the parties with regard to, the reasons alleged and attributed to each other for the delay in the execution of the project, which shall be settled interse in between the parties through the mechanism provided in the GCC.
17. In the absence of there being any material to suggest irretrievable hardship or injustice by the applicant, the application deserves to be dismissed and is accordingly dismissed.
Order Date :- 11th July, 2025 VNP/-
[Pankaj Bhatia, J]