Delhi High Court
Director General Project Varsha vs Navayuga Van Oord Jv on 17 September, 2024
Author: C. Hari Shankar
Bench: C. Hari Shankar
$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Pronounced on : 17 September 2024
+ ARB. A. (COMM.) 15/2024
DIRECTOR GENERAL PROJECT VARSHA .....Appellant
Through: Mr. K.K. Venugopal, Sr.
Advocate with Ms. Aishwarya Bhati, ASG
and Mr. Kapil Arora, Mr. P. Veer Misra, Ms.
Palak Nagar, Ms. Kajal Arora, Mr. Siddhant
Kohli, Mr. Kartik Sharma, Ms. Anuradha
and Mr. Aryaman Vachher, Advocates.
versus
NAVAYUGA VAN OORD JV .....Respondent
Through: Mr. Saurav Agrawal, Mr.
Shantanu Agarwal, Mr. Aadya Chawla, Mr.
Harshit Malik, Mr. Manas Arora, Ms.
Chandreyee Maitra, Ms. Sulekha Agarwal
and Ms. Allaka, Advocates.
CORAM:
HON'BLE MR. JUSTICE C. HARI SHANKAR
JUDGMENT
% 17.09.2024
1. Consequent on completion of hearing, this Court, on 12
September 2024, allowed the present appeal and set aside the
impugned Order dated 10 January 2024 passed by the learned Arbitral
Tribunal, presently in seisin of the disputes between the parties, for
reasons to follow.
2. This judgment sets out the reasons for the decision.
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3. In order to avoid prejudice to the parties, the order dated 12
September 2024 and the present judgment are being released together,
on 17 September 2024.
The Dispute
4. Arbitral proceedings are presently ongoing between the
respondent Navayuga-Van OORD JV as the claimant and the appellant
Director General Project Varsha, of the Indian Navy, as the
respondent. An application under Section 171 of the Arbitration and
Conciliation Act, 19962 stands decided by the learned Arbitral
Tribunal, comprising three learned arbitrators, by order dated 10
January 2024. This appeal, under Section 37(2)(b)3 of the 1996 Act,
assails the said order.
117. Interim measures ordered by arbitral tribunal.–
(1) A party may, during the arbitral proceedings, apply to the arbitral tribunal–
(i) for the appointment of a guardian for a minor or person of unsound mind for the
purposes of arbitral proceedings; or
(ii) for an interim measure of protection in respect of any of the following matters,
namely–
(a) the preservation, interim custody or sale of any goods which are the
subject-matter of the arbitration agreement;
(b) securing the amount in dispute in the arbitration;
(c) the detention, preservation or inspection of any property or thing
which is the subject-matter of the dispute in arbitration, or as to which any
question may arise therein and authorising for any of the aforesaid purposes any
person to enter upon any land or building in the possession of any party, or
authorising any samples to be taken, or any observation to be made, or
experiment to be tried, which may be necessary or expedient for the purpose of
obtaining full information or evidence;
(d) interim injunction or the appointment of a receiver;
(e) such other interim measure of protection as may appear to the arbitral
tribunal to be just and convenient,
and the arbitral tribunal shall have the same power for making orders, as the
court has for the purpose of, and in relation to, any proceedings before it.
(2) Subject to any orders passed in an appeal under Section 37, any order issued by the
arbitral tribunal under this section shall be deemed to be an order of the court for all purposes and
shall be enforceable under the Code of Civil Procedure, 1908 (5 of 1908), in the same manner as if
it were an order of the court.
2 “the 1996 Act”, hereinafter
3 (2) An appeal shall also lie to a court from an order of the arbitral tribunal–
(a) accepting the plea referred to in sub-section (2) or sub-section (3) of Section 16; or
Signature Not Verified (b) granting or refusing to grant an interim measure under Section 17 Signature Not Verified
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5. I have heard Mr. K.K. Venugopal, learned Senior Counsel for
the appellant and Mr. Saurav Agrawal, learned counsel for the
respondent, at length.
Facts
6. The appellant floated a tender, in November 2016, for
construction of the outer Harbour Package at Project Varsha, South-
West of Visakhapatnam, Andhra Pradesh. The respondent Joint
Venture emerged as the successful bidder, and Letter of Acceptance
was issued to the respondent by the appellant on 24 October 2017.
This culminated in a contract dated 19 December 2017.
7. As required by the contract, the respondent issued, in favour of
the appellant, two Performance Bank Guarantees4 dated 18 November
2017 and 29 November 2017 for ₹ 292.54 crores and ₹ 74,16,97,410/-
respectively, an Advance Bank Guarantee5 dated 9 December 2017 for
₹ 188,82,87,026/- and four Retention Money Bank Guarantees6 for ₹
32 crores, 3.7 crores, 22.5 crores and 20 crores. The impugned order
restrains the appellant from invoking these Bank Guarantees7, for a
total amount of ₹ 633,73,84,436/-.
4 “PBGs” hereinafter
5 “ABG” hereinafter
6 “RBGs” hereinafter
7 “BGs”, hereinafter
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8. It is necessary, here, to reproduce the relevant recitals contained
in the BGs furnished by the respondent:
PBGs:
“In consideration of office of the Director General, Project Varsha,
IHQ MoD (Navy), New Delhi -110011 acting on behalf of the
President of India (hereinafter referred as ”the Employer”) having
entered into a contract No. DGV /0113/OHMW/01 dated
24.10.2017 for “Construction Of Outer Harbour for Project
Varsha” (hereinafter referred to as the said Contract) with M/s.
Navayuga-Van Oord JV, Plot No.379, Road No. 10, Jubilee Hills,
Hyderabad-500033, hereinafter referred to as the “Contractor” for
Works of the said Contract to the said Contractor and whereas the
Contractor has undertaken to produce a bank guarantee for ten
percent (10%) of total Contract value amounting to
Rs.292,54,00,000/- (Rupees Two Hundred Ninety Two Crores and
Fifty Four Lakhs only) to secure its obligations to the Employer.
We the Union Bank of India, Industrial Finance Branch-
Hyderabad, First floor, The Grand, Raj Bhavan Road, Somajiguda,
Hyderabad – 500 082, Telangana, having our registered office at
Union Bank Bhavan, 239, Vidhan Bhavan Marg, Narimanpoint,
Mumbai – 400 021, hereby expressly, irrevocably and unreservedly
undertake and guarantee as principal obligors on behalf of the
Contractor that, in the event that the Employer declares to us that
the Works have not been supplied according to the Contractual
obligations under the aforementioned Contract, we will pay you,
on demand and without demur, all and any sum up to a maximum
of Rs.292,54,00,000/- (Rupees Two Hundred Ninety Two Crores
and Fifty Four Lakhs only).
l. Your written demands shall be conclusive evidence to us
that such repayment is due under the terms of the said Contract.
We undertake to effect payment upon receipt of such written
demand.”
ABG
“1. With reference to contract No.DGV/0113/0HMW/01 dated
24.10.2017 for “Construction of Outer Harbour for Project Varsha”
concluded between the Director General, Project Varsha, IHQ
MoD (Navy), New Delhi-110011 acting on behalf of the President
of India, hereinafter referred to as “the Employer” and
M/s.Navayuga-Van Oord JV, Plot No.379, Road No. 10, Jubilee
Hills, Hyderabad-500033 hereinafter referred to as “the
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Contractor” for the Works as detailed in the above Contract which
is hereinafter referred to as “the Said Contract” and in
consideration of the Employer having agreed to make an advance
payment in accordance with the terms of the Said Contract to the
said Contractor, we the Union Bank of India, Industrial Finance
Branch – Hyderabad, First floor, The Grand, Raj Bhavan Road,
Somajiguda, Hyderabad- 500 082, Telangana, having our
registered office at Union Bank Bhavan, 239, Vidhan Bhavan
Marg, Narimanpoint, Mumbai – 400 021, hereinafter called “the
Bank” hereby irrevocably undertake and guarantee to you that if
the Said Contractor would fail to deliver the Works in accordance
with the terms of the Said Contract for any reason whatsoever or
fail to perform the Said Contract in any respect or should whole or
part of the said on account payments at any time become repayable
to you for any reason whatsoever, we shall, on demand and without
demur pay to you all and any sum up to a maximum of
Rs.199,94,47,196/- (Rupees One Hundred Ninety Nine Crores
Ninety Four Lakhs Forty Seven Thousand One Hundred Ninety Six
only) paid as advance to the Said Contractor in accordance with the
provisions contained in Clause 14.2 of the Said Contract.
2. We further agree that the Employer shall be the sole judge
as to whether the Contractor has failed to deliver the Works in
accordance with the terms of the Said Contract or has failed to
perform the Said Contract in any respect or the whole or part of
the advance payment made to Contractor has become repayable to
the Employer and to the extent and monetary consequences thereof
by the Employer.
3. We further hereby undertake to pay the amount due and
payable under this Guarantee without any demur merely on a
demand from the Employer stating the amount claimed. Any such
demand made on the Bank shall be conclusive and binding upon us
as regards the amounts due and payable by us under this
Guarantee and without demur. However, our liability under this
Guarantee shall be restricted to an amount not exceeding
Rs.199,94,47,196/- (Rupees One Hundred Ninety Nine Crores
Ninety Four Lakhs Forty Seven Thousand One Hundred Ninety Six
only).”
(Emphasis supplied)
RBGs
“1. In consideration of Director General, Project Varsha, IHQ
MoD (Navy), New Delhi-110011 acting on behalf of the President
of India (hereinafter referred as “the Employer” which expression
shall, unless repugnant to the context or meaning thereof, include
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its successors, administrators and assignees) having awarded to Signature Not Verified
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M/s. Navayuga-Van Oord JV, having its Office at Plot No.379,
Road No.10, Jubilee Hills, Hyderabad – 500 033 (hereinafter
referred as “the contractors” which expression shall, unless
repugnant to the context or meaning thereof, include its successors,
administrators and executors), vide Contract No-
DGV/0113/OHMW/01 dated 24.10.2017 amounting to Rs.
3635,35,85,389/- for the works know as “Construction of
Inner/Outer Harbour” for Project Varsha (hereinafter referred to as
“the Contract”).
2. We, Union Bank of India, Industrial Finance Branch –
Hyderabad, First floor, The Grand, Raj Bhavan Road, Somajiguda,
Hyderabad – 500 082, Telangana, have been informed by the
Contractor that pursuant to provisions in Conditions of the
aforesaid Contract, Retention Money is to be deduced at the rate
Ten (10) percent from each Interim Payment Certificate, subject to
a maximum of Ten (10) percent of the Accepted Contract Amount.
However, no deduction for the Retention Money shall be made
from the Interim Payment Certificates provided the Contractor
submits an unconditional Bank Guarantee (the “RMBG”) for an
amount equal to the Retention Money to be withheld on the
anticipated certified amount for the following quarter, pursuant to
Sub-Clause 14.3 of Contract conditions.
3. At the request of the Contractor, we, the undersigned Union
Bank of India, Industrial Finance Branch – Hyderabad, First floor,
The Grand, Raj Bhavan Road, Somajiguda, Hyderabad – 500 082,
Telangana, having our registered office at Union Bank Bhavan,
239, Vidhan Bhavan Marg, Narimanpoint, Mumbai-400 021,
(hereinafter referred to as “the Bank”) which expression shall,
unless repugnant to the context or meaning thereof, include its
successors, administrators, executors, representatives and
assignees, do hereby irrevocably undertake to pay you, the
Beneficiary/Employer, without any demur, reservations, recourse,
contest or protest and/ or without referring to any other sources
including the Contractor, merely on a written demand from the
Employer stating that the claimed amount is due by way of breach
by the said Contractor of any of the terms or conditions contained
in the aforesaid Contract or by reason of the Contractor’s failure to
perform the said Contract, any sum or sums not exceeding Rs.
32,00,00,000/- (Rupees Thirty Two Crore only) (the “guaranteed
amount” or “Guarantee”) [10% of the anticipated certified amounts
for the · following Quarter]. Any and all monies, but not exceeding
Rs.32,00,00,000/- (Rupees Thirty Two Crore only) [Ten (10)
percent of the Accepted Contract Amount] at any time up to 01 Sep
2023 (End of the Defect, Notification Period] any such demand
made by the Employer on the Bank shall be conclusive and binding
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no withstanding any difference between the Employer and the Signature Not Verified
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Contractor or any dispute pending before any Court, Tribunal,
Arbitrator or any other Authority. We hereby agree that the
Guarantee herein contained shall be irrevocable and shall continue
to be enforceable till the Employer discharge this Guarantee.”
(Emphasis supplied)
9. Disputes arose between the appellant and the respondent. On
the premise that it anticipated coercive action by the appellant, the
respondent approached this Court by means of OMP (I) (Comm)
208/20228, seeking two reliefs. The first was that an independent
agency be appointed to work out an effective way forward and to
enable expeditious completion of the contractual works, during which
period the appellant be restrained from taking coercive steps against
respondent. The second was a restraint against the appellant invoking
or encashing the BGs furnished by the respondent during the
pendency of the arbitral proceedings.
