Gujarat High Court
Bhadreshwar Vidyut Private Limited vs Godrej Industries Limited on 23 September, 2022
Author: N.V.Anjaria
Bench: N.V.Anjaria, Samir J. Dave
C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/FIRST APPEAL NO. 4066 of 2021
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE N.V.ANJARIA
and
HONOURABLE MR. JUSTICE SAMIR J. DAVE
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1 Whether Reporters of Local Papers may be allowed to see the Yes
judgment ?
2 To be referred to the Reporter or not ? Yes
3 Whether their Lordships wish to see the fair copy of the No
judgment ?
4 Whether this case involves a substantial question of law as to No
the interpretation of the Constitution of India or any order made
thereunder ?
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BHADRESHWAR VIDYUT PRIVATE LIMITED
Versus
GODREJ INDUSTRIES LIMITED
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Appearance:
MR NAVIN PAHWA, SR.ADVOCATE with SAUMITRA CHATURVEDI(8369)
for the Appellant(s) No. 1
MR DEVANG NANAVATI, SR. ADVOCATE with MS PRACHITI V
SHAH(9990) for the Defendant(s) No. 1
NANAVATI & NANAVATI(1933) for the Defendant(s) No. 1
RULE SERVED for the Defendant(s) No. 2
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CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIA
and
HONOURABLE MR. JUSTICE SAMIR J. DAVE
Date :23/09/2022
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C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022
CAV JUDGMENT
(PER : HONOURABLE MR. JUSTICE N.V.ANJARIA) The present appeal under Section 37 of the Arbitration and Conciliation Act, 1996 read with Section 10(2) of the Commercial Courts Act, 2015, is directed against order dated 27.10.2021 below Exhibit 37 in Commercial Civil Miscellaneous Application No.445 of 2021 passed by learned Judge Commercial Court, City Civil Court, Ahmedabad, whereby Court allowed the application filed by respondent herein and restrained the appellant from encashing the bank guarantee till the third adjournment in the arbitral proceedings.
2. Learned counsels for the parties stated at the conclusion of the hearing that they argued the appeal finally. The parties through their respective advocates relied on paper book containing the relevant documents which were on record of the court below and that they were ad-idem in respect of contents of such documents.
3. Application seeking interim measures came to be filed under Section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter mentioned as 'the Arbitration Act') by the applicant- (respondent herein - Godrej Industries Limited - the parties are hereinafter referred to as per their original status as 'the applicant' and 'respondent' respectively) stating that it was desirous of procuring supply 3.8 MW RTC Power for its unit located at Village Kanerao, Taluka Valia, Bharuch, from respondent No.1 - the appellant herein, who was engaged in the business of generation, transmission and distribution of electricity, and who has its 2x150 MW thermal power plant Page 2 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 located at Bhadreshwar, Mundra- Kachchh. The supply was agreed on the basis of Long Term Open Access for period of twelve years and one month. Initially Memorandum of Understanding dated 16.2.2016 and thereafter power supply agreement dated 30.3.2016 were executed.
3.1 The bank guarantee dated 28.10.2016 was given by the respondent herein as required under the agreement, for Rs.3,26,67,840/- valid upto 31.8.2028. The applicant in its application stated that it terminated power supply agreement on 31.7.2021, because the respondent was unable to supply the power to the applicant since 6.6.2021, thereby committing breach of the agreement. It was stated that the respondent was asked to release the bank guarantee but it was not done and it was apprehended that despite termination of the Power Supply Agreement, the respondent No.1 may illegally encash the bank guarantee.
3.1.1 The applicant based its act of terminating the agreement by resorting to the Amendment No.1 in sub clause 3.2 of Clause No.3 of the agreement claiming that it gave right to terminate the agreement after four years and one month. The applicant claimed that on account of such termination there would be no liability upon the applicant from the GETCO, that the applicant had cleared all the dues against the invoices raised by the respondent for the power supplied, and that there were no pending invoices when the termination notice dated 27.1.2021 was served.
3.1.2 The applicant communicated its intention to Page 3 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 terminate the power supply agreement with effect from 31.7.2021 by issuing notice dated 27.1.2021. The appellant herein however responded saying that the agreement was for Long Term Open Access Supply and was valid till 28.7.2028. According to the appellant herein, the applicant would remain liable to pay the exit charges and other liabilities under the power supply agreement and the Uninterrupted GERC Open Access Regulations, 2011.
3.1.3 The applicant further stated that despite e-mail dated 31.7.2021 asking the appellant to return the bank guarantee, the respondent did not respond, hence the respondent approached the commercial court at City Civil Court, Ahmedabad seeking injunction against the encashment of bank guarantee. The commercial court passed order dated 27.10.2021 and restrained the appellant herein from encashing the bank guarantee.
3.2 In the reply filed by the respondent, it was inter alia submitted that the application was based on misinterpretation of the Clauses of power supply agreement; that the applicant issued notice under Section 11 of the Act only on 3.9.2021 which was after three weeks from date of grant of ex-parte interim relief in its favour. It was stated that as the applicant had desired to procure 3.8 MW, it was allotted desired quantum of power under the Long Term Open Access for a period of twelve years and one month and that the power supply commenced from 27.7.2016.
3.2.1 It was stated that in furtherance, applicant issued Page 4 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 authorization letter dated 26.7.2016 addressed to the Chief Engineer, State Load Dispatch Centre, Gujarat Energy Transmission Corporation (GETCO) authorizing the respondent- appellant herein for entire co-ordination and scheduling with the load dispatch centre. It was stated that both the applicant and respondent No.1 were aware that the approval of Long Term Open Access to use the Intra State Transmission System or Distribution System can only be for twelve years and that about the said fact was within the know of the applicant since inception.
3.2.2 It was contended that there was wrongful invocation of sub clause 3.2 of the agreement, and that the termination was provided in Clause 7, which could be invoked upon satisfaction of the conditions mentioned therein. It was contended that the termination notice was in contravention to the Clauses of the agreement and also in breach of the Long Term Open Access Regulations, 2011. It was further contended that Clause No.3.2 fell under the head 'Consideration,' which was amended. It was submitted that only in the case where the dispute was to be in relation to 'Consideration', Clause No.3.2 could be applied.
3.2.3 It was the further say of the respondent that e-mail dated 18.11.2021 of the applicant revealed its real intention behind the termination notice, in which it was conveyed by the applicant that it had started its own bio-mass based captive power plant for generation of electricity. The respondent cautioned the applicant by e-mail dated 6.3.2021 about consequences of wrongful termination, stating further that the demand notice dated 7.7.2021 which was issued, was justified.
