Delhi High Court - Orders
Jay Autocomponents Limited vs Energy Efficiency Services Limited & ... on 18 January, 2019
Author: Navin Chawla
Bench: Navin Chawla
$~21
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ O.M.P.(I) (COMM) 12/2019
JAY AUTOCOMPONENTS LIMITED ..... Petitioner
Through: Mr.Ratan K. Singh, Mr.Suraj Prakash,
Ms.Mrinal Litoria, Ms.Priyanka
Solanki, Mr.Aman Prasad and Mr.Jai
Pratap, Advs.
versus
ENERGY EFFICIENCY SERVICES LIMITED & ANR.
..... Respondents
Through: Mr.Sandarshi Sanjay, Adv. for R-1.
Mr.Rajat Katyal, Adv. for R-2.
CORAM:
HON'BLE MR. JUSTICE NAVIN CHAWLA
ORDER
% 18.01.2019 I.A. No.813/2019 (Exemption) Allowed, subject to all just exceptions.
O.M.P.(I) (COMM) 12/2019
1. This petition has been listed before me on being mentioned before the Hon‟ble Judge Incharge (Original Side).
2. This petition under Section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the „Act‟) has been filed by the petitioner seeking inter alia an order of restrain against respondent no. 1 (Energy Efficiency Services Limited) from accepting payment from respondent no. 2 (HDFC Bank Limited) of the Earnest Money Deposit (EMD), in form of Bank Guarantee submitted by the petitioner with the respondent no. 1 in terms of the tender invited by the respondent no. 1 for "International Competitive Bidding (ICB) for Procurement of 5 million Smart Meters for Pan India. "
3. The petitioner had been found as the lowest bidder in the said tender and by the Letter of Award (LOA) dated 12.10.2018, the respondent no. 1 placed an order of supply of 2 .5 Million Smart Meters for Pan India on the petitioner. Letter of Award gave the period of supply of the Smart Meters as under:-
"6. Delivery Locations, Terms, Schedule & Timelines: Delivery schedule as given below shall be follows:
Year Total Meters Deliver location
supplied in 1
years (in units)
Implementation
Partner
Implementation 25,00,000 Bidder shall be
Partner fully liable to
Total 25,00,000 execute the works
at Locations across
PAN India-details
shall be intimated
later.
Please note that:
a. Year 1 is defined as one year after date of project award. Quantities for single-phase whole current, three phase whole current and LT-CT operated whole current meters shall be mutually decided between EESL and the utilities identified in Pan India identified by EESL. b. Year 1 above will start after 3 months of the date of letter of award.
c. Delivery needs to be uniformly done throughout the year on monthly pro-rata basis.
d. The above delivery schedule is indicative. EESL will provide the final delivery schedule at the time of award of contract."
4. The LOA further obliged the petitioner to submit the Contract Agreement within 28 days from the date of issuance of the LOA to the respondent no. 1. It further provides for submission of the Contract Performance Guarantee (CPG) of a value of 10% of the Contract value in form of a Bank Guarantee with the respondent no. 1 within 28 days on the receipt of the LOA.
5. The respondent no. 1 by its letter dated 12.11.2018 called upon the petitioner to submit the Contract Agreement and the CPG in terms of the LOA. The petitioner claims that it submitted the Contract Agreement with the respondent no. 1 on 01.12.2018. However, admittedly, the petitioner had not submitted the CPG with the respondent no. 1.
6. The respondent no. 1 by its letter dated 26.12.2018 called upon the petitioner to submit the Contract Agreement and the CPG and even in the Impugned Termination Notice dated 16.01.2019 has stated that the Contract Agreement and the CPG have not been submitted.
7. Therefore, there is a dispute whether the respondent no. 1 has infact received the Contract Agreement or not. At the same time and as noted above, there cannot be a dispute with respect to the non-submission of CPG in terms of the LOA.
8. As far as the delivery schedule is concerned, the petitioner submits that it had submitted the prototype of the Single Phase Smart Meters with the Electrical Research and Development Association (ERDA) on 30.11.2018. ERDA by its letter dated 07.12.2018 informed the petitioner that the test would be completed by 22.02.2019 and the test report will be sent to the petitioner on 28.02.2019. The petitioner by its letter dated 15.12.2018 requested ERDA to expedite the testing process and provide the test report as early as possible as the same was to be submitted with the respondent by January 2019.
9. The learned counsel for the petitioner on basis of the above documents, submits that the petitioner has taken all steps within its power to expedite the grant of certification and therefore, the cancellation of the Contract and the invocation of EMD by the respondent is unjustified. He further submits that by the letter dated 09.01.2019 the petitioner had given a detail representation to respondent no. 1, including giving a monthly production schedule for the supply of the Smart Meters.
10. The learned counsel for the petitioner further relying upon the judgment of this Court in M/s Aurochem (India) Private Limited v. The Union of India and Others, 1994 (29) DRJ (DB) and of the Supreme Court in B.S.N. Joshi & Sons Ltd. v. Nair Coal Services Ltd. and Others, (2006) 11 SCC 548 submits that there being a power vested in the respondent no. 1 to extend the period of submission of the CPG, and the respondent no. 1 having exercised such right in favour of the other tenderers in the previous years, the insistence of the time line in the present case would be totally arbitrary and would amount to hostile discrimination.