10. A learned Single Judge of this Court disposed of OMP (I)
(Comm) 208/2022 by judgment dated 30 June 2022, which concluded,
in para 36, thus:
“36. It was conceded on behalf of the respondent that the
petitioner is continuing to work on the site even after April, 2022
and no express letter indicating termination of Contract has been
served upon the petitioner. An ambivalent situation prevails
wherein the respondent though has served Notice of Correction and
the Delay Damages Notice, but has yet not served any Notice of
termination or has notified the petitioner to stop the work at site
after April, 2022. Therefore, as held in the cases of Hindustan
Construction Limited9 that though invocation of Bank Guarantee
cannot be prohibited or injuncted, it is held to be a fit case where
the respondent is directed to give a prior Notice of 15 days8 Navayunga-Van OORD JV v UOI
9 This appears to be a compendious reference to orders dated 30 May 2014 and 12 February 2015 passed inOMP 536/2014 (Hindustan Construction Co Ltd v NHPC Ltd) and order dated 28 May 2015 passed in
FAO (OS) 131/2015 (NHPC Ltd v Hindustan Construction Co Ltd).
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expressing his intention to revoke the Bank Guarantee before
revocation of Bank Guarantees.”
11. The respondent challenged the aforesaid judgment dated 30
June 2022, of the learned Single Judge, before a Division Bench of
this Court by way of FAO (OS) (Comm) 175/202210. The Arbitral
Tribunal, which has come to pass the impugned Order, was constituted
in the meanwhile on 2 January 2023.
12. The respondent filed an application before the learned Arbitral
Tribunal under Section 17 of the 1996 Act seeking, inter alia, restraint
against the appellant invoking or encashing the BGs. In that view of
the matter, the Division Bench of this Court disposed of FAO (OS)
(Comm) 175/2022, on 16 March 2023, in the following terms:
“In view of the foregoing, the present appeal is dismissed as not
pressed, and the interim order dated 18.07.2022, passed by this
Court, in the instant appeal, is hereby vacated.
Needless to state that the appellant is at liberty to prosecute the
aforesaid application under Section 17 of the Arbitration and
Conciliation Act, 1996, before the Arbitral Tribunal, in accordance
with law.
The appeal as aforestated, is dismissed as not pressed, and disposed
of accordingly. Pending applications also stand disposed of.”
13. By the presently impugned Order dated 10 January 2024, the
learned Arbitral Tribunal has allowed the respondent’s application and
has restrained the appellant from invoking any of the BGs, pending
disposal of the proceedings by the learned Arbitral Tribunal.
10 Navayunga-Van OORD JV v UOI
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14. The appellant is in statutory appeal before this Court, under
Section 37(2)(b) of the 1996 Act.
Reasoning of the learned Arbitral Tribunal
15. Paras 61 to 112 of the impugned order set out the reasoning of
the learned Arbitral Tribunal in arriving at its conclusion.
16. In paras 63 to 72, the learned Arbitral Tribunal has set out the
law relating to injunctions against invocation of BGs and has referred,
inter alia, to the judgments of the Supreme Court in Ansal
Engineering Projects Ltd v Tehri Hydro Development Corporation
Ltd11, Standard Chartered Bank v Heavy Engineering Corporation
Ltd12, Himadri Chemicals Industries Ltd v Coal Tar Refining Co13,
Vinitec Electronics Pvt Ltd v HCL Infosystems Ltd14 and Gujarat
Maritime Board v Larsen and Toubro Infrastructure Development
Projects Ltd15.
17. Thereafter, in paras 73 and 74, the impugned order delineates
the precise issue arising for consideration thus:
“73. On the contrary, at present, what needs to be determined is
only whether the Tribunal shall be justified in granting stay of the
invocation of the 7 (seven) BGs in question furnished in favour of
the Respondent by the Bank at the Claimant’s behest. This
consequently, requires a two-fold examination. Firstly, it needs to
be ascertained whether or not the 7 (seven) BGs in question are in
essence unconditional and if not, whether the Respondent validly
invoked the said BGs by and through the means of the BG11 (1996) 5 SCC 450
12 (2020) 13 SCC 574
13 (2007) 8 SCC 110
14 (2008) 1 SCC 544
15 (2016) 10 SCC 46
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Invocation Letters dated 06 July 2022 duly in accord with the
prescribed conditions. Secondly, whether any of the exceptions of
egregious fraud or special equities prima facie come into play to
support the Claimant’s prayer for stay of invocation of the subject
BGs.
74. Be it noted, learned Senior Counsel for the Claimant has
not pressed the contention of fraud as a ground to seek an
injunction on the invocation of the BGs. The Tribunal, therefore,
need not delve into the same. However, the main thrust of the
arguments advanced on behalf of the Claimant is that the
invocation of the BGs in question not being in accordance with the
terms thereof, is bad in law. The second plank of the Claimant’s
contention is that special equities exist in favour of the Claimant as
irreparable harm and injury will be caused to it if the invocation
and encashment of the BGs is not restrained.”
18. From paras 75 to 97, the learned Arbitral Tribunal addresses the
first aspect of whether the invocation letter dated 6 July 2022 was in
terms of the concerned BGs.
19. For this purpose, the learned Arbitral Tribunal first refers to the
decision of the Supreme Court in Hindustan Construction Company
Ltd v State of Bihar16 and the judgment of a learned Single Judge of
this Court in Basic Tele Services Ltd v UOI17, which was upheld by
the Division Bench in UOI v Basic Tele Services Ltd18. The impugned
Order extracts the clauses of the various BGs. Having done so, the
learned Arbitral Tribunal proceeds, in paras 87 to 98, to examine
whether the letter of invocation dated 6 July 2022 was in conformity
with the requirements of the BGs. In this regard, the learned Arbitral
Tribunal holds in paras 92, 93 and 95 to 98 as under:
“92. Simultaneously, however, on a plain reading of the terms of
the respective BGs, it is also quite clear that the payment under:
16 (1999) 8 SCC 436
17 2009 (112) DRJ 688 (Del), hereinafter “Basic Tele Services-I”
18 2012 SCC Online Del 4499, hereinafter “Basic Tele Services-II”
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(i) the 2 (two) PBGs is provisional to a situation or
event whereby the Respondent/Employer makes an
explicit declaration that the works have not been supplied
by the Claimant/Contractor in accordance with the
Contractual obligations;
(ii) the ABG is premised on circumstances where either
the Claimant/Contractor has failed to deliver the works in
accordance with the terms of the subject Contract or has
failed to perform the subject Contract in any respect or
when the whole or part of the advance payments become
repayable to the Respondent/Employer;
(iii) the 4 (four) RMBGs is qualified to a situation
whereby the Respondent/Employer again makes an
explicit declaration that the Claimant/Contractor has
committed a breach of the subject Contract and that the
amount claimed under the RMBGs has become due by
reason of breach by the Claimant/Contractor.
93. There are, therefore, pre-requisite stipulations expressly
embedded in the 7 (seven) BGs specifying the foundational
circumstances and consequent declarational requirements to be
made by the Respondent that resultantly govern the Respondent’s
entitlement to invoke and get the BGs en-cashed in the first place.
The Tribunal may hasten to state that the aforesaid foundational
circumstances are imperative for invoking the BGs in question and
form the basis for invocation expressly stated in the BGs itself, but
the same are conspicuously absent in the BG Invocation letters
dated 06 July 2022. The Respondent/beneficiary, while striving to
invoke the BGs in question, has even failed to assert in the said
Invocation letters that the foundational circumstances have arisen,
which, thus, makes such invocation invalid in law.
*****
95. In the present case, it is manifest that the BG Invocation
letters dated 06 July 2022, all of which are similarly worded,
invoke the BGs in question on the assertion that the “Notice for
Termination of contract has been issued” to the Claimant and there
has been a “breach of contractual terms and conditions”. It is,
however, clear that the said BG Invocation letters nowhere even
aver that the demand against the:
(i) 2 (two) PBGs is being made due to non-supply of
works by the Claimant in accordance with the Contractual
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(ii) ABG is being made due to the Claimant’s failure to
perform/deliver the works in accordance with the terms of
the subject Contract or that the whole or part of the
advance payments have become repayable to the
Respondent;
(iii) 4 (four) RMBGs is being made due to the
Claimant’s breach of the subject Contract and, resultantly,
the amount claimed under the RMBGs has become due
consequent to such breach.
96. The Tribunal, therefore, is of the considered view that the
wording of the BG Invocation Letters dated 06 July 2022 is not in
accord with the requirements of the 7 (seven) BGs in question. That
being the case, the invocation of the BGs is not in accordance with
the terms thereof and is, accordingly, untenable in law.
97. In addition to the above, de hors the wording of the BG
Invocation Letters dated 06 July 2022, it needs to be accentuated
that the said Invocation Letters contain an identical paragraph in
the form of paragraph 4, which quotes a distorted portion of the
clause contained in the 4 (four) RMBGs, despite the fact that the 2
(two) PBGs and the ABG nowhere contain such a similarly worded
clause. Besides, the fact remains that the Respondent also has
placed on record subsequent letter dated 13 July 2022 with respect
to one of the PBGs issued by the State Bank of India.
98. These two aforesaid facets, on a combined appreciation of all
facts and circumstances, reinforce and substantiate the Tribunal’s
finding that the invocation of the 7 (seven) BGs in question by the
Respondent is not in accordance with the terms thereof and is,
accordingly, unsustainable in law.”
(Emphasis supplied)
20. Thus, the learned Arbitral Tribunal has found the letter dated 6
July 2022 addressed by the appellant to the concerned Banks seeking
to invoke the BGs not to be in conformity with the requirements of the
BGs themselves.
21. The impugned Order proceeds, thereafter, to examine the aspect
of “special equities”. There can be no dispute that, even where the
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letter of invocation is in terms of the Bank Guarantee, its invocation
may be injuncted, where there exist “special equities” justifying such
injunction.
22. For this purpose, the learned Arbitral Tribunal first observes
that, in Ansal Engineering Projects, the Supreme Court has held
interference with the enforcement of unconditional BGs to be justified
where egregious fraud or special equities are found to exist. The
learned Arbitral Tribunal proceeds to rely on the judgment of this
Bench in CRSC Research and Design Institute Group Company Ltd
v Dedicated Freight Corridor Corporation of India Ltd19 as well as
the judgment of the Division Bench of this Court in the appeal
preferred thereagainst in CRSC Research and Design Institute Group
Company Ltd v. Dedicated Freight Corridor Corporation of India
Ltd20.
23. In para 103, the impugned Order notes that while in BSES Ltd
v Fenner India Ltd21, the Supreme Court held irretrievable injury and
irretrievable injustice as species of the “special equities” genus, in
some other cases they were held to be distinct and different. The
learned Arbitral Tribunal thereafter refers in paras 104 and 105 to the
decision of this Court in Hindustan Construction Co. Ltd v National
Hydro Electric Power Corporation Ltd22, and Hitachi Energy India
Ltd v Sterlite Power Transmission Ltd23.
19 2020 SCC Online Del 2100
20 MANU/DE/1803/2020, 2020 SCC OnLine Del 1526
21 (2006) 2 SCC 728
22 MANU/DE/1625/2020
23 (2023) 2 Arb.LR 311
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24. Having thus cited judicial authorities on the point, the learned
Arbitral Tribunal proceeds, in paras 106 to 112, to hold that the
consideration of special equities would also justify injunctive
invocation of the BGs provided by the respondent as, if they were
invoked, the respondent would be subjected to irreversible financial
prejudice. These paragraphs merit reproduction thus:
“106. The test of special equity or irrevocable injustice is a matter
of assessment by the concerned adjudicatory body on the particular
facts presented to it while seeking stay of invocation. The injury or
injustice must be irrevocable, irremediable and irreversible. The
party seeking an order for restraint must be able to demonstrate
that the invocation and consequent payment by the bank to the
intended beneficiary would set the party back irreversibly in
monetary terms, which it may not be able to recover in the
foreseeable future.
107. Primarily, therefore, whether or not special equities exist
depend on the facts and circumstances of each case and in the case
at hand, the facts and circumstances of the case cumulatively
demonstrate special equities in favour of the Claimant/Applicant,
for the Tribunal is of the considered view that financial burden of
almost Rs. 633 crores ought not to be imposed upon the
Claimant/Applicant by allowing the Respondent to encash the BGs
in question. The special equity also stands satisfied by reason of
the Claimant facing an immediate and huge financial distress if
the payment is made by the concerned Banks, for it is not the
mandate of the law that encashment of a BG be permitted at the
drop of a hat with eyes shut and with a obscured vision ignoring
the totality of the facts and circumstances. Since irretrievable
injustice is likely to ensue to the Claimant, invocation of the BGs
in question certainly deserves to be restrained.
108. This finding of the Tribunal gets further bolstered by the
Claimant’s Letter dated 11.07.2022 to the Respondent in reply to
the BG Invocation Letters containing a previous ante-litem motam
statement whereby the Claimant highlighted to the Respondent that
it has incurred huge expenditure for executing the construction
under the subject Contract and invocation of the BGs in question
shall cause immense prejudice. The relevant part of the Claimant’s
said Letter dated 11.07.2022 is reproduced below:
“Thus, as on the date, the Employer is in possession of
bank guarantees, i.e., CPBGs ABGs and RMBG, from the
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Contractor for a total value of Rs. 633,73,84,4361-. If
such invocation· of the above stated Bank Guarantees
occurs, then the same is likely to cause immense prejudice
to the Contractor.