Page 5 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 3.3 Having noticed rival case in Application under Section 9, it would be Power Supply Agreement between the parties maybe looked at. The 'bank guarantee' is defined in Clause 2(v) to have its meaning ascribed in Clause 4.5.1; the additional bank guarantee was also defined in Clause (i). 'Contracted capacity' as per clause 2(xiii) is the quantum of power and energy the member consumer has agreed to consume from the generator on firm basis as specified in Clause 2.1 of the agreement. The definition of monthly bill was in Clause (xxxi), means a bill raised by the generator- the appellant herein for the contracted capacity as per the tariff outlined in Schedule A in respect of each billing period.
3.3.1 Clause 2 is the 'terms of allotment of power' in which Clause 2.1 is about 'contracted capacity' to the the capacity which the consumer would purchase and consume during the term, for the tariff prescribed in the schedule in the agreement. As per Clause 2.8 the member consumer shall pay the capacity schedule by the generator irrespective of quantum of consumption by member consumer unless the generator fails to generate the power capacity as agreed in the power supply agreement. It was provided further that the member consumer shall pay for the Contracted Capacity scheduled by the generator, irrespective of the quantum of consumption by the Member Consumer provided however that the member consumer shall not be liable to pay under this Agreement in the event the generator fails to schedule the Contracted Capacity in consonance with the terms of this Agreement. It was provided that for the purpose of raising Monthly Bills and Supplementary Page 6 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 Bills by the generator, the Contracted Capacity shall be treated as consumed by the Member Consumer irrespective of the fact that actual consumption by the Member Consumer is less than the Contracted Capacity.
3.3.2 Clause 3 and the group of Sub clauses are about 'consideration'. It is provided in Clause 3.1 that the member consumer shall pay the generator for the contracted capacity at the tariff determined as per Clause 3 and explained further in Schedule A. Sub clause 3.2 of the agreement came to be amended to the extent that the respondent can terminate the agreement after availing supply of power under long term open access for at least four years and one month from the commencement of power supply.
3.3.3 By seeking to invoke amended Sub clause 3.2, the termination of the power supply agreement by the respondent was acted upon and sought to be justified, whereas as asserted by other side, the termination Clause in the agreement was Clause 7. In wake of bone of contention in this regard between the parties it will be worthwhile to extract amended Sub clause 3.2.
"1. Amendment in Sub clause (3.2) to Clause no. 3 of the Agreement -- Consideration The tariff per unit shall be computed as follows:
the prevailing Relevant Discom Tariff or Dakshin Vij. Company Limited minus Rs.0.60/kWh as illustrated in the schedule A. The tariff will be linked to the relevant DISCOM tariff. In case of any decrease in the cross subsidy surcharge or additional surcharge or increase in relevant discom tariff provided by the statutory authority Page 7 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 or GERC, such decrease or increase which had been made effective on or after 1st June 2016, will be upfront accounted to the member consumer maximum up to Rs. 1.22/kWh.
The Cost of Renewable Purchase Obligation will be in the scope of Member Consumer. In case the net discount to Member Consumer goes below Rs.0.50/kWh due to cost of Renewable purchase Obligation, Generator will give additional discount of maximum Rs.0.08/kWh to Member Consumer for period upto 30th September 2016 provided minimum effective discount for Member Consumer net off Renewable Purchase Obligation at any point of time will be Rs.0.40/kWh , GENERATOR & Member Consumer has right to terminate the Power Supply Agreement on or after availing long term open access supply for atleast 4 years and 1 month from the date of commencement of supply under long term access by giving a prior notice of atleast 1 year as per the Open Access Regulations. There will be no liability on Member Consumer from GETCO on account of termination after 4 years 1 month provided the Member Consumer will clear all its due against the invoice raised by GENERATOR for power supplied upto the termination of agreement before serving such termination notice to Generator.
GENERATOR & Member Consumer agree that neither party can terminate the agreement until completion of 4 years and 1 month from the date of commencement of power supply except for the terms os per Clause 9 of this Agreement.
Save and except the Member Consumer's right to terminate under the amendment to Clause 7.3 hereinbelow, in case of Member Consumer terminates the Agreement before availing power under the Long term access of 4 years and 1 month, Member Consumer will be liable to pay out but not limited to all the statutory or Page 8 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 transmission charges in accordance with Open Access Regulations to Gujarat Energy Transmission Corporation Limited, or Gujarat State Load Dispatch Centre in addition to any due payment against the invoice raised by GENERATOR till the termination of agreement, if any."
3.3.4 Clause 7 is about 'term and termination' which is as under.
"7. Term and Termination 7.1 This Agreement shall become effective upon its execution and shall be in force for a period of 12 years and 1 Month from the Date of Commencement of Supply ("Term"), unless mutually extended by the Parties in writing.
7.2 The GENERATOR may terminate this Agreement at any time during the Term, on any one or more of the following grounds attributable to the Member Consumer and the determination by the GENERATOR of the occurrence of such grounds shall be final and binding and conclusive, that is to say the Member Consumer:
(a) Fails to purchase/draw/consume the Contracted Capacity partially or fully during a Billing Period subject to the Member Consumer's right of deviation to the extent of 10% in terms of this Agreement;
(b) Defaults in paying any Monthly Bill and/or Supplementary Bill within the Due Date for payment;
(c) Commits any breach of this Agreement;
(d) Commits any default whereby the Page 9 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 Bulk Power Transmission Agreement is adversely affected/terminated;
(e) Commits any action or due to the Member Consumer's omission, whether in negligence or otherwise, the evacuation of Power from the Delivery Point to the Member Consumer's facility is hindered or is stopped;
(f) Commits any act, deeds, things or matters which in any event have adverse implication on the GENERATOR;
(g) Commits any breach of Electricity Act, the Electricity Rules, Wheeling Agreement and any regulations, guidelines, rules, notifications and orders issued by Government of India or Government of Gujarat or the GUVNL or GUVNL's Subsidiaries or GETCO or SLOC and/or by any Competent Authority, including a breach of the shareholding to consumption of power ratio laid down in Electricity Rules for captive consumers.
(h) Repudiates the Agreement or otherwise evidences an intention not to be bound by the Agreement;
(i) Ceases to carry on its business;
(j) In the event (a) the Member Consumer becomes voluntarily or involuntarily the subject of any bankruptcy or insolvency or winding up proceedings...
(k) Transfers or attempts to transfer the Equity Shares...
(l) Is subjected to change in control, in terms of the Articles of Association of Page 10 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 the GENERATOR;
(m) Undergoes any merger, demerger, amalgamation..."
