Calcutta High Court
Videocon Industries Ltd. & Anr vs Coal India Ltd. & Ors on 26 February, 2014
Equivalent citations: AIR 2014 CALCUTTA 113, (2015) 1 ICC 932, (2014) 2 CAL LJ 261, (2014) 3 BANKCAS 605
Author: I. P. Mukerji
Bench: I. P. Mukerji
ORDER SHEET
GA NO.3458 OF 2013
WITH
CS NO.392 OF 2013
IN THE HIGH COURT AT CALCUTTA
Ordinary Original Civil Jurisdiction
ORIGINAL SIDE
VIDEOCON INDUSTRIES LTD. & ANR.
Versus
COAL INDIA LTD. & ORS.
............
BEFORE:
The Hon'ble JUSTICE I. P. MUKERJI Date : 26th February, 2014.
Ms. P. Anand, Mr. G. Mitra, Mr. D. Dutta, Mr. R. Medora, Ms. R. Mitra, Mr. R. Jain...for petitioners.
Mr. P. Dutta, senior advocate, Mr. R. Dutta, Mr. P. Basu, Mr. S. Prasad...for respondent nos.1 & 2. The Court : This is another application in aid of a suit seeking an order of injunction from this Court restraining the defendant from invoking a bank guarantee. The plaintiff company [plaintiff] seeks such an order to restrain invocation of a bank guarantee for Rs.8,65,17,900/- dated 29th June, 2011 and renewed in 2013 upto December, 2014, furnished by them in favour of the first and second defendants. The first defendant is Coal India Ltd. The second defendant is South Eastern Coalfields Ltd., a subsidiary of the first defendant. The third defendant is Allahabad Bank.
This bank guarantee was furnished in connection with a contract between the parties evidenced by a Letter of Assurance [LOA] issued by the first/second defendants [hereinafter referred to collectively as the defendants]. It was dated 12th August, 2011 and valid for two years uptill 11th August, 2013.
The validity of the Letter of Assurance [LOA] was extended by the defendants upto 11th November, 2013. It is quite clear from the available evidence that this extension was made by the defendants considering some factors in the performance of the contract, which were not within the control of the plaintiff. This is so because the minutes of the meeting of the Standing Linkage Committee 2 [Long Term] [SLC(LT)]for power to review the status of existing coal linkages/LoAS in power sector and other related matters dated 7th January, 2013 stated that such cases were to be brought before the SLC [LT] for making suitable recommendations. These minutes are to be read with the Minutes of the meeting of the Committee held on 20th December, 2013. These documents were produced by Mr. P.K. Dutta, learned senior counsel for the defendant. That the case of the plaintiffs was considered by this Committee is quite undisputed.
Some clauses of the contract are crucial for the purpose of a decision in this matter. They are reproduced hereinbelow :
"3.1 Amount of Commitment Guarantee Prior to the date of issue of this LOA, the Assured have provided to the Assurer, a Commitment Guarantee (CG), in bank guarantee, for a sum of Rs.8,65,17,990 (Rs. Eight Crore Sixty Five Lakhs Seventeen Thousand Nine Hundred) equivalent to ten percent (10%) of base price of Grade F* Run- of-Mine (ROM) coal of the Assurer prevalent on the date of application for issue of LOA, multiplied by the quantity of coal mentioned in the Preamble. {Note: In no case shall the CG be less than Rs.2,50,00,000/- (Indian Rupees Twenty Fifty Million only) per mtpa of coal quantities requested by the Assured or part thereof.} Such CG shall be non-interest bearing, and in case of it being deposited in the form of bank guarantee it should comply with the format specified by the Assurer and issued by a scheduled bank acceptable to the Assurer.
3.2 Validity of Commitment Guarantee The Commitment Guarantee (CG) shall remain valid until four (4) months after the expiry of the LOA period of twenty-four (24) months. Thereafter, the CG shall stand converted into the Contract Performance Guarantee (CPG) that would be the condition precedent to signing of the FSA, in which case, validity of the CG shall be extended in accordance with the terms of the FSA. For the avoidance of any doubt, the Assured shall be liable to submit the guarantee for such further amount that may result from the difference between the CPG under FSA and the CG under this LOA.