11. On the other hand, the learned counsel for the respondent no.1 submits that even as per the letter dated 09.01.2019, the petitioner has asserted that it would be in a position to supply the Single Phase Meters only from 2019. For the Three Phase Meters the production is proposed to start from June 2019. Infact, as per the Schedule submitted by the petitioner with the respondent no. 1, it would be applying for prototype sanction of Three Phase Meter only on 26.02.2019 and for LT-CT Three Phase Meters on 25.04.2019. Clearly the petitioner is not interested in complying with the delivery schedule as stipulated in the LOA.
12. He further submits that as far as the CPG is concerned, the letter dated 09.01.2019 sought 4 weeks further time to submit the same with the respondent no. 1. The above are clear breaches of the LOA and therefore, the respondent no. 1 was within its right to issue the letter dated 16.01.2019 terminating the LOA as also proceed to invoke / encash the EMD.
13. The learned counsel for respondent no. 1 further submits that, in any case, the Bank Guarantee being an independent Contract between respondent nos. 1 and 2, respondent no. 1 cannot be restrained from exercising its right under the same.
14. I have considered the submissions made by the learned counsels for the parties. As noted above, admittedly, the petitioner has been unable to comply with the terms of the LOA at least in the form of submitting the CPG within 28 days period as prescribed in the LOA. The respondent no. 1 by its letters dated 12.11.2018, 29.11.2018 and 26.12.2018 has been repeatedly calling upon the petitioner to submit the CPG. Even by the letter dated 09.01.2019, the petitioner sought four weeks further time to submit the same. Further, the petitioner is yet to apply for the sanction of prototype for the Three Phase Meters. The petitioner also applied for the sanction of prototype for Single Phase Meters only on 30.11.2018, knowing fully well that the supplies have to start within the period of three months from the LOA, that is, by 11.01.2019. The petitioner, as on today, is certainly not in a position to make the supply in terms of the LOA. Even as per the schedule submitted by the petitioner with the respondent no.1 vide its letter dated 09.01.2019, the petitioner does not propose to commence the supply of Three Phase Meters till June, 2019. In any case, the schedule proposed by the petitioner is not in terms of the delivery schedule provided in the LOA, which requires equated monthly supplies.
15. Having said so, the law in relation to the Bank Guarantee is no longer res integra, and in fact, has been settled in a number of judgments of the Supreme Court. I may only quote a few in the present order.
16. In Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd,. (1997) 6 SCC 450, Supreme Court reiterated the law of injunction of a Bank Guarantee and held as under:
"21. Numerous decisions of this Court rendered over a span of nearly two decades have laid down and reiterated the principles which the courts must apply while considering the question whether to grant an injunction which has the effect of restraining the encashment of a bank guarantee. We do not think it necessary to burden this judgment by referring to all of them. Some of the more recent pronouncements on this point where the earlier decisions have been considered and reiterated are Svenska Handelsbanken v. Indian Charge Chrome [(1994) 1 SCC 502] , Larsen & Toubro Ltd. v. Maharashtra SEB [(1995) 6 SCC 68] , Hindustan Steel Workers Construction Ltd. v. G.S. Atwal & Co. (Engineers) (P) Ltd.[(1995) 6 SCC 76] and U.P. State Sugar Corpn. v. Sumac International Ltd. [(1997) 1 SCC 568] The general principle which has been laid down by this Court has been summarised in the case of U.P. State Sugar Corpn. [(1997) 1 SCC 568] as follows: (SCC p. 574, para 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 the 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."
Dealing with the question of fraud it has been held that fraud has to be an established fraud. The following observations of Sir John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank [(1984) 1 All ER 351, CA] are apposite:
"... 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 discharged."
(emphasis supplied) The aforesaid passage was approved and followed by this Court in U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. [(1988) 1 SCC 174]
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."
17. In Gujarat Maritime Board v. Larsen and Toubro Infrastructure Development Projects Limited and Anr., (2016) 10 SCC 46, the Supreme Court once again cautioned that Bank Guarantee is a separate contract and is not qualified by the contract under which it is given. The relevant paragraphs of the said Judgment are quoted as under:
"9. Unfortunately, the High Court went wrong both in its analysis of facts and approach on law. A cursory reading of LoI would clearly show that it is not a case of forfeiture of security deposit "... if the contract had frustrated on account of impossibility..." but invocation of the performance bank guarantee. On law, the High Court ought to have noticed that the bank guarantee is an independent contract between the guarantor Bank and the guarantee appellant. The guarantee is unconditional, no doubt, the performance guarantee is against the breach by the lead promoter viz. the first respondent. But between the bank and the appellant, the specific condition incorporated in the bank guarantee is that the decision of the appellant as to the breach is binding on the Bank. The justifiability of the decision is a different matter between the appellant and the first respondent and it is not for the High Court in a proceeding under Article 226 of the Constitution of India to go into that question since several disputed questions of fact are involved.