3.3.5 Sub-clause 7.6 is important, quoted in para 3.4.2 hereinafter, it provides for payment of transmission charges by the member consumer upon termination of the agreement by the member consumer. Such transmission charges are payable under the Gujarat -Electricity Regulatory Commission's Order and Regulation.
3.3.6 Sub clause 4.5 is about 'payment security'. The bank guarantee is contemplated in this Sub clause, which is as under.
"4.5 Payment Security Bank Guarantee :
4.5.1 The Member Consumer shall on the Effective Date of this Agreement or not later than 15 (fifteen) days prior to the date of Commencement of Supply furnish to GENERATOR on irrevocable and unconditional bank guarantee. In a form and substance acceptable to the Generator, for an amount equal to 60 days energy bill as per the Tariff payable for the Contracted Capacity, from any Indian bank acceptable to the GENERATOR ("Bank Guarantee".) 3.3.7 Sub-clause 4.5.2 is about furnishing additional bank guarantee, Sub-clauses 4.5.3 and 4.5.4 are also extracted.
4.5.3 The GENERATOR shall be entitled to invoke the Bank Guarantee, Including such Additional Bank Page 11 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 Guarantee (if applicable), in part or in full, In accordance with provisions of this Agreement. In particular, if the Member Consumer fails to pay any Monthly Bill or Supplementary Bill or parts thereof within the Due Date, then notwithstanding any Bill Dispute Notice (as defined in Clause 4.6.2 below), the GENERATOR can invoke the Bank Guarantee and the Additional Bank Guarantee for an amount equal to such Monthly Bill and/or Supplementary Bill or parts thereof, along with interest, if any, in accordance with Clause 4.2 above.
4.5.4 The Bank Guarantee including such Additional Bank Guarantee (if applicable) shall be valid during the Term of this Agreement, with an additional claim period of thirty (30) days thereafter. "
3.3.8 Clause 5 mentions 'obligations and undertaking of the member consumer'. They relate to consumption of entire quantum of power, to secure that its facilities do not consume less power, to make payment for contracted capacity in each billing period, to pay bills and taxes and to pay all levies to Gujarat Urja Vikas Nigam Limited, GETCO and various charges relating to captive power arrangement proposed in the agreement. Clause 6 is about 'obligations and undertaking of generator'.
3.3.9 Clause 12 in the agreement is the 'arbitration Clause'. Sub clause 12.2 says that 'All disputes and differences between the parties arising out or in connection with this agreement ('Disputes') shall first be tried to be settled through Page 12 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 mutual negations.' As per Sub clause 12.3, 'in the event that any Dispute could not be resolved between the Parties pursuant to Clause 12.2 then such Dispute shall be referred to arbitration under the Arbitration and Conciliation Act, 1996 to a sole arbitrator to be appointed mutually by the Parties.' What is to be noticed is that the disputes which may be referred to the arbitrator are Clause 'arising out of' or in 'connection with this agreement.' 3.4 The respondent terminated the agreement taking shelter of amended Clause 3.2 of the agreement sending notice dated 27.1.2021 which was to take effect from 31.7.2021. While terminating the agreement, the stand of the respondent was revealed in its e-mail dated 18.11.2020 whereby the appellant was informed that, 'From:Mayank [email protected] Sent: 18 November 2020 14:30 To: Sumit Kumar- BEFL Cc: Jitendra Agarwal Subject: Godrej power requirement from open access up to April-2021 I would like to inform you that we are going for our own bio-mass based captive power plant and it will be ready by April, 2021. So from May, 2021 onwards we will not require power from our medium term open access.
Consider this mail as formal intimation for the same and suggest us forward procedure to exit from our PPA from May-2021.Page 13 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022
C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 We are expecting 100% power availability and the same business relation for your end till April-2021.
However Our plant is going under huge expansion and by end of year 2021 we may require power from open access.
Please keep it in your consideration. In case of any doubt please feel free to contact me.
Regards, Mayank Naik Manager- Electrical Godrej Industries Limited.
9099036823."
3.4.1 Subsequent to the above email and the notice of termination, further communication dated 25.6.2021 was addressed wherein the respondent reiterated its intention and decision for termination of the agreement, further stating that the requirement of completion of minimum duration of four years and one month was fulfilled. As against this, the appellant's case has been that the termination of the contract would be governed by Clause 7 in the agreement, and that Clause 3.2 of which the recourse is taken by the respondent was under the head 'consideration' to apply in relation to the dispute touching the consideration. It is the say of the appellant that the power supply agreement was for long term access which was prematurely terminated by the respondent giving rise to payment liabilities and obligations on the respondent arising out of such termination.
Page 14 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 3.4.2 According to the appellant, as per Sub clause 7.6 of the agreement, respondent is liable to pay statutory transmission charges to the appellant at the rates prevailing since the termination of the agreement was effected for the reasons attributable to respondent No.1. Sub clause 7.6 reads as under.
"Clause 7.6- It is expressly agreed between the Generator and the Member Consumer that in the event of termination of this Agreement by the Member Consumer or any reason attributable to member consumer then member consumer shall only be liable to pay the statutory transmission charges to the Generator at the rates prevailing then during the termination this Agreement as per Gujarat Electricity Regulatory Commission Order No.3 of 2011 dated 01.06.2011 (Terms and Conditions of Intra State Open Access) regulation 2011 as amended from time to time."
3.5 The bank guarantee in question is reproduced hereinafter in para 5.2 Learned senior Mr.Navin Pahwa assisted by learned advocate Ms.Saumitra Chaturvedi advocate for the appellant raised the following submissions. (i) Bank guarantee is an independent and separate contract between the bank and the beneficiary. (ii) Bank is always obliged to owner the bank guarantee like the instant one which is unconditional and irrevocable. (iii) The contract of bank guarantee is not qualified by the provisions of the underlying contract. (iv) Recitals in the preamble of the bank guarantee do not control the operative part of the bank guarantee. (v) The exceptions for grant of order of injunction namely fraud and irretrievable injustice, do not arise in the facts of the case.
Page 15 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 4.1 In order to buttress his proposition, he relied on the decision of the Supreme Court in Ansal Engineering Projects Limited Vs. Tehri Hydro Development Corporation Limited [(1996) 5 SCC 450]. He further relied in U.P. Cooperation Federation Limited Vs. Singh Consultants and Private Limited [(1988) 1 SCC 174] as also in Hindustan Construction Company Limited Vs. State of Bihar [(1999) 8 SCC 446]. Learned senior advocate for the appellant emphasized following observations from Ansal Engineering Projects Limited (supra), the Supreme Court observed and held as under.