4. It is stated that the Contractor has incurred huge
expenditures for executing the construction under the
contract, despite the Employer’s wilful default of its
payment obligation”
109. Clearly, special equities emerge in favour of the Claimant
as its financial position shall definitely become precarious and it
will be left crippled, financially speaking, if the Respondent is
permitted to realize the huge amounts covered under the 7 (seven)
BGs in question furnished by the Claimant and a situation would
arise in which restitution of the Claimant would become near
impossible. In this context, it is profitable to allude to the decision
of the Madras High Court in National Federation of Farmers
Procurement Processing and Retailing Cooperatives of India
Limited v NLC India Ltd24., wherein it has been held thus:
“71. The applicant/petitioner has pleaded irretrievable
injury in the affidavit filed in support of this application as
they have pleaded that if the bank guarantee for the huge
sum, if invoked, they will be put to irreparable injury. The
first respondent has also not disclosed in their counter
affidavits, the details of the losses suffered by them on
account of their alleged claim that the applicant/petitioner
had submitted a fabricated document for the purpose of
satisfying the tender conditions. The value of the contract if
awarded to any bidder will be a huge one and the bank
guarantee amount to be given along with the tender
documents by any bidder is also for a huge sum of
Rs.21,88,12,0001/- for 200 MW. Even though, the
applicant / petitioner need not be put on notice by the first
respondent before invoking the bank guarantee, this Court
is of the considered view that being a huge sum and that too
when the contract has not been awarded to the applicant/
petitioner, the invocation of the bank guarantee, even
before the adjudication of the arbitral proceedings, will
certainly cause the applicant, irretrievable harm / injustice.
The Doctrine of proportionality, which is a special equity
exception for granting injunction from invoking the bank
guarantee also comes into play as the first respondent may
not have suffered a huge loss equivalent to the value of the
bank guarantee which is for a sum of Rs.21,88,12,000/-.
24 MANU/TN/5108/2023
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*****
74. For the foregoing reasons, since the applicant /
petitioner has satisfied that irretrievable injustice will be
caused to them and has also satisfied the special equities
exception of proportionality for the grant of an order of
injunction from invocation of bank guarantee, this Court is
inclined to allow this application by granting an order of
injunction against the first respondent from invocation of
the bank guarantee as prayed for in this application”
110. Yet again, in the case of Chennai Metro Rail Limited v
Transtonnelstroy-Afcons (JV) and Others25, the Madras High
Court duly noted that likely irretrievable damage may entail on the
Contractor – the Respondent therein if the beneficiary / Employer is
allowed to en-cash the huge amounts involved in the BG. The
relevant observations in this regard are as follows:
“27. xxxx
In case, the Appellant is allowed to encash the Bank
Guarantee for Rs.117.5 Crores and later on it is found by
the Arbitral Tribunal that no money is due by the
respondents to the Appellant or a much lesser money is
due by the respondents when compared to the Bank
Guarantee value, the respondents will find it difficult to
recover the unjust enrichment made by the Appellant as
the amount involved is a huge sum. A balancing act will
have to be done in this case as admittedly the Appellant
has not crystallized its losses and there is no break-up
details given by it for its alleged losses and there is also no
prima-facie evidence to show that the respondents owe the
Appellant the Bank Guarantee value. In the case on hand,
the Arbitral Tribunal has rightly applied the test of balance
of convenience and has granted the order of injunction
restraining the Appellant from invoking the Bank
Guarantee and at the same time protected the interest of
the Appellant too by directing the respondents to keep the
Bank Guarantee alive till the disposal of the Arbitration.”
111. Therefore, in the considered opinion of the Tribunal, in the
instant Arbitration matter, the two exceptions against the
invocation of BGs stand satisfied, namely, the Respondent’s BG
Invocation Letters dated 06 July 2022 are not in terms of the BGs
in question and special equity exists in favour of the
Claimant/Applicant.
25 2021 SCC OnLine Mad 5637
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112. Lastly, it is worthwhile to mention that the Tribunal has
also duly noted the other authorities relied upon by the learned
Senior Counsel for the Respondent to bolster the Respondent’s
case. However, it needs to be stated that the said decisions relate to
the general position of law and deal with facts which are not
applicable to the present case. As a result, the Tribunal is firmly of
the view that the said judgments are distinguishable on facts and do
not come to the aid of the Respondent.”
(Emphasis supplied)
Rival Contentions
Submissions of Mr. K.K. Venugopal for the appellant
25. Arguing for the appellant, Mr. Venugopal submits that the
appellant was constrained to terminate the contract as the respondent
had defaulted in ensuring proper and timely performance of the
contract. Having thus justifiably terminated the contract, Mr.
Venugopal submits that the appellant had equally justifiably invoked
the BGs furnished by the respondent.
26. Mr. Venugopal submits that the decision of the learned Arbitral
Tribunal is in the teeth of the law relating to injunction against
invocation of unconditional BGs. He submits that the only
circumstances in which invocation of an unconditional Bank
Guarantee can be stayed is where there exist special equities,
egregious fraud or irretrievable injustice. Where a BG is conditional,
invocation may additionally be stayed where the invocation of the BG
is not in terms of the BG itself.
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27. Mr. Venugopal submits that the learned Arbitral Tribunal is in
serious error in holding that the letters dated 6 July 2022, issued by
the appellant to the Banks whereby BGs provided by the respondent
were invoked, was not issued in terms of the BGs themselves. He has
taken me through the said letters and submits that the most serious
error in the impugned Order, which stands reflected in para 87 thereof,
is that, while reproducing the paragraphs of the letters of invocation,
the opening paragraphs 1 and 2 have been omitted. This, submits Mr.
Venugopal, is a serious lapse on the part of the learned Arbitral
Tribunal inasmuch as, in para 1 of the letters dated 6 July 2022, the
appellant had also referred to the notice dated 6 July 2022 whereby
the contract between the appellant and the respondent was terminated.
This notice of termination, he submits, set out, in detail, the various
defaults committed by the respondent and how, on that basis, the
appellant had become entitled not only to terminate the agreement but
also to invoke the BGs and recover the amounts guaranteed
thereunder. If this notice of termination were taken into consideration,
Mr. Venugopal submits that it could never be said that the letters of
invocation, simultaneously issued on 6 July 2022, did not contain the
requisite recitals as envisaged in the BGs. Mr. Venugopal has taken
me in detail through the notice of termination of the contract dated 6
July 2022.
28. Thus, submits Mr. Venugopal, the learned Arbitral Tribunal was
in serious error in holding that the letters dated 6 July 2022, whereby
the BGs furnished by the respondent were invoked were not issued in
terms of the Bank Guarantee themselves.
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29. Adverting next to the finding that injunction of invocation of
the BGs was justified on the ground of special equities, Mr. Venugopal
submits that the only ground on which the learned Arbitral Tribunal
held in favour of the respondent on the aspect of special equities is
that, were the amounts covered by the BGs to be recovered by the
appellant, the respondent would be submitted to serious and
irretrievable financial prejudice and would not be able to recover the
amount so realized even if the respondent were to ultimately succeed
in arbitration. He submits that, besides being factually incorrect, there
is no basis for this finding, which is entirely presumptive in nature.
There is no empirical data, submits Mr. Venugopal, on the basis of
which the finding that the invocation of BGs would result in serious
financial prejudice to the respondent, could be supported.
30. On facts, Mr. Venugopal submits that, as the appellant is a wing
of the Indian Navy, there is no question of the respondent being
unable to reap the benefit of any arbitral award, in the event that the
award goes in its favour. He further submits that the respondent is
engaged in several large contracts of considerable amounts and cannot
therefore be said to be in any kind of precarious financial position, as
would result in irretrievable prejudice to it, were the BGs to be
invoked.
31. The reliance by the learned Arbitral Tribunal on the principle of
special equities is also therefore, he submits, misguided.
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32. These being the only grounds on which the impugned Order has
come to be passed, Mr. Venugopal submits that the Order deserves to
be set aside.
Submissions of Mr. Agrawal, learned counsel for the respondent
33. Arguing for the respondent, Mr. Agrawal has sought to contend
that the finding, in the impugned Order, that special equities exist, as
would justify a restraint on invocation of the BGs provided by the
respondent, is justified on facts. He submits that, owing to intervening
circumstances beyond the control of the respondent, including the
COVID-19 pandemic, it had become impossible to complete the
project within the originally envisaged contractual period of 42
months. Inasmuch as the contractually stipulated period for
completion of the work had been envisaged on the basis of a report of
the Indian Institute of Technology26, Madras, the respondent also
referred the matter to Prof Nallayarasu of IIT Madras, who opined that
it would take 88 months to complete the project and that the originally
stipulated contractual period of 42 months had become impossible of
performance.
34. The respondent had presented the aforesaid report of Prof
Nallayarasu to the appellant under cover of a letter dated 2 February
2022. Though, prior to the submission of the said opinion, the
appellant and respondent were actively in discussion on the aspect of
26 “IIT”, hereinafter
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extension of the period of contract, consequent on submission of the
report of Prof Nallayarasu by the respondent, all discussions ceased.
35. In these circumstances, the respondent moved this Court by
way of OMP (I) (Comm) 208/2022 under Section 9 of the 1996 Act,
seeking the appointment of an agency to examine the report of Prof
Nallayarasu to work out a way forward to complete the work, and to
restrain the appellant from taking coercive steps against the
respondent by way of invocation of the BGs.
36. OMP (I) (Comm) 208/2022 was disposed of by a coordinate
Bench of this Court by the order dated 30 June 2022 supra. Though
the respondent assailed the judgment dated 30 June 2022 of the
coordinate Bench before the Division Bench in FAO (OS) (Comm)
175/2022, the appellant, in the interregnum, terminated the contract on
6 July 2022.
37. The Division Bench, in its initial order dated 18 July 2022,
directed status quo to be maintained. The respondent, thereafter,
issued a notice to the appellant under Section 21 of the 1996 Act on 15
October 2022, resulting ultimately in the constitution of the learned
three-member Arbitral Tribunal, which came to pass the impugned
Order on 10 January 2024. The respondent, therefore, moved an
application before the learned Arbitral Tribunal under Section 17 of
the 1996 Act, seeking, inter alia, a restraint against the appellant
invoking the BGs.
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38. The application was scheduled for hearing by the learned
Arbitral Tribunal on 16 March 2023. In that view of the matter, the
Division Bench disposed of FAO (OS) (Comm) 175/2022, reserving
liberty with the respondent to prosecute its interim prayer before the
learned Arbitral Tribunal under Section 17.
39. Before the learned Arbitral Tribunal, the appellant, on 16 March
2023, gave an undertaking that it would not take coercive steps against
the BGs. The learned Arbitral Tribunal thereafter proceeded to hear
the respondent’s Section 17 application, resulting in the passing of the
impugned Order on 10 January 2024.
40. Mr. Agrawal also placed reliance on the Notice to Correct
issued by the appellant to the respondent on 3 December 2021 under
Clause 15.1 of the GCC. He submits that, by the said notice, the
appellant imposed, on the respondent, an entirely unrealistic and
impractical requirement of achieving a progress of 2.5% average per
month for the period upto March 2022. It is worthwhile to reproduce
the said letter in extenso, thus:
“Contractor’s Representative
NECVO JV
NAOB, Project Varsha,
Rambilli Mandal, Visakhapatnam District,
Andhra Pradesh – 531061.
Date: 03 December 2021
Our Ref: 200807/OH/42/13065
Your Ref: None
Kind Attention: Mr. C S NagarajaDear Sir,
Project Varsha
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Outer Harbour- Notice to Correct as per Sub Clause 15.1 of
General Conditions of Contract (GCC)
1. This refers to
a. Engineer’s letter 200807 / OH/42/11992 dated 11 March
2020.
b. NECVO’s letter NECVO-HCI-L-1374 dated 02 March
2020.
c. Engineer’s letter 200807/OH/42/11938 dated 18 February
2020.
d. Engineer’s letter 200807/OH/31/11881 dated 28 January
2020- Sub-Clause 8.6 Rate of Progress.
e. Engineer’s letter 200807/OH/31/11868 dated 23 January
2020- Delay in Works as on 31 December 2019.
2. After almost 21 months of our letter referred in para-1 (c)
above, it is a serious concern that the Contractor’s failure to
perform his obligations under the Contract continues. The details
are provided in the following paragraphs.