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11. It is contended on behalf of the first respondent that the invocation of bank guarantee depends on the cancellation of the contract and once the cancellation of the contract is not justified, the invocation of bank guarantee also is not justified. We are afraid that the contention cannot be appreciated. The bank guarantee is a separate contract and is not qualified by the contract on performance of the obligations. No doubt, in terms of the bank guarantee also, the invocation is only against a breach of the conditions in the LoI. But between the appellant and the Bank, it has been stipulated that the decision of the appellant as to the breach shall be absolute and binding on the Bank.
12. An injunction against the invocation of an absolute and an unconditional bank guarantee cannot be granted except in situations of egregious fraud or irretrievable injury to one of the parties concerned. This position also is no more res integra. In Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co. [Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co., (2007) 8 SCC 110] , at para 14: (SCC pp. 117-18) "14. From the discussions made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement of a bank guarantee or a letter of credit, we find that the following principles should be noted in the matter of injunction to restrain the encashment of a bank guarantee or a letter of credit:
(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the beneficiary is entitled to realise 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 realisation 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."
13. The guarantee given by the Bank to the appellant contains only the condition that in case of breach by the lead promoter viz. the first respondent of the conditions of LoI, the appellant is free to invoke the bank guarantee and the Bank should honour it "... without any demur, merely on a demand from GMB (appellant) stating that the said lead promoter failed to perform the covenants...". It has also been undertaken by the Bank that such written demand from the appellant on the Bank shall be "... conclusive, absolute and unequivocal as regards the amount due and payable by the Bank under this guarantee". Between the appellant and the first respondent, in the event of failure to perform the obligations under the LoI dated 6-2-2008, the appellant was entitled to cancel the LoI and invoke the bank guarantee. On being satisfied that the first respondent has failed to perform its obligations as covenanted, the appellant cancelled the LoI and resultantly invoked the bank guarantee. Whether the cancellation is legal and proper, and whether on such cancellation, the bank guarantee could have been invoked on the extreme situation of the first respondent justifying its inability to perform its obligations under the LoI, etc. are not within the purview of an inquiry under Article 226 of the Constitution of India. Between the Bank and the appellant, the moment there is a written demand for invoking the bank guarantee pursuant to breach of the covenants between the appellant and the first respondent, as satisfied by the appellant, the Bank is bound to honour the payment under the guarantee."
18. The only allegations of "Fraud" that have been made in the petition are in paragraph nos. 12 and 17 of the same which are reproduced hereinbelow:
"12. It is the most humble submission of the Petitioner that as the Petitioner has already signed the contract, the earnest money deposit cannot be forfeited, as to forfeit the same two conditions are to be met i.e. non submission of the signed contract and non- submission of the performance bank guarantee. The Respondent no. 1 has suffered no losses and in fact suffer losses by terminating the contract as the petitioner was L1 and has quoted the lowest rate till date which has brought the price of smart meter from around INR2,500/- to INR 2,000/-. The Respondent no. 1 being well aware that the petitioner has submitted the signed contract is fraudulently invoking the bank guarantee knowing fully well that they are not entitled to forfeit the earnest money deposit.
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17. In the premises it is submitted that the Respondent no. 1 has illegally and fraudulently invoked the bank guarantees and it is not entitled to terminate the contract. The acts of the Respondent no. 1 suffers from bad faith."
19. The above does not in any manner qualify as "Fraud" within the exception laid done by the Supreme Court in the above referred judgments. I therefore, find no reason to restrain the respondent no.1 from encashing the Bank Guarantee in question.
20. The Judgement of M/s Aurochem (India) Private Limited (Supra ) would have no application to the facts of the present case insofar as the issue of the Bank Guarantee is concerned, inasmuch as in the said case, the issue was of termination of the contract and consequential blacklisting. The Court found that the contract was being performed and the only grievance raised was with respect to the submission of the performance security. It further found that the respondent had extended the time for submission of the performance security.
21. The decision of the Supreme Court in B.S.N. Joshi & Sons Ltd. (Supra) again did not relate to the question of invocation of the Bank Guarantee, therefore, would have no application as far as the issue of Bank Guarantee is concerned.
22. However, the petitioner has also sought stay of the operation of the Letter of Termination dated 16.01.2019, including order of blacklisting. In this respect, let notice be issued to the respondent no.1.
23. As the encashment of Bank Guarantee has not been stayed, the respondent no.2 is not a necessary party and is therefore, deleted from the array of the parties. The petitioner is directed to file the Amended Memo of Parties within four weeks from today.
24. Notice is accepted by Mr. Sandarshi Sanjay, Advocate on behalf of the respondent no.1. He prays for and is granted three weeks time to file reply. Rejoinder, if any, be filed within a period of two weeks thereafter.
25. Learned counsel for the petitioner submits that the petitioner shall be submitting another representation with the respondent no.1 within a period of two days from today. The petitioner shall always be free to make such representation with the respondent no.1 and the respondent no.1 shall be free to consider the said representation, without being influenced by any observation made in the present order.
26. List on 7th March, 2019.
27. Dasti, under the signature of the court master.
NAVIN CHAWLA, J JANUARY 18, 2019/rv