"It is settled law that bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the beneficiary..." (para 4) 4.1.1 Learned advocate for the appellant submitted that commercial court was not justified in concluding that there was irretrievable injury. He submitted that such conclusion was drawn by referring to order passed by the National Law Tribunal, Chennai in petition filed by the bank under Insolvency and Bank Bankruptcy Code. It was submitted that not only that it was an interim order, in appeal filed by the appellant before the NCLT, New Delhi challenging the final order in respect of the petition filed by the another bank, the NCLT observed that the appellant was solvent company and further that the said judgment was confirmed by the Supreme Court on 14.12.2020 passed in Civil Appeal No.3565 of 2020. It was also submitted Page 16 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 that the commercial court failed to apply the real purport of exception of irretrievable injustice.
4.2 On the other hand, learned senior advocate Mr.Devang Nanavati for Nanavati & Nanavati with learned advocate Ms.Prachiti Shah for the respondent raised the following contentions to support the impugned order.
(i) The Bank Guarantee was furnished in lieu of Payment Security as provided in Clause 4.5.1 of the agreement. Clause 4.5.1 read with Clause4.5.3 shows that the Bank Guarantee was given for an amount equivalent to 60 days energy bill and it is only upon failure to make payment towards such monthly or supplementary energy bill that the Appellant would be entitled to invoke the Bank Guarantee.
(ii) Bank Guarantee was conditional to the extent that it could be invoked only in relation to non-payment of monthly or supplementary energy bill. Once a bill is raised and remains unpaid after the due date, then notwithstanding any dispute, the Bank Guarantee was unconditional only in such an event. In the present case, there was no pending energy bill.
(iii) There was no occasion for the appellant to invoke or seek encashment of the Bank Guarantee under the Power Supply Agreement. On the contrary, it is the appellant who has failed to supply power due to its financial difficulties, thereby committing material breach of the Power Supply Agreement which is evident from the e-mail correspondence dated 05.06.2021 and the Unit Outage Details shown in the website of GETCO.
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(iv) The respondent was drawing power for the notice period. However, as stated above, the appellant failed to supply power till date.
(v) On perusal of the Notice dated 07.07.2021 the appellant has made a demand of Rs, 18,34,45,737.26 /- towards alleged Transmission charges and Rs.20,95,50,240/- towards alleged compensation liability. The respondent denies the alleges claim. It is pertinent to note that the alleged claim is in the nature of unliquidated damages which has not yet been adjudicated and crystallized. This amount is not an energy bill nor is it raised against any energy supplied as per the terms of the contract.
(vi) The alleged claim of the appellant would be a subject matter of arbitration which has already been initiated by the respondent by filing IAAP No. 192 of 2021 before the High Court of Gujarat.
(vii) Without prejudice to what is stated above and, in the alternative, it was submitted that this is a case, wherein the respondent have approached the Commercial Court under Section 9 of the Arbitration Act, before the appellants have invoked the Bank Guarantee. It is an accepted position of law that the Bank Guarantees an independent contract and the bank is not bound by the terms of the parent agreement, however the appellant and the respondent are bound by the terms and conditions specified in the Power Supply Agreement.
4.2.1 Learned senior advocate for the respondent, referred to the decision of the Supreme Court in Standard Chartered Bank Vs. Heavy Engineering Corporation Limited [(2020) 13 SCC 574] to submit that there are three exceptions namely, Page 18 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 fraud, irretrievable injustice and special equities on the basis of which injunction against the encashment of bank guarantee can be granted. Learned senior advocate submitted that there is possibility of irretrievable injustice to the respondent if the injunction is not confirmed. He referred to the proceedings of National Company Law Tribunal, he further referred to annual report for the year 2019-20 of the appellant as also auction notice published by the State Bank of India in order to support his plea that the respondent may not be able to recover the money even if he succeeds arbitral tribunal. According to learned senior advocate special equities also exists in favour of the respondent as the power supply agreement was terminated as per amended agreement and the claims raised by the appellant were false claims of unliquidated damages.
4.2.2 Learned senior advocate relied on decision of the Supreme Court in H.M. Kamaluddin Ansari Vs. Union of India [(1983) 4 SCC 417], Raman Iron Foundry [(1973) 3 SCC 231] to submit about the aspect of unliquidated damages. He then relied on Madras High Court judgment in M/s. Geodesic Techinics Private Limited Vs. Larsen & Tubro Limited being OA No.240 of 2018. A Delhi High Court judgment in Hindustan Construction Company Vs. National Hydro Electric Power [(2020) SCC Online Delhi 1214]. He lastly referred to Section 9 and submitted that the object of the interim measure is to see that the no parties sufferes prejudice during the arbitral resolution process.
5. From the above conspectus of the facts and contentions, it emerges inter alia that the agreement was for long term power supply valid upto 2028. Termination Clause No.7 in its Sub Page 19 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 clause 7.2 provided in (a) to (m) the grounds of termination. The respondent by stating that it had acquired its own bio-mass captive plant, and invoking sub clause 3.2 of the agreement prematurely terminated the agreement giving rise to disputes about the obligations and liabilities arising thereby under the terms of agreement about payment of the transmission charges under the Regulations of 2011.
5.1 The long terms open access is defined in the regulations as the right to use intra state transmission system or distribution system for a period exceeding twelve years but not exceeding twenty-five years. The Regulations provide further that the customer who relinquishes the procurement of long term open access without applying one year prior in advance for such relinquishment is bound to pay transmission charges for the stranded transmission capacity.
5.1.1 In the present case, as was submitted on behalf of the appellant that the respondent No.1 customer has authorized the appellant to pay the transmission charges on its behalf which were paid by the appellant on monthly basis to the GETCO. Thus in the sphere of disputes between the parties, it is the issue of the premature termination of contract and the liability of payment of transmission charges etc. arising thereby.
5.1.2 Following aspects of facts and events in the controversy stand deserve to be noticed.
(i) Respondent No.1 addressed e-mail dated 18.11.2020 stating that it has prepared its own captive power plant and therefore would not require power from respondent No.1, to submit that it was a formal intimation for the exit of the agreement.
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(ii) By e-mail dated 11.12.2020 the respondent No.1 was intimated by the appellant that if it chooses to walk away from the agreement, it will have to pay exit charges under the terms and conditions of the agreement, and also as per the provisions of Gujarat Electricity Regulatory Commission (Terms and condition of Intra State Open Access) Regulations, 2011.
(iii) Respondent No.1 terminated the agreement by notice dated 27.1.2021 which was to take effect from 31.7.2021.
(iv) By e-mail dated 26.4.2021 the respondent No.1 did not dispute liabilities about which it was intimated by the appellant but only requested for calculation.