3.3. Additional Commitment Guarantee If any activity/milestone is not duly performed or completed by the Assured within the time stipulated against each such activity/milestone, as specified in Annexure 1, then the Assured shall be liable to furnish to the Assurer one tenth (1/10th) of the amount of CG for each such non-performed or incomplete milestone, as additional CG, within fifteen (15) days from the date such activity/milestone is falling due for completion. For the avoidance of any doubt, such additional CG may need to be deposited multiple times subject to partial/non-fulfillment of each activity/milestone at the end of each half-yearly interval, as mentioned in Annexure 1. Further, such additional CG(s) shall at all times be deemed to be a part of the CG and all related provisions of this LOA shall be equally applicable for additional CG.
3.4. Encashment of Commitment Guarantee 3 3.4.1 Cancellation of withdrawal of LOA In the event that any of the activities/milestones is delayed beyond the period specified against each such activity/milestone in Annexure 1 and the Assured fails to furnish the additional CG to the Assurer in accordance with Clause 3.3 hereof, or the Assured furnishes additional CG to the Assurer in accordance with Clause 3.3 hereof, or the Assured furnishes additional CG to the Assurer in accordance with Clause 3.3 hereof but fails to fulfill all the activities/milestones within the total period of twenty-four (24) months, as specified in Annexure 1, the Assurer shall have the right to cancel or withdraw this LOA after duly notifying the Assured in writing at least seven (7) days in advance. For the avoidance of doubt, all the milestones, as specified in Annexure 1, shall need to be fully completed and any partial completion with regard to any activity/milestone at the end of validity of the LOA shall entitle the Assurer to cancel or withdraw this LOA. Upon such cancellation/withdrawal of this LOA, the Assurer shall encash the CG including any additional CG submitted by the Assured. It is clarified for removal of doubt that this Clause shall survive the cancellation/withdrawal of this LOA.
3.4.2 Failure to sign the FSA The Assurer shall have the right to encash the CG in the event of failure by the Assured to sign the FSA within three (3) months from the expiry of validity of the LOA or the satisfactory achievement of all the milestones, as shown in Annexure 1, whichever is earlier. It is also clarified to the Assured that the percentage of annual contracted quantity fixed with respect to Take or Pay obligations in the FSA may be reviewed by the Seller in light of its coal availability and coal commitments, and amended on year-to-year basis during the term of the FSA.
3.5 Return of Commitment Guarantee In case of inability of the Assured to fulfill any activity/milestone, as specified in Annexure 1, due to the occurrence of any Force Majeure event, the time period for fulfillment of such activity/milestone, shall be extended for the period of such Force Majeure event, subject to a maximum extension period of three (3) months, continuous or non-continuous in aggregate. In no case including a Force Majeure event affecting multiple activities/milestones shall the validity of LOA be extended by more than three (3) months. Thereafter, this LOA may be cancelled/withdrawn by the Assurer after duly notifying the Assured in writing at least seven (7) days in advance without any liabilities or damages, whatsoever, payable by the Assured to the Assurer; and the Assurer shall return the CG submitted by the Assured.
4. Validity of the LOA The LOA shall remain valid for a period of twenty-four (24) months from the date of issue of this LOA unless extended for three (3) months in accordance with Clause 3.5 hereof, and shall stand annulled upon expiry of such period. "
Now some dates are very important. The LOA was extended till 11th November, 2013.
The bank guarantee initially furnished was to expire on 28th December, 2013.
4By their letter dated 2nd December, 2013 to the bank with a copy to the plaintiff the second defendant stated that the bank guarantee was expiring on 28th December, 2013 and 'needs extension'. If it were not extended the bank guarantee would be invoked.
A meeting of the SLC [LT] was held on 20th December, 2013. They clearly recorded that the case of the plaintiff was considered by it. According to these minutes, the company had not achieved the 'milestones' under the contract within the validity period. They had not furnished the additional commitment guarantee. The participants suggested further action according to the LOA.
Almost one year before that was the meeting of 7th January, 2013. It is most interesting to note that these minutes noted that the concerned Ministry should consider ensuring that the letter of LOA should not 'terminate automatically' along with 'forfeiture of CG' before a reasonable opportunity was given for consideration, by the SLC [LT].
By their letter dated 17th February, 2014 the second defendant stated that the LOA was terminated and threatened to encash the bank guarantee. On 21st February, 2014, the second defendant wrote to the bank invoking the bank guarantee.