3. Non-performance/further slippage in performance is
observed as listed below:
a. Safety and Quality (QHSE)-List of letters which
captures concerns during fortnightly QHSE meetings are
enclosed as Annexure I. Some of the main concerns are:
i. Slippage in implementation of site safety
plan which is reflected in a sub-optimal HSE score
of 61% in July 2021 whereas the desirable HSE
score is 80%.
ii. Absence of key site personnel in the QHSF,
organization chart.
iii. Absence of the Contractor’s representative at
site for 50% duration in the period from January
2021 till date. As per Sub Clause 4.3 temporary
absence is only allowed subject to appointment of
suitable replacement with Engineer’s prior consent.
iv. Poor workmanship in piling resulting in
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v. Delay in testing of piles.
vi. Delay in application of protective coat to
exposed reinforcement of piles and precast elements
from corrosion.
vii. Sub-optimal action in carrying out Sand
Stacking Area (SSA) monitoring surveys and
reinstating beach profiles after finding that trigger
levels have been breached. Non-compliance in this
regard may become a serious impediment in
renewal of environmental clearance for the overall
project.
viii. Delay in closure of NCRs and QHSE
observations.
b. Programme and Progress: The Engineer has
highlighted to the Contractor, through letters at monthly
intervals, his concerns regarding the accumulating delays in
the Works. A revised programme with effective mitigation
measures for the delays has also been sought.
To date, the Contractor has failed to provide a revised programme
to the Engineer.
As on 31 October 2021, the status of the Works are as
follows:
i Achieved progress is around 20% against
planned progress of 92.5%
ii. Delay of 902 days (30.1 months) providing a
forecast finish date of 23 August 2024 for Section 3
of the Works.
Therefore, the main concerns are:
iii. Insignificant progress achieved till date
considering the due Time for Completion in
accordance with Sub-Clause 8.2 to be 05 March
2022. Breach of obligation in timely completion is
imminent, although it is acknowledged that the
Contractor’s Claim for OH006 (excluding COVID-
19 pandemic events) is yet to be agreed or
determined.
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iv. Non-submission of revised programme in
accordance with Sub Clause 8.3.
Additional pertinent points to be noted:
v. The Contractor was allowed to propose
alterations in the original design to suit his preferred
methods of construction. After due deliberations
with the designers during the period from May to
July 2021, an in-principle acceptance was provided.
vi. Some alterations, like additional width in
dredged trenches of seaside toe, were allowed
during the actual execution of works during the
‘fair-weather working season’ from October 2020 to
March 2021. The Employer sought and received
from the Contractor details of the progress to be
achieved over this period and the equipment that the
Contractor would mobilise. The Contractor had
committed to achieve considerably less progress
than his planned progress as per baseline
programme.
vi. The conservative forecast was not achieved.
Furthermore, actual progress up to September 2021
was less than 50% of the forecast. Mobilisation of
Equipment were also delayed a compared to the
Contractor’s committed dates.
vii. With the onset of a further ‘fair weather
working season’ from October 2021, in view of the
in-principle acceptance of the Contractor’s preferred
means and methods, a comprehensive revised
programme was sought. The Contractor has refused
to provide such programme until approval of
additional cost and time sought in his proposal and
continues to maintain that the original design is not
constructible. It is to be noted that there is no
provision in the Contract for additional cost and
time as sought in the proposal.
Without dilution to the above and without prejudice to the
Contract, it is acknowledged that the Parties and the Engineer have
been in discussion to seek to reach a solution regarding the
construction challenges projected by the Contractor. Until such
time that a formal agreement has been reached in this regard
(including any extension of time), the Employer is willing to take a
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with a requirement to achieve a progress of average 2.5% per
month for the period up to March 2022.
4. In view of the above, in accordance with Sub Clause 15.1
of GCC, this letter is being issued as a ‘Notice to Correct’. The
Contractor is notified herein to make good the failures of his
obligations under the Contract and to remedy such failures within
the timescales as specified below:
a. Programme and progress:
i. Demonstration of achieving the required
average rate of 2.5% per month progress for the
period up to March 2022 after the receipt of this
letter.
ii. Submission of revised programme as per
Sub-Clause 8.3, within 14 days addressing
Engineer’s comments in letter no 13021.
b. Sand Stacking Area (SSA): Reinstate the beach
profiles within a month from the receipt of this letter and
conduct monthly monitoring surveys without failure in
future,
c. QHSE-Satisfactory close-out of all issues within
two months from receipt of this letter.
Yours sincerely
Sam Eralil
Chief Resident Engineer”
41. Mr. Agrawal points out that, on the same date, i.e. 3 December
2021, the appellant’s engineer wrote to the respondent, thus:
“Contractor’s Representative
NECVO JV
NAOB, Project Varsha,
Rambilli Mandal, Visakhapatnam District,
Andhra Pradesh – 531061.
Date 03 December 2021
Our Ref 200807/OH/31/13063
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Your Ref NECVO-HCI-L-2212 Signature Not Verified
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Kind Attention: Mr. C S NagarajaDear Sir,
Project Varsha
Outer Harbour – Revised Programme with suggested
completion date of April 2024
1. This refers to the following:
a. Contractor’s letter NECVO-HCI-L-2212 dated 02
December 2021.
b. Employer’s letter DGV/0113/OHMW/Contract dated 29
November 2021.
c. Engineer’s letter 200807/OH/31/13042 dated 23
November 2021.
d. Contractor’s letter NECVO-HCI-L-2188 dated 18
November 2021.
e. Engineer’s letter 200807/OH/31/13021 dated 06
November 2021 – Comments on revied programme.
f. Contractor’s transmittal NECVO-HCI-TRN-1604 dated
29 October 2021 enclosed with revised Programme for
Section 3 of the Works.
g. Engineer’s letter 200807/OH/62/12992 dated 25 October
2021 – Proposal for technical issues.
h. Contractor’s letter NECVO-HCI-L-2150 dated 11
October 2021 – Proposal for technical issues.
i. Engineer’s letter 200807/OH/31/12951 dated 04 October
2021 – Revised programme.
j. Engineer’s letter 200807/OH/62/12850 dated 09 August
2021.
k. Contractor’s letter NECVO-HCI-L-2043 dated 04 August
2021 enclosed with Proposal for technical issues.
2. The Engineer has reviewed the Contractor’s submission
under letter in para 1(a) above and his comments are as follows:
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a.Para-1: Please refer the Employer’s letter
DGV/0113/OHMW/Breakwater dated 15-Nov-21. The contents of
this letter addresses comprehensively and voids the Contractor’s
contention of unanticipated conditions.
b. Para-2: The Engineer disagrees and refutes the Contractor’s
statement “Despite engaging to find a solution to these issues, none
was provided to the Contractor.” The Engineer and the Employer
had proactively engaged with the Contractor to address / resolve
his construction difficulties. Accordingly, in consultation with the
Designer an in-principle acceptance of the technical proposal
submitted was provided for the Contractor to proceed with his
preferred means and method. Further, the Contractor’s revised
programme is not complying to Sub-Clause 8.2. Hence, the
Contractor’s statement that he submitted a programme/plan with
suggested means to overcome the issues showing completion by
July 2025 is incorrect and misleading. Notwithstanding the non-
complaint nature of the programme, the Engineer’s comments
regarding matters like productivity, inadequate equipment planned,
inadequate key personnel, lack of experienced manpower etc. have
not been addressed.
c. Para-3: The Employer’s request to complete the outstanding
Works by April 2024 is justified as the forecast completion
indicated by the Contractor in his monthly report for October 2021
is of 23 August 2024 (per the updated programme as on 31-Oct-
21). Further, the Contractor assured the Employer and the Engineer
during the meeting with Vice Chief of Naval Staff (VCNS) on 22-
Nov-21 that he will expedite the Works to complete by April 2024
by implementing revised techniques. Refer minutes issued by IN
under letter DGV/0113/OHMW/Breakwater dated 02-Dec-21.
d. Para-4: The Contractor himself states that timelines are
“unrealistic and not achievable”. This makes the submission of the
programme infructuous. Even whilst making the statement, the
Contractor has chosen not to elaborate quantitatively how the
anticipated very large quantities are not fitting in against the
timelines and no reasons have been provided on why the several
dependencies are not in his control. Please clarify on these aspects.
Comments on enclosure:
e. Annexure I (revised programme with completion date April
2024): The Contractor is advised to submit the following.
i. Detailed narrative/ general description of the method of
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execution of works. Signature Not Verified
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ii. Detailed programme – Level 4 or 6 (the current
submission is very high level).
iii. Inter alia works like dredging, revetment beyond SCB,
revetment adjacent to Groyne, electrical and mechanical
works are not included in the subject programme. Please
include all items of work and make it comprehensive.
iv. Resources (equipment/ marine fleet) for better
understanding.
v. Reasonable estimate of manpower required to execute
the works.
vi. Quarry production details.
Yours sincerely
Sam Eralil
Chief Resident Engineer”
42. This, however, submits Mr. Agrawal, is only one of a series of
communications. On 29 November 2021, the appellant wrote to the
respondent stating that the concerns of the respondent would be
expeditiously addressed and that a revised plan for completion of the
project with target completion by April 2024 would be presented to
Vice Chief of Naval Staff27 by the end of November 2021. On 2
December 2021, the respondent, even while providing a revised
program for completion of the project by April 2024, emphasized in
para 4, as under:
“4. Although a revised programme aiming for the suggested
completion dated of April 2024 is enclosed herewith, such plan
will require achievement of very large quantities within very short
timelines along with several dependencies, which are clearly
outside the Contractor’s control. The Contractor humbly submits27 “VCNS”, hereinafter
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that the estimated volumes and timelines required by this
programme are unrealistic and not achievable.”
43. On the next day, i.e., 3 December 2021, the appellant issued, to
the respondent, a Notice to Correct and the revised program especially
envisaging completion of the project by April 2024, which stands
reproduced supra. On 2 February 2022, the respondent wrote to the
appellant, in response to the Notice to Correct issued by the appellant,
stating that the appellant’s Engineer had failed to objectively
appreciate the difficulties which were being faced in performing the
contract. It was also alleged that the inability of the respondent to
perform the contract within the initially stipulated period was
attributable to some extent to the defaults on the part of the appellant
in adhering to its contractual obligations. Specifically drawing
attention to the report of Prof Nallayarasu, the respondent submitted
that it was entitled to reasonable time to perform the remainder of the
contract, which had to be computed taking into account the opinion of
Prof Nallayarasu. The appellant was, therefore, requested to examine
the respondent’s contentions and its entitlement, including reasonable
time to comply with the contract.
44. The appellant, in response, issued another Notice to Correct on
4 March 2022, in which the submissions of the respondent were
refuted and denied.
45. Mr. Agrawal also placed reliance on Clause 15.6 of the contract,
as amended, which provided thus:
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“Without prejudice to the generality of the provisions of the
Contract, if the Contractor unsuccessfully challenges any action of
the Employer before a court of law regarding invocation of bank
guarantee furnished under the Contract or termination of the
Contract and any interim directions are obtained against the
Employer, which are subsequently vacated by the court, then the
Contractor shall be liable to pay:
(a) in case of a bank guarantee interest at 12% of the
bank guarantee amount; or
(b) in case of termination of the Contract an amount
equivalent to 1/2500 per day of the Accepted Contract
Amount.
for the intervening period starting from the date of the interim
directions till the final disposal of the case by the court.
Both the Parties agree that the damages stated in sub-paragraph (a)
and (b) above are a genuine pre-estimate of the losses suffered by
the Employer.”
The above clause, submits Mr. Agrawal, recognizes the possibility of
interim directions being passed, restraining invocation of the BGs
furnished by the respondent, and safeguards the interests of the
appellant in such an event by providing that, if the interim injunction
were to be subsequently vacated, the contractor would have to pay
interest @ 12% of the Bank Guarantee amount for the period between
during which the injunction remained in force as damages, which have
contractually been made a genuine pre-estimate of the losses suffered
by the appellant. Thus, Mr. Agrawal submits that there was no
justification for the appellant invoking the respondent’s BGs, even
while the issue of whether the respondent was entitled to extension of
time for completion of contract was under active consideration, and
the respondent had with it a report of Prof Nallayarasu of the IIT
Madras in its favour.
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46. Mr. Agrawal also submits that, in breach of the stipulation, in
the contract, that payments against bills raised by the respondent were
to be made within a particular time, the appellant was in default of
payment, to the respondent, of over ₹ 100 crores, against the bills
raised by the respondent. He submits that it is impossible for any
contractor to perform the contract sufficiently or expeditiously, if the
payment due to it is held up by the employer. In such circumstances,
any invocation of the BGs by the employer would, in his submissions,
be completely unjust and inequitable.
47. The above facts, Mr. Agrawal submits, constitute “special
equities” as would justify injunction against invocation, by the
appellant, of the BGs provided by the respondent.
48. He submits that all these aspects were set out in detail by the
respondent in its written submissions, filed before the learned Arbitral
Tribunal, but the learned Arbitral Tribunal has, unfortunately, not
adverted thereto.
49. Mr. Agrawal further submits that the finding, of the learned
Arbitral Tribunal, that there existed special equities which would
justify injuncting the appellant from invoking the BGs furnished by
the respondent, is liable to be upheld on these grounds, even if these
do not form the part of the reasoning of the learned Arbitral Tribunal
in the impugned award.