(v) After virtual meeting held between the parties on 14.5.2021, respondent No.1 addressed e-mail dated 21.5.2021 claiming additional discount under Clause 3.3. This letter was addressed only after a meeting which was for the first time.
(vi) Respondent terminate the agreement by notice dated 27.1.2021, thereafter the appellant addressed e-mail dated 2.8.2021 demanding the amounts by letter dated 7.7.2021 to be paid on or before 4.8.2021.
(vii) It is the stand of the appellant that the respondent is liable to pay Rs.18,34,45,737.26/- towards statutory transmission charges for the remaining period of remaining long term open access. The respondent is also required to pay Rs.20,95,50,240/- towards compensation liability due to non offtake of power on account of early termination of the agreement.
Page 21 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 5.2 Now the bank guarantee in question may be considered. The bank guarantee in its contents reads as under.
"(BANK GUARANTEE) OUR GTEE REF NO. :240GT01163020004 BG AMOUNT : Rs.3,26,67,840/- (Rupees Three Crores Twenty Six Lakhs Sixty Seven Thousand Eight Hundred and Forty Only) ISSUE DATE : 28-OCT-2016 EXPIRY DATE : 31-AUG-2028 CLAIM DATE :30-NOV-2028 To, OPGS POWER GUJARAT PVT.LTD
6 SARDAR PATEL ROAD, GUINDY, CHENNAI-
600032.
In consideration of M/s. OPGS Power Gujarat Pvt Ltd a company registered under the Companies Act, 1956 having its registered office at No. 6 Sardar Patel Road, Guindy, Chennai -
600032 and administrative Office at No. 6Sardar Patel Road, Guindy, Chennai - 600032. (hereinafter referred to as 'Beneficiary' which expression unless repugnant to context shall include its successors & assigns) having agreed to supply power to Godrej Industries Limited Plot-3, Burjorji Nagar, Vilage Kanerao, Tal- Vallia, Ankleshwar, Gujarat 393002 (hereinafter referred to as the "Principal") as under the terms and conditions of agreement signed dated 16/02/2016 (hereinafter referred to as the"
Contract") which contract inter alia requires the provision of a Security Deposit or a Bank Guarantee in lieu thereof by the Principal in favour of the Beneficiary and accordingly this bank guarantees for Rs. 3,26,67,840/- (Rupees Three Crores Twenty Six Lakh Sixty Seven Thousand Eight Hundred and forty Only), is hereby issued by ourselves -- HDFC Bank Ltd in favour of the Beneficiary.
We, HDFC Bank Ltd a Banking Company Page 22 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022
incorporated under Companies Act, 1956, having their Registered office at HDFC Bank Ltd., HDFC Bank House, C.S. No. 6/242, Senapati Bapat Marg, Lower Parel (W), Mumbai 400 013 and having their Branch office at HDFC Bank Lid.,2nd Floor, Tej Enclave, Above Emrald Honda Showroom, Opp. Gandhigram Railway Station, Off Ashram Road, Anmedabad-380009 (hereinafter referred to as "THE BANK" which expression shall, unless repugnant to the context or meaning thereof, include its successors and assigns ) do hereby undertake to pay the Beneficiary an amount not exceeding Rs. 3,26,67,840/(Rupees Three Crores Twenty Six Lakh Sixty Seven Thousand Eight Hundred and Forty Only), against any loss or damage caused to or suffered or would be caused to or suffered by OPGS Power Gujarat Pvt Ltd reason of any breach by the said Principal of any of the terms or conditions contained in the said Contract.
Accordingly, this Bank Guarantee is furnished on behalf of the Principal which would operate as the Security deposit paid by the Principal.
We the Bank do hereby undertake to pay the Beneficiary any and all monies payable under this guarantee without any demur, or protest & without recourse to the Principal merely on Beneficiary's first written demand or authenticated tele transmission message stating that the amount(s) claimed is due by way of loss or damage caused to or would be caused to or suffered by the Beneficiary, by reason of any breach by the said Principal of any of the terms or conditions contained in the said Contract. We the Bank further agree that the Beneficiary shall be the sole judge to decide whether the Principal has committed any breach of terms & conditions of said Contract and that the decision of the Beneficiary shall be final & binding as to factum of breach and amount(s) payable by the Bank. However, Page 23 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 our liability under this guarantee shall be restricted to an amount not exceeding Rs. 3,26,67,840/(Rupees Three Crores Twenty Six Lakh Sixty Seven Thousand Eight Hundred and Forty Only).
We, the bank further agree that the guarantee herein contained shall be effective upon its issue and shall remain in full force and effect until the obligations of the Principal under or by virtue of the said Contract have been fully discharged to the satisfaction of the Beneficiary and the latter's claims satisfied or discharged or till the Beneficiary certifies that the terms and conditions of the said Contract have been fully and properly carried out by the said Principal and accordingly discharges the guarantee. The Guarantee shall remain in force & effect until 31st Aug 2028 unless a demand or claim under this guarantee is made on us in writing within 3 (three) months of this date i.e. on or before 30th Nov. 2028. We shall be discharged from all liability under this guarantee thereafter.
We, the Bank further agree that the Beneficiary shall have the fullest liberty without our consent and without affecting in any manner our obligations hereunder to vary any of the terms and conditions of the said Contract or to extend time of Performance by the said Principal or to postpone for any time or from time to time any of the powers exercisable by the Beneficiary against the said Principal and to forbear or enforce any of the terms and conditions relating to the said Contract and we, the Bank shall not be relieved from our liability by reason of any such variation, or extension being granted to the said Principal or for any forbearance, act or omission on the part of the Beneficiary or any indulgence by the Beneficiary to the said Principal or by any such matter or thing whatsoever which under the law relating to sureties would but for this provision have effect of so relieving us.
Page 24 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 For HDFC BANK LTD Authorized Signatory."
(highlighted for emphasis) 5.2.1 Analysing the contents and recitals in the above bank guarantee, it unequivocally provides, firstly that the bank has undertaken to pay the beneficiary any and all monies payable under the guarantee without any demur or protest and without recourse to the principal. The money will be payable upon beneficiary's first written demand. In the third place it is contemplated that money becomes payable to the beneficiary under the bank guarantee once the beneficiary states in the written demand or such authenticated message that the amount is 'due by ways of loss or damage caused or would be caused to or suffered by the beneficiary.' Therefore the loss and damage which may have been suffered in presenti, as well as the loss or damage which would be caused or suffered, that is the loss or damage in futuro both are covered. Fourthly, which is important, such loss or damage may have been suffered by reason of 'any breach' by the principle 'of any of the terms or conditions contained in the said contract'. The fifth aspect mentioned is that the beneficiary will be the sole judge to decide whether the principal has committed any breach of terms and conditions of the contract and that the finality is attached to such decision of the beneficiary.