The case, as put forward by Ms. Anand, learned advocate for the plaintiff is straightforward. She submitted that due to the admitted faults on the part of the defendants, the plaintiff was unable to adhere to the 'milestones' in the LOA. For this reason, the validity period of the LOA had been extended by the defendants for a period of three months from the date of its expiry i.e. till 11th November, 2013.
Under clause 3.4.1, the defendants had the power to terminate the contract only within two years of its execution, giving a notice of seven days. Upon such cancellation of the contract, the defendants could encash the bank guarantee. Under clause 3.5, upon expiry of the validity period of the LoA, the defendants were obliged to return the guarantee. The LOA would remain valid for a period of 24 months from the date of issue or such extended period and would stand annulled upon expiry of such period, subject to clause 3.2 above. Under the 5 clause the guarantee would remain valid for a total period of 28 months from the date of execution of the LOA.
Ms. Anand submitted that the defendants did not terminate the contract within two years. Since they did not terminate the contract and the validity period of the contract expired, they were obliged under clause 3.5, to return the bank guarantee.
Thus, there was special equity in favour of the plaintiff. Therefore, according to learned counsel, an expired contract could not be terminated by the letter of the defendants dated 17th February, 2014.
She cited a decision in the case of Hindustan Construction Co. Ltd. vs. State of Bihar & Ors.; reported in AIR 1999 SC 3710 and an unreported Division Bench judgment of the Delhi High Court in Humboldt Wedag India Pvt. Ltd. vs. Dalmia Cement Ventures Ltd. decided by it on 24th September, 2010.
A case of promissory estoppel giving rise to special equity in favour of the plaintiff, was also made out in course of argument. At the instance of the above Committee, the validity period of the contract was extended till 11th November, 2013. At the time of such extension of the contract, the defendants knew fully well that in terms of clause 3.2, the guarantee had to be kept valid for a period of four months after the expiry of the original LOA period. Accordingly the existing guarantee was valid till 31st December, 2013 only. Yet the defendants at the time of extension of the validity period did not insist that the plaintiffs should extend the validity period of the bank guarantee. They did not invoke the guarantee either.
The above minutes very plainly suggest it was argued, that the defendants had realised that there were some factors which were beyond the control of the plaintiff contributing to non-performance of the contract. Hence, the above committee had considered the case of the plaintiffs and granted them extension of the validity period.
So much so, that the letter of 2nd December, 2013 of the defendants to the bank, stated that the bank guarantee needed renewal. There was no hint of any invocation of the bank guarantee at that point of time. On this representation, the plaintiff had renewed the bank guarantee till December, 2014. 6
Only after the meeting of 20th December, 2013, the defendants appear to have taken a decision to terminate the contract and invoke the bank guarantee, Ms. Anand submitted. This was unjust, according to her.
It was further submitted by her that the facts of this case are absolutely similar to those in G.A. No. 2494 of 2012; C.S. No. 295 of 2012 [Videocon Industries & Anr. Vs. Coal India Ltd. & Ors.]. In that matter, an interim order had been passed by this Court, staying invocation of the bank guarantee for the time being. That order had not been appealed against. Even the affidavit in opposition has not been filed.
Appearing for the defendants, Mr. Dutta, learned Senior Counsel, submitted that the terms of the agreement had been misinterpreted by the plaintiffs. The defendants always had the right to invoke the bank guarantee which was unconditional. The provisions in the contract for return of the bank guarantee after expiry of the validity period of the contract, did not preclude the defendants from invoking the bank guarantee. He argued that the clause had to be read so as to mean that in case the validity period of the L.O.A. expired and the subsequent Fuel Supply Agreement entered between the parties, then in that event, the guarantee had to be returned. It did not mean that the defendants have lost their right to invoke the bank guarantee.
He took me extensively through the Minutes of the meeting of 7th January, 2013 and 20th December, 2013 to show how the case of the plaintiff was considered by the said Committee and how ultimately the defendants decided to invoke the bank guarantee.
Mr. Dutta submitted citing BSES Ltd. vs. Fenner India Ltd. & Anr. reported in (2006) 2 SCC 728 paragraphs 10, 26 and 28 that there was no fraud or special equity involved in this case. The bank guarantee was unconditional. Therefore, the Court should refrain from passing an order restraining its invocation.