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50. Mr. Agrawal also relies on Office Memorandum28 dated 12
November 2020, issued by the Department of Expenditure, Ministry
of Finance29, particularly emphasizing the following paragraphs from
the OM:
“2. The Government is in receipt of many representations that on
account of slowdown in economy due to the pandemic, there is
acute financial crunch among many commercial entities and
contractors, which in turn is affecting timely execution of the
contracts. It has also been represented that this may affect the
ability of contractors to bid in tenders and hence reduce
competition. Requests are being received for reduction in quantum
of Security Deposits in the Government contracts.
3. In view of all above, it is decided to reduce Performance
Security from existing 5-10% to 3% of the value of the contract for
all existing contracts.However, the benefit of the reduced
Performance Security will not be given in the contracts under
dispute wherein arbitration/ court proceedings have been already
started or are contemplated.”
51. Mr. Agrawal submits that, applying the aforesaid OM dated 12
November 2020, the respondent was entitled to reduction of the PBG
value from 10% to 3 % of the value of the contract which would result
in a reduction from ₹ 633.73 crores to about ₹ 110 crores. He points
out that, on 26 November 2020, the respondent had specifically
written to the appellant asking for reduction of the PBG amount. The
aspect of special equities, he submits, cannot be examined de hors this
request of the respondent.
52. In this context, Mr. Agrawal reiterates his contention that the
delay in performance of the contract was entirely owing to the
situation created by the appellant. He has drawn my attention to the
28
“OM” hereinafter
29 “DOE”, hereinafter
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following paragraphs from the SOC, in which this point was raised
before the learned Arbitral Tribunal:
“357. The COVID-19 pandemic caused a slowdown in the
economy causing an acute financial crunch among commercial
entities and contractors. To address this economic disruption, the
Ministry of Finance (Government of India) on 12.11.2020 issued
an Office Memorandum bearing no.F.9/42020- PPD providing for
reduction of the PBGs from 5% – 10% to 3% of the value of the
Contract. Accordingly, the Claimant issued letter dated 26.11.2020
to the Respondent seeking reduction of the PBG to 3% of the value
of the Contract in terms of the Government of India’s office
memorandum.
358. The Engineer vide its letter dated 30.11.2020, unscrupulously
stated that only on the Claimant giving a declaration to the effect
that it was not contemplating any arbitration or court proceedings
for its claims till date would its request be taken forward for
internal approvals by the Respondent.
*****
361. In response thereto, on 21.12.2020, the Claimant confirmed
the fact that it was not then contemplating any arbitration/court
proceedings. Due to lack of response from the Respondent or
Engineer, the Claimant issued reminders to the Engineer for the
reduction of the PBG as assured by the Engineer in its letter dated
30.11.2020.”
53. With respect to the ABG, Mr. Agrawal further submits that the
ABG was furnished by the respondent against the advance payment
made by the appellant to the respondent. He submits that, against
works performed by the respondent, bills were raised, which were
examined by the Engineer, after which interim payments were
released and interim payment certificates issued. These payments, he
submits, were adjusted against the advance paid by the appellant to the
respondent. Over a period of time, he submits that the entire advance
payment stands adjusted. Having thus adjusted the entire advance
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payment, he submits that the appellant could not justifiably seek to
encash the ABG.
54. Mr. Agrawal further submits, apropos the ABG, that the
advance payment made by the appellant to the respondent had already
been spent by the respondent against temporary and enabling works
undertaken by it. Consequent on the termination of the contract with
the respondent, he submits that the appellant is availing of these works
in the new contract, executed with the respondent’s successor.
55. These circumstances, submits Mr. Agrawal render the
invocation of the ABG by the appellant, liable to be injuncted
applying the principle of special equities.
56. Mr. Agrawal cites paragraphs 20, 21 and 22 of the judgment of
the Supreme Court in Hindustan Construction Company to submit
that the appellant could not be permitted to invoke the BGs after
having financially strangulated the respondent by holding up its bills
to the extent of almost ₹ 100 crores. He submits that the respondent
had never abandoned the work as alleged by the appellant, but that
adherence to the contracted time schedule had become impossible on
account of defects in the design configuration in the contract as well
as the intervening COVID-19 pandemic. The parties were, at the time,
in the process of working out a revised schedule. In such
circumstances, he submits that the appellant could not be permitted to
encash the BGs provided by the respondent. He also relies on the
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judgment of the learned Single Judge of this court in PD Alkarma Pvt
Ltd v. Canara Bank30.
57. These contentions, he submits, were raised in paragraphs 429
and 430 of the SOC:
“429. Based on Respondent’s/ Engineer’s expectation that the
Works would be completed in 42 months, the Contractor budgeted
for the mobilization advance given to the Claimant to be repaid
with interest by the 27th month of the said 42 months. The total
interest liability of the Claimant for such mobilization advance
would have been less than ₹20 crores (₹19.989 crores) after
recovery of the total advance amount.
430. However, due to aforesaid delays arising out of the failures
of the Respondent and Engineer, as of April 2022, the Claimant
incurred ₹81,88,88,433/- towards recovery of mobilization
advance, out of which ₹71,78,19,003/- was wrongly adjusted by
the Respondent and its Engineer towards interest on mobilization
advance. The recovery of the principal amount of mobilization
advance has thereby been wrongly restricted to only about ₹10
crores when it should have been reduced by over Rs. 61 Crores.
Therefore, for reasons attributable to the Respondent and Engineer,
the Claimant has been wrongly charged interest liability over ₹70
crores on principal recovery of only about ₹10 crores instead of the
anticipated interest of only less than ₹20 crores on the overall
principal amount.”
58. Mr. Agrawal next addresses the issue of invocation of the
RBGs. He drawn my attention to paragraphs 50 to 58 of the written
submissions filed by the respondent before the learned Arbitral
Tribunal:
“50. In all the said RMBGs, the invocation requires:
” … a written demand from the Employer stating that the
claimed amount is due by way of breach by the said
Contractor of any of the terms or conditions contained in
the aforesaid Contract or by reason of the Contractor’s
failure to perform the said Contract…”
30 1998 (45) DRJ 423
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51. Thus, the Respondent was not just required to state that the
Claimant breached the Contract, but that “claimed amount is due
by way of” such “breach”.
52. However, in its BG Invocation Letters, the Respondent has
failed to comply with and adhere to terms of the bank guarantee, as
it wrote stating that:
“3. Notice for Termination of Contract has been issued
to M/s Navayuga- Van Oord JV (Contractor) on 06 Jul 22
vide letter at Para 1 above. In accordance with Terms and
Conditions of the Contract Bank Guarantees (BGs), it has
been decided to invoke the aforementioned BGs in view of
the breach of contractual terms and conditions.
4. It may be noted that your Bank has “irrevocably
undertake to pay us, the Beneficiary /Employer, without,
any demur, reservations, recourse, contest or protest and/ or
without referring to any other sources including the
Contractor; merely on a written demand from the Employer
stating that the claimed amount is due by way of breach by
the said Contract”.
53. The Respondent has neither specified the alleged breach of
the Contract nor identified any alleged claim amount nor stated that
the claimed amount is due by way of the purported breaches by the
Claimant. Quoting the provisions of the Bank Guarantee is not an
assertion that the Claimant has breached the Contract nor that
“claimed amount is due” that too “by way of breach”. On the
contrary, it only states a clause of the bank guarantee but does not
comply with the requirements of the RMBGs at all.
54. As the BG Invocation Letters are not in terms of the
RMBGs, for the reasons stated herein above and as per the well
settled law, the Claimant is entitled to an injunction restraining any
payment under the RMBG.
55. Without prejudice to the above, it is submitted that even
otherwise, before any amount can even be purportedly due under
the Contract, the Respondent had to comply with the requirements
of the Contract, without which compliance, no amount could at all
be due by way of breach.
56. The law is also well settled that when a contract provides
that something is to be done in a particular manner then it must be
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done in that manner or not at all. (See G+H Schallschutz Gmbh v.
Bharat Heavy Electricals Ltd.31)
57. The due process for making the claim in terms of the
Contract is as follows:
a) The Respondent must make a claim under Sub-
clause 2.5 of the Contract;
b) Such claim must be assessed/determined by
Engineer under Subclause 3.5 (in present case, because of
Engineer’s bias, it had to be an independent Engineer); and
c) The Claimant must accept the determination or can
challenge it as per dispute resolution procedure.
58. Admittedly the Respondent did not follow such a procedure
and the Engineer did not even purport to determine any claim by
following the procedure in the Contract prior to the purported
invocation letter being issued and thus had no right to even call on
the RMBGs.”
In this context, Mr. Agrawal relies on the decision of a learned Single
Judge of this Court in Ansal Properties & Industries Ltd v UOI32.
59. Mr. Agrawal then refers me to the findings of the learned
Arbitral Tribunal with respect to the compliance of the letters of
invocation dated 6 July 2022, with the requirements contained in the
RBGs, in paragraph 95 of the impugned order. He points out that the
view of the learned Arbitral Tribunal, in the said paragraph, that the
letters of invocation did not contain any specific averment that the
RBGs were being invoked due to the respondent’s breach of the
contract, as a result of which the amounts covered by the RBG had
become due to the appellant, was at the least a plausible view, which
did not call for interference by this Court. In support of this
31 2020 SCC OnLine Del 19
32 1994 (29) DRJ 66
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submission, Mr. Agrawal relies on paragraph 48 of the judgment of a
learned Single Judge of this Court in Basic Tele Services-I, as upheld
in Basic Tele Services-II by the Division Bench.
60. Reverting, thereafter, to the aspect of special equities, Mr.
Agrawal, submits that the view expressed by the learned Arbitral
Tribunal, to the effect that the encashment of the BGs would place the
respondent in severe financial straits and would result in irreversible
prejudice to it, was again a view which was plausible and, in the
circumstances of the case, did not call for interference. He
emphasises, in this context, that, though the invocation of the BGs, as
per their express terms, were neither dependent nor linked to
termination of the contract, the actual invocation was solely on the
ground of termination.
61. Mr. Agrawal refers to the following paragraphs from the written
submissions furnished by the respondent before the learned Arbitral
Tribunal, which emphasized the contraints faced by the respondent in
performing the contract within the originally stipulated period:
“180. The continuous preventions are apparent from the time
periods when Claimants ability to work was constrained:
a. February 2018 to October 2018 – Delay in
notification of commencement date and consequential loss
of first fair-weather season and effectively nearly one year.
b. 07 May 2018 to 25 January 2019 – Revisions to
GFC Drawings because of variance in actual seabed level
compared to seabed levels considered in design. This
resulted in loss of nearly another fairweather season or
second year.
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c. March 2018 to July 2020 - Impediments to access to
Site A (Contractor’s facilities), Loading jetty, South
Breakwater, and other South Side Works because of lack of
access compounded by agitations/threats by villagers.
d. May 2019 to August 2021- Collapsing of trenches
prepared as per Engineer’s designs and GFC Drawings and
subsequent attempts to mitigate the challenges of
constructability that the Engineer had failed to consider in
its designs.
e. March 2020 to September 2021 and December 2021
to February 2022 – COVID -19 pandemic and its
consequences, including but not limited to restrictions by
central and state governments at various stages. Further, the
Respondent did not even extend the reliefs provided by the
Government such as reduction in value of PBG to 3% to the
Claimant to ease cash flows.
f. July 2020 to July 2022 – Squeezing the cashflow
and liquidity of the Claimant on account of COVID-19
pandemic, then illegal withholding of funds and finally
non-payment of certified amounts by the Respondent.”
62. Mr. Agrawal also seeks to contest Mr. Venugopal’s contention
that paragraphs 1 and 2 of the letters of invocation of the BGs, issued
by the appellant to the Banks, rendered them sufficiently in
compliance with the stipulations in of the BGs, by referring to
paragraph 30 of the judgment of the Supreme Court in NBCC (India)
Ltd v Zillion Infraprojects Pvt Ltd33.
63. Elaborating on this, Mr. Agrawal has first addressed the issue of
invocation of the PBGs. He submits that the PBGs, by their express
terms, required the appellant to declare, to the Bank, “that the works
have not been supplied according to the contractual obligations” under
the contract. In the event of the appellant making such a declaration
33 (2024) 7 SCC 174
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to the Bank in its letters of invocation, Mr. Agrawal accepts that the
Banks were required to honour the PBGs without demur. The letters
of invocation dated 6 July 2022, he submits, do not contain the
requisite declaration that the respondent had not performed the work
according to its contractual obligations. Mr. Agrawal submits that the
mere reference, in the opening paragraphs of the letters of invocation,
to the notice of termination, issued by the appellant to the respondent
on the same day, i.e. 6 July 2022, does not suffice to satisfy the
requirement of the said declaration, which had necessarily to be made
by the appellant to the Banks while invoking the PBGs.
64. Mr. Agrawal points out that, in fact, the appellant’s stand before
the learned Arbitral Tribunal was not that the letters of invocation had
been issued in terms of the stipulations contained in the PBGs, but that
the PBGs were themselves unconditional. He draws attention, in this
context, to paras 21, 23 and 25 of the Statement of Defence34, which
read thus (omitting the extracts from the BGs provided in the said
paras):
“21. That the Bank Guarantees are unconditional in nature and
have been invoked by the Appellant in terms of the said Bank
Guarantees. The Hon’ble Arbitral Tribunal while holding that the
Bank Guarantees were not invoked in accordance with the terms of
such Bank Guarantees, has relied on the following language from
the Bank Guarantees.