5.2.2 Thus the bank guarantee clearly provides that the encashment thereof to the beneficiary will be permitted in the event of any breach arising out of any of the terms or conditions of the contract of the power supply. Thus, though the words in Page 25 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 particular is mentioned to mention about non-payment of monthly bill, the reading of the bank guarantee as a whole leave no manner of doubt that it confers unconditional right on the beneficiary to get the amount secured thereby on the score of breach of any conditions of power supply agreement, not delimited non payment of the monthly bill or supplementary bill.
5.3 Having noticed the contents and recitals in the bank guarantee as above, the principles initiated by the courts relating to grant of injunction against the encashment of bank guarantee may be surveyed.
5.4 The Supreme Court in Hindustan Construction Company Limited Vs. State of Bihar and Other [(1999) 8 SCC 436], stating that the bank guarantee represents an independent contract between the bank and the beneficiary, emphasized that the terms of the bank guarantee are extremely material. It was stated, "What is important, therefore, is that the Bank Guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the Bank Guarantee or the person on whose behalf the Guarantee was furnished." (para 9) 5.4.1 In Oil and Natural Gas Corporation Limited Vs. SBI Overseas Branch, Mumbai [(2000) 6 SCC 385], the principle was reiterated by the Supreme Court that when the Page 26 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 bank guarantee is unconditional the encashment thereof would not depend upon the adjudication, observing, "Encashment of an unconditional bank guarantee does not depend upon the adjudication of disputes. Also no distinction can also be made between bank guarantee for due performance of a work contract and a guarantee given towards security deposit for a contract or any other kind of guarantee. Where the beneficiary shall be the sole judge on the question of breach of primary contract the bank shall pay the amount covered by the guarantee on demand without a demur. In the absence of a plea of fraud, guarantee had to be given effect to." (para 7) 5.4.2 In Vinitec Electronics Private Limited Vs. HCL Infosystems Limited [(2008) 1 SCC 544], the Apex Court after stating in para 22 that the recitals in the preamble in the deed of guarantee do not control the operative part of the deed, it was further observed again that the beneficiary is entitled to realise such unconditional bank guarantee irrespective of any pending disputes.
5.4.3 Reiterating the principle that the bank guarantee is an separate contract between the guarantor bank and person entitled to benefit thereof who is the guarantee- recipient, Gujarat Maritime Board Vs. Larson and Toubro Infrastructure Development Projects Limited [(2016) 10 SCC 46]. The Supreme Court observed in para 11, inter alia that the bank guarantee contract is not qualified by the main contract on performance of obligations.
"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 Page 27 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 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 contact 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." (para 11) 5.4.4 The principles regarding the principles for grant or refusal to grant of injunction to restrain enforcement of a bank guarantee or a letter of credit were summarized in Himadri Chemical Industries Limited Vs. Coal Tar Refining Company [(2007) 8 SCC 110], "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.Page 28 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022
C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022
(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."
(para 12) 5.4.5 In Vinitec Electronics Private Limited Vs. HCL Infosystems Limited [(2008) 1 SCC 544], it was observed again that the beneficiary is entitled to realise such unconditional bank guarantee irrespective of any pending disputes. It was stated that the bank is always obliged to honour its guarantee as long as it is unconditional and the dispute between the beneficiary and the party at whose instance the bank gas given the guarantee is immaterial.
5.4.6 The decision of Culcutta High Court in Hindustan Paper Corporation Limited Vs. Keneilhouse Angami [(1990) 68 Company Cases 361], is also lucid in highlighting the working of law in respect of enforcement of bank guarantee by the beneficiary against the bank. It was explained thus (para
12), "...A bank guarantee may be furnished in terms of a particular contract between two parties. In terms of the Page 29 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 conditions of the contract, a bank guarantee may be provided by a bank in favour of one of the parties to the original contract (hereinafter called "the beneficiary"). As to the question of enforcement of the bank guarantee by the beneficiary against the bank, the rights and liabilities are to be governed by the bank guarantee itself and not by the terms and conditions of the original contract. The bank guarantee itself is a contract separate from the original contract pursuant to which the bank guarantee is furnished. The bank is not a party to the original contract.
Similarly, the party at whose instance the bank guarantee is furnished pursuant to the agreement, is not a party to the bank guarantee.
5.4.7 The High Court proceeded to observe.
"The bank guarantee is to be enforced if it complies with the terms and conditions of the bank guarantee itself and not when there is any default or breach of the terms and conditions of the main contract. If the condition for payment under the bank guarantee is fulfilled, then such payment is to be made to the beneficiary though ultimately it may be open to the party at whose instance the bank guarantee was furnished to file a suit for damages against the other parties to the contract. It is open to such parties also to file any suit against the bank for recovery of any amount, if any, if the bank has acted contrary to the transaction between the bank and such other parties. That is no ground for holding that the original contract is to be treated as part of the guarantee or that the arbitration agreement in the Page 30 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 original contract can be incorporated in the bank guarantee."
5.5 It is manifested from the contents of the bank guarantee analyzed in para 5.2.1 and 5.2.2 above is unconditional. It is unequivocal in its terms. It is It is made payable on demur, which aspect makes it unconditional. Analysing the contents, the bank guarantee is not dependent upon the terms of the power supply agreement. In eye of law, as noticed above it is an independent contract between the bank and the beneficiary. The terms of the primary contract has nothing to do with the bank guarantee when by itself constitutes and guarantees unconditional payment on demand by the beneficiary.
5.5.1 As the principle is already noticed, the terms of the agreement cannot be read into the bank guarantee which is independent and separate contract like one on hand. Therefore, the contention on part of the respondent that Clause 4.2 and 4.5.3 falls flat. The bank guarantee cannot be read by incorporating them, for, the obligations under the bank guarantee are independent and they operate between the bank and beneficiary. Even otherwise, for the sake of going with the submission of the respondent on that count that the bank guarantee is given for a purpose of monthly bill only, it does not follow even from the clauses. The word used in Clause 4.5.3 is in particular, which does not suggest exclusivity and does not discard the other terms and conditions and the disputes which may arises between the parties. It does not make the bank guarantee conditional. The language of the bank guarantee is clear. In that view the bank guarantee cannot be construed as was wanted by learned senior advocate.
Page 31 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022
6. Three exceptions or the circumstances are carved out under which the injunction can be granted against the encashment of the bank guarantee. They are fraud by the beneficiary, irretrievable injustice and third existence of special equities. Proceeding to notice them through the eye of decisions of the Apex Court.