An unconditional bank guarantee is a credit document. It is very common in trade and commerce. It secures payment in favour of the beneficiary without him having to face any obstacle in realizing the money guaranteed. The bank guarantee is a contract which is separate from the underlying contract. (See Hindustan Construction Co. Ltd. Vs. State of Bihar & Ors. reported in AIR 1999 SC 3710) A party so arranges with his bank that the latter issues the 7 document in favour of the beneficiary guaranteeing to make payment of the sum mentioned therein. Sometimes a bank guarantee is conditional, when some formalities have to be fulfilled by the beneficiary to the satisfaction of the bank before payment under the guarantee is made. In that case cash cannot be obtained as freely as in the case of an unconditional bank guarantee where the bank is obliged to make the payment on demand.
So as not to interfere with free trade and commerce, the courts have been extremely reluctant in restraining the beneficiary from invoking an unconditional bank guarantee. Two exceptions were carved out. The first and foremost was fraud. The second was irretrievable injury or injustice to the plaintiff. The latter was also sometimes described as special equity in favour of the plaintiff. (See U. P. Cooperative Fedaration Ltd. v. Singh Consultants & Engineers Pvt. Ltd. reported in [1988] 1 SCR 1124, Bolivinter Oil SA v. Chase Manhattan Bank reported in [19841 ALL E.R. 351, Sevenska Handelsbanken v. Indian Charge Chrome reported in AIR 1994 SC 626, Larsen & Toubro Ltd. v. Maharashtra State Electricity Board reported in AIR 1996 SC 334. Hindustan Steel Works Construction Ltd. v G.S. Atwal & Co. (Engineers) (P) Ltd. reported in AIR 1996 SC
131. National Thermal Power Corporation Ltd. v. Flowmeore (P) Ltd. reported in AIR 1996 SC 445. State of Maharashtra v. National Construction Co. reported in [1996] 1 SCR 293. Hindustan Steel Works Construction Ltd. v. Tarapore & Co. reported in AIR 1996 SC 2268, U.P. State Sugar Corporation v. Sumac International Ltd. reported in AIR 1997 SC 1644 and Hindustan Construction vs. State of Bihar & Ors reported in AIR 1999 SC 3710, cited by Ms. Anand, where the other cases are referred to.) The Supreme Court, in the case of BSES Ltd. (Now Reliance Energy Ltd.) v. Fenner India Ltd. And Another cited by Mr. P.K. Dutta, learned Senior advocate, clearly formulated the above principles in paragraph 10 and 26 as follows:
"10. There are, however, two exceptions to this rule. The first is when there is a clear fraud of which the bank has notice and a fraud of the beneficiary from which it seeks to benefit. The fraud must be of an egregious nature as to vitiate the entire underlying transaction. The second exception to the general rule of non-intervention is when there are "special equities" in favour of injunction, such as when "irretrievable injury" or "irretrievable injustice" would occur if such an injunction were not granted. The general rule and its exceptions has been reiterated in so many judgments of this Court, that in U.P. State Sugar Corpn. V. Sumac International Ltd. (hereinafter "U.P. State Sugar Corpn".) this Court, correctly declared that the law was "settled".
26. Accordingly, we are prima facie not satisfied that performance had been duly satisfactorily certified. Under the terms of the "wrap-around agreement", the appellant was entitled to encash all or any of the bank guarantees for breach of the 8 first respondent's obligations under any one of the contracts. In our view, it is the case of the appellant that there was no satisfactory performance of the contract, as a result of which, the appellant was justified in encashing the bank guarantee concerned. Indeed, as per the terms of the bank guarantee itself, the appellant is the best judge to decide as to when and for what reason the bank guarantees should be encashed.
Further, it is no function of the second respondent Bank, nor of this Court, to enquire as to whether due performance had actually happened when, under the terms of the guarantee, the second respondent Bank was obliged to make paymenht when the guarantee was called in, irrespective of any contractual dispute between the appellant and the first respondent. Indeed, in similar circumstances, this Court in General Electric Technical Services Co.
Inc. v. Punj Sons (P) Ltd., held:
"The Bank must honour the bank guarantee by the courts. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases that is to say in case of fraud or in case of irretrievable injustice, the court should interfere. ... The nature of the fraud that the courts talk about is fraud of an 'egregious nature as to vitiate the entire underlying transaction'. It is fraud of the beneficiary, not the fraud of somebody else.""