*****
23. That the wordings of the Bank Guarantees as quoted
hereinabove are clear and unambiguous and reveal that the Bank
Guarantees are unconditional in nature. There were no ‘conditions’
as such which were required to be fulfilled for the invocation of the34 SOD
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Bank Guarantees and only written demands were required to be
raised, which the Appellant duly complied with. The Hon’ble
Arbitral Tribunal in paragraph 90 and paragraph 91 makes a
distinction between bank guarantee being unconditional ‘as to
payment’ and being conditional ‘as to invocation’. It is most
respectfully submitted that such a distinction is unknown to law
and there exist numerous judicial precedents of the Hon’ble
Supreme Court of India and this Hon’ble Court wherein almost
identical bank guarantees were in question and were held to be
‘unconditional’.
*****
25. The PBGs use clear phrases and terms viz. ‘expressly’,
‘irrevocably’ and ‘unreservedly’, ‘on demand’, ‘without demur’,
‘written demand shall be conclusive evidence that such repayment
is due under the terms of the said Contract’. In the Advance
Encashment Notices and supplementary letter dated July 13, 2022
(to be read collectively and in tandem), the Appellant had in fact
made a clear declaration that the Respondent has breached the
contractual terms and conditions and that works had not been
supplied according to the contractual obligations under the
Contract. It is submitted that the Project was a contract involving
supply of the Outer Harbour works by the Respondent to the
Ministry of Defence to strengthen India’s strategic defences against
foreign vulnerabilities. A breach of the contractual terms and
conditions can mean nothing but a non-supply of the works
according to contractual obligations and the Appellant was in
complete compliance while issuing the Advance Encashment
Notices. The Impugned Order fails to consider that the ‘non-supply
of works in accordance with contractual obligations’ in the Project
of the present nature is the same as ‘breach of contractual terms and
conditions ‘ and any suggested difference between the two is
artificial, at best. Therefore, the Appellant by stating that the
Respondent was in “breach of contractual terms and conditions”
has sufficiently complied with the terms of the PBGs.”
65. Even in its written submissions filed before the learned Arbitral
Tribunal, the appellant, Mr. Agrawal submits, maintained the stand
that all BGs were unconditional. He draws attention, in this context,
to paras 18 and 35 of the written submissions, in which the appellant
had contended, firstly, that all BGs were unconditional and, secondly,
that the RBGs were in any case unconditional.
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66. Mr. Agrawal further submits that the reliance by the appellant,
in para 27 of its SOD, on the letter dated 13 July 2022, purportedly
addressed by the appellant to the Bank, was itself an
acknowledgement that the earlier letter dated 6 July 2022 was not
issued in terms of the PBGs. He submits that the reference to the
purported second letter dated 13 July 2022 addressed by the appellant
to the bank surfaced for the first time in the appellant’s reply to the
respondent’s application under Section 17 before the learned Arbitral
Tribunal. The said letter dated 13 July 2022, moreover, was issued
only with respect to the PBGs and not with respect to other BGs.
67. Mr. Agrawal has referred me to the letter dated 13 July 2022,
paras 1 to 3 of which read as under:
“1. Refer to following –
(a) Bank Guarantee No. 0999517FG0002374 dated 29
Nov 17.
(b) This Headquarters letter DGV/4(111)/452/7/(iii)
dated 06 Jul 22.
(c) Your letter CAG/MUM/IBD/FX/FG/2022-23 dated
07 Jul 22.”
2. The terms and provisions of the BG state that the Bank
hereby expressly, irrevocably and unreservedly undertake and
guarantee as principal obligators on behalf of the contractor that, in
the event employer declares to us that the works have not been
supplied according to the Contractual obligations under the
aforementioned contract, we will pay you, on demand and without
demur, all and any sum up to maximum of INR 741,697,410.00
(say Seven Hundred and Forty-One Million Six Hundred and
Ninety-Seven Thousand Four Hundred and Ten Rupees Only).
3. As brought out vide this Headquarters letter dated 06 Jul 22
at Para 1(b) above, Notice for Termination of Contract has been
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and it has been decided to invoke the aforementioned BG in view
of breach of contractual terms and conditions. We hereby confirm
that the works have not been supplied according to the Contractual
obligations under the contract.”
Paras 2 and 3 of the letter dated 13 July 2022, submits Mr. Agrawal,
now contained the requisite recitals as envisaged in the PBGs, and
amounted to an overt acknowledgement that the earlier letter dated 6
July 2022 was deficient in that regard.
68. Moreover, referring to para 1 of the letter dated 13 July 2022,
Mr. Agrawal points out that the paragraph refers to a letter dated 7
July 2022 from the Bank to the appellant. This letter, he submits, has
never surfaced at any point in the arbitral proceedings or before this
Court. It, nonetheless, indicates that the letter of invocation dated 6
July 2022, from the appellant to the Banks, was immediately followed
up by a communication from the Banks to the appellant on 7 July
2022, in response to which the appellant, by its letter dated 13 July
2022, rectified the lacunae existing in the earlier letter dated 6 July
2022 and incorporated the requisite recitals, in terms of the
requirements contained in the PBGs. This indicates that the Banks
were also not satisfied with the letter dated 6 July 2022, which was
why, on 7 July 2022, they wrote back to the appellant, most probably
underscoring deficiencies in the recitals contained in the letter dated 6
July 2022, pursuant to which the appellant issued a second letter dated
13 July 2022, taking corrective steps.
69. The appellant, he submits, cannot rely on the letter dated 13
July 2022. In the first instance, the letter refers only to the PBGs, and
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does not cover the ABG or the RBGs. Secondly, the letter has been
issued in violation of the order dated 30 June 2022 of this Court in
OMP (I) (Comm) 208/2022, preferred by the respondent under
Section 9 of the 1996 Act, which required a copy of the letter to be
given to the respondent. Inasmuch as no copy of the letter dated 13
July 2022, addressed by the appellant to the Banks, had been provided
to the respondent, the letter could not be relied upon, having been
issued in breach of the order passed by this Court. For this
proposition, Mr. Agrawal also cites the judgment of the High Court of
Bombay in Sri Sai Krishna Constructions v Glove Infracon35.
70. Mr. Agrawal next trains his guns on the invocation, by the
appellant, of the ABG. He submits that the ABG was also conditional,
and not unconditional as the appellant would contend. The liability of
the bank to make payment to the appellant in terms of the ABG was
conditional on the contractor (i.e. the respondent) failing to deliver the
works in accordance with the terms of the contract, or the whole or
any part of the contract on account payments becoming repayable to
the appellant at any time. These requirements, submits Mr. Agrawal,
were not met.
71. Mr. Agrawal further submits that the appellant was seeking to
contend that the allegation, by the appellant, of the respondent having
breached the contract, impliedly indicated that the respondent had not
delivered the works to the appellant as contractually required. He
submits that this inference does not logically follow.
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72. Mr. Agrawal further relies on the concluding reference, in para
1 of the ABG, to the effect that the payment of the amount covered by
the ABG would be made by the Bank to the appellant in accordance
with Clause 14.2 of the contract. The provisions of Clause 14.2,
therefore, stood incorporated by reference in the ABG.
Submission of Mr. Venugopal by way of rejoinder
73. Arguing in rejoinder, Mr. Venugopal first addresses Mr.
Agrawal’s contention that paragraphs 1 and 2 of the letters of
invocation did not result in the letters of invocation being compliant
with the stipulations contained in the BGs. He submits that the
allusion, by Mr. Agrawal, to the principle of incorporation by
reference, which essentially applies to legislative instruments, was
misdirected. There is no occasion to apply the said principle, as the
entire notice of termination dated 6 July 2022 was annexed to the
letters of invocation of the same date, and all necessary averments, to
comply with the requirements of the BGs, are to be found in the notice
of termination. This, therefore, is not a situation in which there is a
mere reference to the notice of termination in the letters of invocation
of the BGs, so as to apply the principle of incorporation by reference.
74. Mr. Venugopal next deals with Mr. Agrawal’s complaint that the
appellant did not reduce the quantum of the PBGs from 10% to 3% as
envisaged by the DOE OM dated 12 November 2020. Mr. Venugopal
points out that the OM itself contained a caveat, rendering it
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inapplicable to contracts in which, arbitral proceedings had started “or
were contemplated”. He refers to the letter dated 31 December 2020
from the respondent to the appellant, which contained various
complaints regarding the facilities available and provided by the
appellant which, according to the respondent, had rendered it
impossible to comply with the respondent’s obligations under the
contract within the contractually stipulated time. Given the tenor of
the grievances urged in the said letter, Mr. Venugopal submits that
arbitration was imminent. In that view of the matter, the OM dated 12
November 2020 would not apply.
75. Mr. Venugopal points out that the contractually fixed period of
42 months was on the basis of the recommendation of the IIT Madras.
The respondent had been given 253 days’ extension beyond the said
period of 42 months but was still unable to complete the contract.
Being thus unable to complete the contract even within the extended
period, the respondent obtained an opinion from Prof Nallayarasu
stating that it would take 88 months to complete the contract. The
appellant clarified this position with the IIT Madras, which reiterated
that 42 months were enough to complete the contracted work and that
the opinion of Prof Nallayarasu was rendered without the requisite
material.
76. Mr. Venugopal submits that the appellant had, in fact, requested
the respondent not to go in for arbitration, but the respondent refused.
It was in these circumstances that the appellant did not deem it
appropriate to reduce the value of the PBGs to 3%.
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77. Dealing, next, with Mr. Agrawal’s contention that the appellant
was recovering, from each bill raised by the respondent, 15% towards
the advance extended by the appellant to the respondent, Mr.
Venugopal places reliance on Clause 15.4 of the contract, as amended,
which read thus:
“Payment after Termination
15.4. Delete the wording of Sub-Clause 15.4 in its entirety and
replace with the following:
“After notice of termination under Sub-Clause 15.2
[Termination by Employer] has taken effect, the Employer
may:
(a) proceed in accordance with Sub-Clause 2.5
[Employer’s Claims];
(b) withhold further payments to the Contractor
until the actions in accordance with the following
sub-paragraphs (c) and (d) are completed;
(c) encash and forfeit the whole of the amounts
of Performance Security and Retention Money and
take possession of Plant and Materials delivered to
Site, for which payment has been made by the
Employer;
(d) encash and appropriate the bank guarantee
for the Advance Payment to recover the outstanding
amount, if any, of the Advance Payment and/ or
other outstanding amount; and
(e) pay to the Contractor any sums due under
Sub-Clause 15.3 [Valuation at Termination], after
the full amounts of the Performance Security and
Retention Money and twenty percent (20%) of the
cost of the balance of the work (as per Sub-Clause
15.3) and any other amount due from the Contractor
to be received by the Employer. Any outstanding
amounts against the Contractor shall immediately
become due and payable by the Contractor to the
Employer.”
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In view of the above contractual stipulation, Mr. Venugopal submits
that Mr. Agrawal’s contention that the respondent had spent the
advance extended by the appellant and that, therefore, the appellant
could not legitimately invoke the ABG, was bereft of substance.
78. Adverting next to the RBGs, Mr. Venugopal submits that, as in
the case of the PBGs, Clause 15.4(c) of the contract entitled the
appellant as of right to encash and forfeit the RBGs, once the contract
had been terminated.
79. With respect to the submission that the wording in the letters of
invocation, in so far as they pertained to the RBGs, were not in terms
of the RBGs themselves, Mr. Venugopal has drawn attention to para 4
of the letters of invocation, which read thus:
“4. It may be noted that your Bank has “irrevocably undertake
to pay us, the Beneficiary/ Employer, without, any demur,
reservations, recourse, contest or protest and/or without referring to
any other sources including the Contractor, merely on a written
demand from the Employer stating that the claimed amount is due
by way of breach by the said Contract’.
The recital in para 4 that “the claimed amount” was “due”, submits
Mr. Venugopal, was sufficient compliance with the requirements of
the RBGs themselves. Moreover, in para 7 of the notice of termination
dated 6 July 2022, which was annexed to the letters of invocation, it
was specifically stated that the respondent was “liable to pay Delay
Damages from 29 April 2022 until the Notice of Termination becomes
effective”. This again put the respondent on notice regarding the
amount payable.
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80. Apropos the observation of the learned Arbitral Tribunal that, if
the BGs were to be encashed, the business of the respondent would be
financially destroyed, Mr. Venugopal relies on para 151 of the
appellant’s reply to the Section 17 application filed by the respondent
before the learned Arbitral Tribunal, which read thus :
151. Paragraphs 100 to 104 are denied in toto. The Claimant’s
submissions are baseless and unfounded in law and in the facts and
circumstances of the present case. The Respondent refers to the
submissions made above, which address the Claimant’s contention.