6.1 The Apex Court in U.P. Federation Limited (supra) referred to with approval the following observations from English decision in R.D. Harbottle (Mercantile) Limited vs. National Westminister Bank Limited [(1977) 2 All ER 862], "...since demands for payments had been made by the buyers under the guarantees and the plaintiffs had not established that the demands were fraudulent or other special circumstances, there were no ground for continuing injunction".
6.1.1 The Supreme Court further observed and held, "In order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties, the very purpose of bank guarantees would be negatived and the fabric of trading operation will get jeopardised."
6.2 In Vinitec Electronics Private Limited (supra), following was stated, "In BSES Limited (Now Reliance Energy Ltd.) vs. Fenner India Ltd. And anr. this court held :
Page 32 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 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 equitiesµ in favour of injunction, such as when irretrievable injuryµ or irretrievable injusticeµ would occur if such an injunction were not granted."
6.2.1 In Svenska Handelsbanken Vs. Indian Charge Chrome [(1994) 1 SCC 502], the contention advanced was in respect of liquidated damages and it was submitted that the respondent had to prove liquidated damages quantified the same before invoking the guarantee. It was contended that the invocation of the bank guarantee relating to advance and liquidated damages was after the expiry of period. Saying that no case was made out relating to fraud or irretrievable injustice, the court held that the appellant would be able to claim relief before arbitration by way of damages or amount wrongly recovered and that the irretrievable injustice could not be said to exists. The Supreme Court stated, "...in case of confirmed bank guarantee/irrevocable letters of credit it cannot be interfered with unless there is fraud and irretrievable injustice involved in the case and fraud has to be as established fraud. There should be prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Mere irretrievable injustice without prima facie case of established fraud is of no consequence in Page 33 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 restraining the encashment of bank guarantee. Only in the event of fraud or irretrievable injustice the court would be entitled to interfere in a transaction involving a bank guarantee and under no other circumstances."
(para 6) 6.3 In Hindustan Construction Company Limited Vs. State of Bihar and Other [(1999) 8 SCC 436] wherein the Supreme Court once again considered the contract of bank guarantee, nature and purpose thereof and the consideration as to when it is encashable and when the court can grant injunction against invocation of the bank guarantee. The Supreme Court observed that the courts are be reluctant in granting injunction against invocation of bank guarantee except in cases of established fraud or where irretrievable injury was likely to be caused to the guarantor.
6.3.1 In Hindustan Construction Company (supra) case the terms of the bank guarantee suggested that it was a guarantee against the mobilization advanced and could not be said to be unconditional. In the facts of the case the injunction against encashment was held to be justified. The court however in terms observed, as in the instant case also, that when the bank guarantee recites that the amount would be paid 'without demur' and irrespective of any dispute that might have cropped up, or might have been subsisting between the beneficiary on one hand and the person furnishing the bank guarantee, both the parties would bound by in terms of bank guarantee since it is an independent contract.
6.4 The Supreme Court in Hindustan Steel Works Construction Limited Vs. Tarapor and Company [(1996) 5 Page 34 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 SCC 34] and reiterated the above principles to observe further, "...in the absence of a plea relating to fraud, much less of a finding thereto, we find that the court could not have stated that the defence raised by the respondent Bank on the grounds set forth earlier is sufficient to hold that unconditional leave should be granted to defend the suit. In the arbitration proceedings that were pending it was certainly open to the parties concerned to adduce proper evidence and establish as to what are the liquidated damages that are payable and if any excess amount had been paid, the same would be recovered." (para 8) 6.5 In Standard Chartered Bank Vs. Heavy Engineering Corporation Limited [(2020) 13 SCC 574], the Supreme Court analyzed various decisions, to propose the same dictum that "The dispute between the beneficiary and the party at whose instance the bank has given the guarantee is immaterial and is of no consequence. There are, however, exceptions to this Rule when there is a clear case of fraud, irretrievable injustice or special equities. The Court ordinarily should not interfere with the invocation or encashment of the bank guarantee so long as the invocation is in terms of the bank guarantee." (para 23) 6.6 In Ansal Engineering Project Limited (supra), the Supreme Court observed, that strong evidence is required to establish the exceptions, Page 35 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 "Unless fraud or special equity exists, is pleaded and prima facie established by strong evidence as a triable issue, the beneficiary cannot be restrained from encashing the bank guarantee even if dispute between the beneficiary and the person at whose instance the bank guarantee was given by the bank, had arisen in performance of the contract or execution of the works undertaken in furtherance thereof."
(para 4) 6.6.1 It was further observed, ".....The court exercising its power cannot interfere with enforcement of bank guarantee/letters of credit except only in cases where fraud or special equity is prima facie made out in the case as triable issue by strong evidence so as to prevent irretrievable injustice to the parties."
(emphasis supplied) (para 5) 6.7 In U.P. State Sugar Corporation vs. Sumac International Ltd.[(1997) 1 SCC 568], the Apex Court explained thus, "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. 6.7.1 About second exception, it was observed inter alia that the harm should be of 'irretrievable' nature, "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 Page 36 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 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 over ride the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may coexist in some cases. (para 12) 6.8 In Mahatama Gandhi Sahakra Sakkare Karkhane vs. National Heavy Engg. Coop. Ltd and Anr.[(2007) 6 SCC 470] , this court observed:
"The person in whose favour the guarantee is furnished by the bank cannot be prevented by way of an injunction from enforcing the guarantee on the pretext that the condition for enforcing the bank guarantee in terms of the agreement entered between the parties has not been fulfilled. Such a course is impermissible. The seller cannot raise the dispute of whatsoever nature and prevent the purchaser from enforcing the bank guarantee by way of injunction except on the ground of fraud and irretrievable injury.
(para 22) 6.8.1. It was further observed, What is relevant are the terms incorporated in the guarantee executed by the bank. On careful analysis of the terms and conditions of the guarantee in the present case, it is found that the guarantee is an unconditional one. The respondent, therefore, cannot be allowed to raise any dispute and prevent the appellant from encashing the bank guarantee. The mere fact that the bank guarantee refers to the principle agreement without referring to any specific Page 37 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 Clause in the preamble of the deed of guarantee does not make the guarantee furnished by the bank to be a conditional one."
[Emphasis supplied] (para 28)
7. The next question therefore would be needed to be considered is whether the present case falls in any of the above exceptions.
7.1 There is no element of fraud muchless erigeron fraud, by the appellant- beneficiary in seeking to encash the bank guarantee. This aspect is entirely ruled out. The fraud not only has to be pleaded with specific facts, but should be established as well. The fraud must be of egregious nature.