The authorities have not defined or set the limits of the application of the principle of irretrievable injury, injustice or special equity. The ordinary meaning of equity is morality, good conscience and justice based on it. To my mind any conduct of the beneficiary, which shocks the conscience of the court, is covered by this doctrine. Also, any conduct of the beneficiary which is grossly unjust or unfair would also come within this doctrine. When the beneficiary of a bank guarantee represents to the person causing the bank guarantee to be furnished that it would not be encashed and induces him to renew it, the beneficiary is estopped from encashing the same, soon after its renewal. Special equity would protect the other party. But normal breach or renunciation of a contract or wrongful conduct of the beneficiary would not so amount.
Now, my prima facie findings: There cannot be any dispute that the facts of this case are more or less identical to those in the said case pending in this Court. In that case, Mr. Dutta had stated before the Court that his clients were not, at that time, invoking the bank guarantee. In those circumstances, an order was passed restraining the defendants from invoking the bank guarantee for the time being and by stipulating that they would have to give 15 days' notice to the plaintiff before doing so. No appeal was preferred from this order. No affidavit was 9 filed. So far there is no notice invoking the bank guarantee, in that case. The defendants, being government companies are estopped from taking a different stand in this case.
I agree with Ms. Anand that the bank guarantee in question could only have been invoked had the contract been terminated within two years of execution of the LOA by giving seven days' notice. This is more so, because in the minutes of their meeting held on 7th January, 2013, the SLC [LT] Committee was very conscious that deliberation by S.L.C./ its members should not be so long that the contract expires 'automatically' with 'forfeiture of C.G.' Here the contract expired by efflux of time by 11th November, 2013 without invocation of the bank guarantee. Therefore, I do not think that at this point of time the defendants have any right under the underlying contract to invoke the bank guarantee.
Furthermore, the letter of termination appears to be nonest. When the contract is gone there is nothing to terminate. The contract, according to the terms, was discharged by efflux of time on or about 11th November, 2013. Therefore, nothing was achieved by the letter dated 17th February, 2014 trying to terminate the contract.
The above conduct of the defendants was grossly unfair and unjust and shocks the conscience of this Court.
Further it is quite clear, in my notion, that the defendants realised that the plaintiffs were not at fault or at least not entirely at fault. That is why, they referred the case to the above committee. The defendants extended the validity of the contract realising this till 11th November, 2013. The plaintiff, according to the LOA, were required to keep the bank guarantee renewed for at least four months after the expiry of the LOA. The defendants extended the validity period of LOA being fully conscious that the bank guarantee was alive till 28th December, 2013 only.
Furthermore, on 2nd December, 2013 the defendants suggested to the plaintiff that the bank guarantee be renewed. There was no whisper of invocation of the bank guarantee. The defendants had the option to do so. Instead they induced the plaintiff to renew the bank guarantee. In my view, having so induced the plaintiff to change their position to their detriment, the defendants were 10 estopped from invoking the bank guarantee immediately after its renewal. Equity prevents them from doing so.
For all those reasons I am of the opinion that for the time being there should be an injunction restraining the defendants from invoking or paying any sum under the bank guarantee for a period of one year from date. In this period, hearing of the suit should be expedited so that the real dispute between the parties as to whether the bank guarantee can at all, be invoked, can be resolved.
Let a copy of the plaint be served by the learned Advocate on Record for the plaintiff upon the learned Advocate on Record for the first and second respondents by 10th March, 2014. Formal service of the Writ of Summons upon the first and second defendants is waived. The Writ of Summons be served formally upon the third defendant. Written Statement be filed by the first and second defendants by 16th April, 2014. Liberty to take further steps for early hearing of this suit.
In my opinion all the papers that were required for disposal of this application were available before this Court. The papers relied upon by the plaintiff are available in the application whereas all the relevant papers of the defendants referred to in this judgement were handed up to this Court by Mr. Dutta. So, in my opinion, there is no need of calling for affidavits in this case.
Since no affidavits are invited, the allegations contained in the application are deemed to have not been admitted.
The bank guarantee should be kept renewed by the plaintiffs at least seven days before its expiry, failing which defendants would be at liberty to invoke the same.
The application being G.A. No. 3458 of 2013 is thus disposed of. All parties concerned are to act on a signed photocopy of this order on the usual undertakings.
(I. P. MUKERJI, J.) Pkd/KB A.R.[C.R.]