Briefly, however, the Claimant fails to prove (even at a prima facie
level) how or why its business relationship would be at “severe”
unrest; and how or why it would be “financially” crippled or
artificial liquidity as a JV (that is jointly and severally liable). The
Claimant admits that the JV and its members are doing over a
dozen projects across the State, equating to tens of thousands of
crores. Therefore, the Claimant admits that it can take huge
commercial risks, and the BGs make up for only a fraction of it.
The Claimant fails to prove (even at a prima facie level) how or
why it would be blacklisted/ disqualified in various other future
tenders and how or why it threatens the Claimant’s commercial
existence (despite being the market leaders in the construction
industry). The Claimant’s submissions are superficially made up,
without substance or girth.”
(Emphasis supplied)
81. The decisions cited by the respondent, submits Mr. Venugopal,
are clearly distinguishable. Referring to paragraphs 29 and 47 of the
judgment of the learned Single Judge in Basic Tele Services, Mr.
Venugopal points out that, in that case, it had been specifically
observed that to get the benefit of the said paragraph, the respondent
had to state that the money covered by the BGs was not due from it. In
the present case, the amounts covered by the BGs, he submits, were
clearly due from the respondent to the appellant, consequent on the
termination of the contract. Ansal Properties, he submits, is clearly
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distinguishable as the wording of the Bank Guarantee in that case is
different from that in the present, for which purpose, he refers to para
3 of the decision. In support of his submissions, Mr. Venugopal places
reliance on Reliance Infrastructure Ltd v NLC India Ltd36.
82. Mr. Venugopal submits that the entire advance extended by the
appellant to the respondent was still with the respondent. The very
purpose of the ABG was to recover the advance given of ₹ 181 crores.
83. Retention payment, submits Mr. Venugopal, was to be released
by the appellant only on successful completion of the project at the
time, it was taken over by the appellant. Nonetheless as the respondent
wanted the retention money upfront, the appellant provided it and
required the respondent to furnish the RBGs to secure the said
retention money. As the respondent had failed to complete the project,
the appellant was entitled to be returned the retention money. The
respondent was therefore, in effect, seeking to retain the money and
the RBGs, without successfully completing the project.
84. Mr. Venugopal submits, therefore, that the impugned order of
the learned Arbitral Tribunal is unsustainable in law and has therefore
to be set aside.
Analysis
The law
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85. Though Mr. Agrawal took the Court through the entire labyrinth
of the facts in an earnest effort to justify the impugned order passed by
the learned Arbitral Tribunal, such a detailed excursion into facts is, in
the opinion of the Court, unjustified in a case where the only issue for
consideration is whether the invocation of the BGs furnished by the
respondent could legally have been injuncted.
86. Every order of injunction is, in its nature, fundamentally
discretionary. Mr. Agrawal also cited the judgment of the Supreme
Court in Wander Ltd v Antox India (P) Ltd37, which advocates
restraint while interfering, in appeal, with discretionary orders passed
by hierarchically lower authorities, and there can be no dispute about
this proposition. Had it been a mere issue of exercise of discretion by
the learned Arbitral Tribunal and nothing more, the Court would have
been loath to interfere, even in exercise of the appellate jurisdiction
vested in it by Section 37(2)(b) of the 1996 Act. The issue here is,
however, not merely of exercise of discretion. With greatest respect to
the members of the Arbitral Tribunal, whose legal knowledge and
acumen is unquestionable and whom I hold in the highest regard, I am
unable to satisfy myself that the manner in which the learned Arbitral
Tribunal has exercised its discretion is in sync with the law, and this
makes it incumbent on me to interfere.
37 1990 Supp SCC 727
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87. The law relating to grant of injunction against invocation of
BGs is by now fossilized through a veritable slew of authorities of the
Supreme Court and of various High Courts.
88. Empirically stated, a Bank Guarantee may be either conditional
or unconditional. In either case, it is an independent contract between
the Bank and the beneficiary of the guarantee. The person, at whose
instance the guarantee is issued by the Bank is not a party to it. He is
merely a benefactor from whose account the payment covered by the
Bank Guarantee would be realized, in the event, the Bank Guarantee
is to be honoured. The benefactor is, therefore, a stranger to the Bank
Guarantee, even if the Bank Guarantee is issued at his instance. Any
prayer for injunction of the invocation of the Bank Guarantee, by the
benefactor, is therefore, in the nature of a prayer by one party seeking
a restraint against a second party complying with its statutory
obligations towards a third party. Such an order of restraint is not
therefore ordinarily or routinely to be granted. It is for this reason that
the law both in this country as well as in foreign jurisdictions has
evolved along distinct and well-identified channels, where a question
of injunction against invocation of a Bank Guarantee arises for
consideration.
89. The position of law is clear.
90. If a Bank Guarantee is conditional, the invocation must
conform to the conditions of the Bank Guarantee. If, therefore, a Bank
Guarantee requires a particular recital to be contained in the letter of
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invocation, that recital must figure in the communication to the Bank,
failing which the invocation is not in terms of the Bank Guarantee and
would not be honoured by the Bank.
91. If a Bank Guarantee is unconditional, restraint against
invocation can be granted only if one or more of three conditions is
shown to exist. The party seeking injunction has to establish that the
injunction is vitiated by egregious fraud, or that invocation would
result in irretrievable injustice, or that there exist special equities
which justify grant of injunction against invocation. The use of the
adjectives “egregious”, “irretrievable” and “special”, preceding these
stipulations, is significant. It is not merely fraud, or injustice, or
existence of equities, which can justify injunction against invocation
of an unconditional Bank Guarantee. The fraud must be egregious, the
injustice must be irretrievable and the equities must be special. It is
only, therefore, if these standards are met that a Court can injunct the
invocation of an unconditional Bank Guarantee.
92. In the present case, the learned Arbitral Tribunal has sought to
justify the decision to grant injunction against invocation of the BGs
furnished by the respondent on two grounds – actually three – firstly,
that the letters of invocation dated 6 July 2022 did not conform, in the
language which they employed, to the conditions contained in the BGs
and, secondly, that special equities existed, justifying grant of
injunction. The finding of existence of special equities is, inter alia,
sought to be supported by the finding that, if the BGs were permitted
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to be invoked, irretrievable injustice and prejudice would result to the
respondent.
93. The sustainability of the impugned order is therefore to be
examined by addressing the following two queries:
(i) Were the letters of invocation dated 6 July 2022 issued in
terms of the BGs?
(ii) Did there exist any special equities as would justify grant
of injunction against invocation of the BGs?
94. Before adverting to these issues, on facts, I deem it appropriate
to cite, with humility, two decisions rendered by this Bench in which
the law relating to grant of injunction against invocation of BGs was
examined. They are CRSC Research and Design Institute Group
Company Ltd and Garg Builders v. Hindustan Prefab Ltd38. The
following paragraphs from these decisions are relevant:
From CRSC Research and Design
24. Himadri Chemicals is an important judgment, in this
canon. Para 14 of the report, in the said case, enumerates the
following six principles, governing the grant of injunction against
the invocation of unconditional bank guarantees:
“(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 realize such a
Bank Guarantee or Letter of Credit in terms thereof38 291 (2022) DLT 135
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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 realization of a Bank Guarantee
or Letter of Credit.
(iv) Since a Bank Guarantee or 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 Guarantee or
Letter 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 Letter of Credit would result in irretrievable
harm or injustice to one of the parties concerned.”
25. The learned Solicitor General also placed reliance
on Vinitec Electronics which, in turn, took note of the earlier
decisions in U.P. State Sugar Corporation39, B.S.E.S.
Ltd. v. Fenner India Ltd.40, Himadri Chemicals and Mahatma
Gandhi Sahakara Sakkare Karkhane v. National Heavy
Engineering Coop. Ltd.41, and proceeded to hold thus (in paras 11,
12 and 14 of the report):
“11. The law relating to invocation of bank guarantees is
by now well settled by a catena of decisions of this Court.
The bank guarantees which provided that they are payable
by the guarantor on demand is considered to be an
unconditional bank guarantee. When in the course of
commercial dealings, unconditional guarantees have been
given or accepted the beneficiary is entitled to realise such
a bank guarantee in terms thereof irrespective of any
pending disputes. In U.P. State Sugar Corpn. v. Sumac39 UP State Sugar Corpn v Sumac International Ltd, (1997) 1 SCC 568
40 (2006) 2 SCC 728
41 (2007) 6 SCC 470
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International Ltd., this Court observed that: (SCC p. 574,
para 12)“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 realise 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 realisation of such a bank
guarantee. The courts have carved out only two
exceptions. A fraud in connection with such a bank
guarantee would vitiate the very foundation of such
a bank guarantee. Hence if there is such a fraud of
which the beneficiary seeks to take advantage, he
can be restrained from doing so. The second
exception relates to cases where allowing the
encashment of an unconditional bank guarantee
would result in irretrievable harm or injustice to one
of the parties concerned. 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. The two grounds are not
necessarily connected, though both may coexist in
some cases.”
12. It is equally well settled in law that bank guarantee
is an independent contract between bank and the
beneficiary thereof. The bank is always obliged to honour
its guarantee as long as it is an unconditional and
irrevocable one. The dispute between the beneficiary and
the party at whose instance the bank has given the
guarantee is immaterial and of no consequence. In BSES
Ltd. v. Fenner India Ltd. this Court held:
“10. There are, however, two exceptions to this
rule. The first is when there is a clear fraud of which
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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., (1997) 1 SCC 568 this Court,
correctly declared that the law was ‘settled’.”
*****
14. In Mahatma Gandhi Sahakra Sakkare
Karkhane v. National Heavy Engg. Coop. Ltd. this Court
observed :
“If the bank guarantee furnished is an unconditional
and irrevocable one, it is not open to the bank to
raise any objection whatsoever to pay the amounts
under the guarantee. 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 into 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.
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 principal agreement without referring to any specific
clause in the preamble of the deed of guarantee does not
make the guarantee furnished by the bank to be a
conditional one.”
26. The following principles clearly emerge from the decision
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(i) Bank guarantees, which are payable on demand by
the guarantor, are unconditional bank guarantees.
(ii) Unconditional bank guarantees entitle the guarantor
to realisation thereof, irrespective of any pending disputes.
In fact, disputes between the guarantor, and the parties, at
whose instance the bank has given the guarantee, are
immaterial and of no consequence. Enforcement of the
guarantee cannot be injuncted on the pretext that the
condition for enforcing the bank guarantee, in terms of the
agreement between the parties, has not been fulfilled. What
is relevant are the terms incorporated in the guarantee (and
not those in the agreement between the parties). The mere
fact that the bank guarantee refers to the principal
agreement, without referring to any specific clause, does
not make the bank guarantee conditional.
(iii) Courts should, therefore, be slow in injuncting
realisation of unconditional bank guarantees.
(iv) The only exceptions, to this general rule, are where
there exist/exists
(a) fraud of an egregious nature, or
(b) irretrievable injustice resulting to the parties,
at whose instance the bank gave the guarantee, were
the injunction not granted, or
(c) special equities, of which the possibility of
irretrievable injustice is itself one.
(v) “Irretrievable injustice”, for this purpose, has to be
of such an exceptional nature as would override the terms
of the guarantee and the adverse effect of the grant of such
injunction on commercial dealings in the country.
27. The Court, in Vinitec Electronics proceeded, thereafter, to
examine whether the bank guarantee, forming the subject matter of
the controversy before it, was conditional or unconditional, and the
discussion, in the judgment, on this aspect, is instructive. Paras 17,
18 and 19 of the report deserve, in this context, to be reproduced in
extenso:
“17. The relevant clause in the bank guarantee dated 10-
8-2001 furnished by the appellant is to the following effect:
“Whereas M/s Vinitec Electronics Pvt. Ltd., H-33,
Bali Nagar, New Delhi (hereinafter called ‘the
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supplier’) supplied their Vinitec online UPS systems Signature Not Verified
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of various capacities pursuant to their agreement
dated 10th May, 2000 and PO No. 4500011730 dated
30-5-2000 (hereinafter called ‘the Company’) for
the final purchaser President of India through the
Director, National Crime Records Bureau, Ministry
of Home Affairs, Government of India, New Delhi
(hereinafter called ‘the purchaser’).
Whereas in terms of Clause 15 of the agreement for
receiving the entire balance payments of Rs.
49,99,335 from the company, the supplier has
agreed to provide a performance bank guarantee
equivalent to Rs. 16,81,238.50/- as 10% of the value
of the contract to be kept valid till the warranty
period during which time the supplier is required to
perform their warranty obligations to the purchaser;
andWhereas pursuant to the application made by the
supplier, we, Oriental Bank of Commerce, Kirti
Nagar, New Delhi (hereinafter called ‘the Bank’)
have accordingly agreed to give the supplier a bank
guarantee for the aforesaid purpose.
Therefore, we, the Bank, hereby affirm that we are
guarantors and responsible on behalf of the supplier
up to a total of Rs. 16,81,238.50/- (Rupees sixteen
lakhs eighty-one thousand two hundred thirty-eight
and paise fifty only) and we undertake to pay any
sum or sums within the limit of Rs. 16,81,238.50/-
(Rupees sixteen lakhs eighty-one thousand two
hundred thirty-eight and paise fifty only) as
aforesaid upon receipt of written demand from the
purchaser and Company within the validity of this
bank guarantee establishing the supplier to be in
default for the performance of their warranty
obligations under the contract.