7.2 The second exception namely, irretrievable injustice is also the circumstance absent in the facts of the case. Merely because the National Law Company Tribunal has passed an order in the insolvency proceedings which is interim order. Fluctuating figures in the books of account and balance sheet, or isolated financial event cannot be the yardstick. It cannot be readily concluded on such counts that it brings into picture irretrievable injustice, nor it could be said that the it would not be possible or it will disable to recover its dues, so as to suffer irreparable injustice. In the facts of the present case no circumstance suggests that if the arbitrator rules in favour of the respondent, it would become paper order or that the respondent would not be able to recover the money to suffer irretrievable injustice. The commercial court below has misdirected itself in recording its findings in this score.
Page 38 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 7.2.1 As to what would constitute irretrievable injury, the Supreme Court in U.P.State Sugar Corporation (supra) elaborated as to the kind and nature of irretrievable injury or injustice, "On the question of irretrievable injury which is the second exception to the rule against granting of injunctions when unconditional bank guarantees are sought to be realised the court said in the above case that the irretrievable injury must be of the kind which was the subject-matter of the decision in the Itek Corporation case (supra). In that case an exporter in the U.S.A. entered into an agreement with the Imperial Government of Iran and sought an order terminating its liability on stand by letters of credit issued by an American bank in favour of an Iranian Bank as part of the contract. The relief was sought on account of the situation created after the Iranian revolution when the American Government cancelled the export licences in relation to Iran and the Iranian Government had forcibly taken 52 American citizens as hostages. The U.S. Government had blocked all Iranian assets under the jurisdiction of United States and had cancelled the export contract. The court upheld the contention of the exporter that any claim for damages against the purchaser if decreed by the American Courts would not be executable in Iran under these circumstances and relisation of the bank guarantee/Letters of credit would cause irreparable harm to the plaintiff. This contention was upheld. (para 14) 7.2.2 It was explained, "To avail of this exception, therefore, exceptional circumstances which make it impossible for the guarantor to reimburse himself if the ultimately succeeds, will have to be decisively established. Clearly, a mere apprehension that the other party will not be able to pay, is not enough." (para 14) Page 39 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 7.2.3 Mere apprehension that the person would suffer irreparable injury in future if bank guarantee is allowed to be encashed is not enough. Possibility is also no consideration. This must be 'decisively' established on facts. The word 'established suggests that the factum in that regard is almost proved. The concept of irretrievable injury or injustice to be applied while granting injunction against the invocation and encashment of bank guarantee, is undoubtedly much greater in degree and quite higher in its pedestal, than the idea of irreparable injury to be considered while granting injunction under Order XXXIX Rule 1, 2 of the Code of Civil Procedure.
7.3 Third consideration or exception is special equities. The consideration of irretrievable injury and the consideration special equities may inform each other. Whenever the irretrievable injury is established, it may create special equity to permit the encashment of the bank guarantee. The irretrievable injury in that way becomes special equity. What is to be emphasised is that the fraud should be egregious and demonstrably arise, the irretrievable injury should be decisively established. In the same way, the special equities should conclusively arise.
8. The Commercial Court framed two issues, firstly the injunction may be granted against the appellant, whereas the second issue was whether the injunction may be granted against the bank. The second issue was answered in negative, still however, the first issue was decided against the appellant and the injunction was granted.Manifestly, the Commercial Court below erred to contradict itself to answer the issue No.2 in the Page 40 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 negative and yet to grant the injunction against the appellant not permitting the encashment of bank guarantee.
8.1 In U.P. Cooperation Federation Limited (supra), the Supreme Court stated, in the similar set of circumstances that what is not permissible directly, cannot be done indirectly.
"In the instant case, the learned Judge has proceeded on the basis that the this was not an injunction sought against the bank but this was sought against the appellant. But the net effect of injunction is to restrain the bank from performing bank guarantee. That cannot be done. One cannot do indirectly what is one is not free to do directly."
9. In view of the above, the injunction against the bank guarantee could not have been granted. Any of the exceptional grounds namely fraud, irretrievable injustice or special equities do not arise in the facts of the case.
10. In Adhunik Steels Limited Vs. Orissa Manganese and Minerals (P) Ltd.[(2007) 7 SCC 125], the Supreme Court has held that the principles governing the grant of injuction under Order XXXIX, Rule 1, 2 of Code of Civil Procedure, namely prima facie case, balance of convenience, and irreparable injury would apply to be the considerations for exercising powers under Section 9 of the Arbitration Act in passing interim measures. In this case, none of these ingrediants are satisfied.
10.1 At the same time, the interim injunction under the Order XXXIX, CPC is an equitable relief. Similarly primary object of the court exercising powers under Section 9 of the Act, is to ensure that until the arbitration proceedings are over, the rights between the parties to dispute are balanced and equities between them are preserved and maintained. Neither party Page 41 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 should suffer any kind of prejudice while before the arbitrator. Both sides should be put to and enjoy a kind of equilibrium while contesting their case before the arbitral tribunal, till the arbitral tribunal finally decides on their disputes.
10.2 For the forgoing discussion, the impugned order whereby the commercial court below granted injunction against invocation of the bank guarantee by the appellant books a clear error in law. The same deserves to be set aside.
10.3 Resultantly, impugned order dated 27.10.2021 below Exhibit 37 passed by the Commercial Court, City Civil Court, Ahmedabad in Commercial Civil Miscellaneous No.445 of 2021 is hereby set aside.
10.4 However, the interest of justice would be sub-served that the amount that will be encashed by the appellant upon invocation of bank guarantee shall be deposited before the commercial court, City Civil Court concerned by the appellant, and the commercial court shall invest the amount of the encashed bank guarantee in cumulative fixed deposit in a nationalized bank initially for a period of six months to be renewed and continued until arbitrator finally decides the disputes between the parties. It is so directed.
11. The appeal is allowed in the said terms.
(N.V.ANJARIA, J) (SAMIR J. DAVE,J) FURTHER ORDER At this stage, learned advocate Ms.Prachiti Shah for the Page 42 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022 C/FA/4066/2021 CAV JUDGMENT DATED: 23/09/2022 respondent requested that the aforesaid order and directions may be stayed for the some time to enable the respondent No.1 to approach the higher forum. The request was objected to by learned senior advocate Mr.Navin Pahwa for the appellant.
In view of what is held and what is directed in the judgment, the request is not acceded to and is rejected.
(N.V.ANJARIA, J) (SAMIR J. DAVE,J) Manshi Page 43 of 43 Downloaded on : Mon Sep 26 20:54:21 IST 2022