We, the Bank, affirm that our liability under this
guarantee is limited to the total amount of Rs.
16,81,238.50/- (Rupees sixteen lakhs eighty-one
thousand two hundred thirty-eight and paise fifty
only) and it shall remain in full force up to and
including 31st August, 2003 and shall be extended
from time to time for such further period(s) as
desired by the purchaser, Company and supplier on
whose behalf this guarantee has been given.”
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18. Thereafter by a letter dated 20-8-2001, the bank
guarantee was amended and Para 4 of the bank guarantee
dated 10-8-2001 was substituted and the same reads as
under:
“Therefore, we, the Bank, hereby affirm that we are
guarantors and responsible on behalf of the supplier
up to a total of Rs. 16,81,238.50/- (Rupees sixteen
lakhs eighty-one thousand two hundred thirty-eight
and paise fifty only) and we undertake to pay any
sum or sums within the limit of Rs. 16,81,238.50/-
(Rupees sixteen lakhs eighty-one thousand two
hundred thirty-eight and paise fifty only) as
aforesaid upon receipt of written demand from the
Company within the validity’. of this bank
guarantee.”
19. In the unamended bank guarantee the Bank affirmed
that they are guarantors and responsible on behalf of the
supplier up to a total of Rs. 16,81,238.50/- (Rupees sixteen
lakhs eighty-one thousand two hundred thirty-eight and
paise fifty only) and had undertaken to pay any sum or
sums within that limit upon receipt of written demand from
the purchaser within the validity of bank
guarantee provided it is established that the supplier be in
default for the performance of their warranty obligations
under the contract. This makes it abundantly clear that
what was furnished was a conditional bank guarantee and
the bankers were liable to pay the amounts only upon
establishing the fact that the supplier was in default for the
performance of their warranty obligations under the
contract. But by the subsequent letter dated 20-8-2001, the
relevant clause in bank guarantee was amended whereunder
the Bank stood as guarantor and responsible on behalf of
the supplier up to a total of Rs. 16,81,238.50/- (Rupees
sixteen lakhs eighty-one thousand two hundred thirty-eight
and paise fifty only) and had undertaken to pay any sum or
sums within that limit “upon receipt of written demand
from the Company within the validity of this bank
guarantee”. This amended clause makes it abundantly clear
that the Bank had undertaken to pay amounts up to a total
of Rs. 16,81,238.50/-. The condition that the amounts shall
be paid only upon establishing the supplier to be in default
for the performance of their warranty obligation under the
contract has been specifically deleted. In our considered
opinion, the bank guarantee as amended replacing Para 4 of
the original bank guarantee makes the bank guarantee
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furnished as unconditional one. The bankers are bound to Signature Not Verified
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honour and pay the amounts at once upon receipt of written
demand from the respondent.”
(Emphasis supplied)
28. These paras illustrate, lucidly, the distinction between a
conditional bank guarantee and an unconditional bank guarantee.
The judgment in Vinitec Electronics makes it abundantly clear that
the first aspect, to be taken into consideration, is the bank
guarantee itself, and the terms thereof. If the bank guarantee is
conditional, then, if the conditions have not been fulfilled,
injunction, against encashment and invocation, may
unquestionably follow. If, however, the bank guarantee is
unconditional, then injunction can be granted only if egregious
fraud, irretrievable injustice, or special equities, exist, and not
otherwise.
29. The issue was revisited, by the Supreme Court, in its more
recent decision in Standard Chartered Bank v. Heavy
Engineering Corporation Ltd. The terms of the bank guarantees,
in that case, contemplated their invocation “against any loss or
damage caused to or suffered by the Corporation by reason or any
breach or failure by the said supplier, in due performance of the
aforesaid contract”. The specifics of the controversy between the
parties need not detain us. Suffice it to state that the Supreme Court
held the bank guarantees to be “unconditional” and “specific in
nature”. Thereafter, the Supreme Court, relying on its earlier
decisions Ansal Engineering Projects Ltd. v. Tehri Hydro
Development Corporation Ltd., Hindustan Construction Co.
Ltd. v. State of Bihar, State Bank of India v. Mula Sahakari
Sakhar Karkhana Ltd.42, Himadri Chemicals and Gujarat
Maritime Board v. Larsen & Toubro Infrastructure Development
Projects Ltd43, reiterated the principles already set out hereinabove,
and emphasised, additionally, that fraud or special equities had, to
support the prayer for stay of invocation of bank guarantees, to be
“pleaded and prima facie established by strong evidence as a
triable issue”.
30. The above legal position stands reiterated in Yograj Infras.
Ltd. v. Ssangyong Eng. & Construction Co. Ltd.44 and Adani Agri
Fresh Ltd. v. Mahaboob Sharif45.
31. Thus far, the position in law appears to be crystal clear.
42 (2006) 6 SCC 293
43 (2016) 10 SCC 46
44 (2012) 2 Scale 58 : JT (2012) 2 SC 17
45 (2016) 14 SCC 517
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32. Some scope for debate, however, arises, on the concept of
“special equities”. The decisions of the Supreme Court – perhaps,
advisedly – do not delineate, in precise contours, the ambit of the
expression. Significantly, Fenner India Ltd. regards “irretrievable
injustice” as a specie of the “special equities” genus,
whereas Standard Chartered Bank treat “special equities” and
“irretrievable injustice” as distinct circumstances, either of which
would justify injuncting the invocation of a bank guarantee.
“Irretrievable injustice”, to reiterate, has to be of such a
magnitude as would override the twin considerations of the express
terms of the guarantee and the adverse effect, from the grant of
injunction, on commercial dealings in the country. “Special
equities”, too, must, therefore, be so “special” so as to prevail
over these two considerations, otherwise paramount while
examining a prayer for injunction against invocation of a bank
guarantee. While, therefore, examining whether “special equities”
exist, so as to justify the grant of a prayer for injuncting invocation
of a bank guarantee, the Court has to tread warily, and cannot
confer, on the expression “special equities”, so elastic a
construction, as would snap the rule.
*****
40. Having noted this, the Court deems it necessary to clarify
that, even if there was material to indicate that such statements had
been furnished, it would not be open to the petitioner to come to
the Court, seeking a restraint on the invocation of the bank
guarantees, on the ground that the statements were not correct. In
other words, in the case of the Performance Bank Guarantee, for
example, if Respondent No. 1 were to furnish a statement, to the
Bank – in that case, the Industrial and Commercial Bank of China
Ltd. – that the petitioner is in breach of its obligations under the
contract, the Bank would, ipso facto, be obligated to honour the
Bank Guarantee, and Respondent No. 1 would be entitled to invoke
it. It would not be open to the petitioner to come to the Court,
questioning the correctness of the statement furnished by
Respondent No. 1 to the Bank, by contending that it had not, in
fact, breached its obligations under the contract, for the simple
reason that the dispute between the petitioner and Respondent No.
1 is entirely foreign to the bank guarantee, and to the obligations of
the Bank under the bank guarantee, which requires only furnishing
of a statement by Respondent No. 1, and nothing more. The bank
guarantee constitutes an independent contract between the Bank
and Respondent No. 1, which has to abide by the covenants of that
contract.
41. Equally, in the case of the Advance Bank Guarantees, if
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Respondent No. 1, as the beneficiary thereunder, furnishes a signed Signature Not Verified
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document, accompanying the demand for invocation, to the effect
that the petitioner has used the advance payment for purposes other
than mobilization, or has failed to repay the advance payment in
accordance with the contract conditions, in whole or in part, the
Bank would, ipso facto, be bound to honour the request for
invocation of the Bank Guarantee. It would not be open to the Bank
to go behind the signed statement tendered by Respondent No 1, or
to carry out any enquiry or investigation to verify the correctness
thereof. Any such attempt by the Bank would be in gross violation
of the terms of the Bank Guarantee and, as the Supreme Court has
cautioned in the afore-quoted decisions, would throw, into disarray,
the very credibility of the commitment of the Bank, towards its
customers. The faith of the investing public, in the entire banking
system of the country would also, in the bargain, be irrevocably
compromised.
42. The jurisdiction of the Court to interfere, in such cases, is,
however, not irrevocably foreclosed. In cases of egregious fraud,
irretrievable injustice, or special equities, the Court can still step in
and injunct the invocation of the bank guarantee(s).
43. Courts cannot afford to be over-aware of the use, in the
above principle, of the qualifying adjectives “egregious”,
“irretrievable” and “special”. It is only fraud which is egregious in
nature, injustice which is irretrievable and equities which are
special, the existence of which would justify the stay of invocation
of an unconditional bank guarantee. In each case, the circumstance
must be pleaded and proved, by cogent evidence.
*****
48. On the second aspect, of the likelihood of irretrievable
injustice occurring to the petitioner, were stay of invocation of the
bank guarantee not granted, the petitioner seeks to liken the
situation to that which was obtained in Itek Corpn46, to plead that
“even if the petitioner succeeds in the arbitration proceedings, it
may not be able to recover the award amount from Respondent No
1”. The contention, in my view, is wholly without merit. Itek
Corpn involved a situation in which an exporter, in USA, entered
into an agreement with the Government of Iran. Certain letters of
credit, issued by an American Bank, in favour of an Iranian Bank,
constituted part of the contract. The USA exporter sought an order
terminating its liability, consequent on the said letters of credit.
This, in turn, was sought as, consequent on hostilities between the
US and the Iraqi government, all Iranian assets, within the
jurisdiction of the US, were blocked by the US government, which
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also cancelled the export contract. In these circumstances the Court
upheld the contention of the US exporter that any claim for
damages, against the Iranian purchaser, even if decreed by the
Courts in the US, would not be executable in Iran. In these
circumstances, as realisation of the letters of credit would result in
irreparable harm to the American plaintiff, relief as sought, was
granted. There is no parallel, whatsoever, between that case and
this. Here, if the plaintiff is to succeed in arbitration, there is no
reason why it would not be able to enforce the award against
Respondent No. 1 – which, as the learned Solicitor General
correctly submits, is a reputed Indian Company – in India. The two
cases are as alike as chalk and cheese.
49. Which leaves us with the third circumstance, in which stay
of invocation of an unconditional bank guarantee can be
legitimately directed by the court, i.e. the existence of special
equities. Again, the petitioner has, undoubtedly, averred, in the
petition, that such “special equities” do exist; the justifiability of
the averment, however, requires to be examined.
50. Without extracting the specific references, to the existence
of “special equities”, as made in the petition, suffice it to state that
the only ground, on which the petitioner has urged the existence of
such “special equities”, is its averment that its claim, against
Respondent No. 1, is far in excess of the amounts of the bank
guarantees. There is no other ground, on which the existence of
“special equities” has been pleaded.
51. Can a mere claim, of the petitioner, against the respondent –
the sustainability of which is yet to be adjudicated – constitute
“special equities”, so as to justify injuncting the invocation of
unconditional bank guarantees, issued by the bank, at the
petitioner’s instance, in favour of Respondent No. 1, even if such a
claim is in excess of the amount covered by the bank guarantees?
In my considered opinion, it cannot.
52. Extrapolating from the principle enunciated in Fenner
India Ltd. in the context of irretrievable injury, I have already
opined, hereinbefore, that “special equities” must be so special as
to override the twin considerations of the sanctity of the terms of
the bank guarantee, and the deleterious effect which the grant of
injunction, against honouring of unconditional bank guarantees,
would have on the commercially transacting public. The Supreme
Court has held, in Meet Singh v. State of Punjab47, that the word
“special” means “distinguished by some unusual quality, peculiar
or out of the ordinary” and that it “has to be understood in
47 (1980) 3 SCC 291
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contradistinction to the word ‘general’ or ‘ordinary’.” Viewed in
this background, Respondent No. 1 is entitled, on the express terms
of the bank guarantees, to their invocation in its favour, subject to
Respondent No. 1 submitting the required signed statements. The
Performance Guarantee goes so far as to specifically stipulate that
Respondent No. 1 was not required to prove or establish the breach
of contract, on the part of the petitioner, before being entitled to the
invocation of the bank guarantee. These are strong equities in
favour of Respondent No. 1, and the sanctity attached to bank
guarantees, and to the credibility of the banking system which
provides such guarantees, serves to augment the equities. Can these
equities be offset by the mere fact that the petitioner may have a
yet to be established claim, against Respondent No. 1, so as to
justify restraining the Bank from honouring the covenants of the
bank guarantees? The answer, in my opinion, has necessarily to be
in the negative.”
From Garg Builders
“34. Despite the clear enunciation of the law as above, and at
least till I sat in that roster, petition after petition continued to be
filed, seeking stay of invocation of unconditional irrevocable bank
guarantees. In nearly every such case – including the present
petitions – reliance was placed, by the petitioners, on the disputes
between the parties relating to the performance/non-performance
of the original contract. The fact that the petitioner, seeking stay of
invocation of the bank guarantees, had a subsisting claim against
the respondent beneficiary of the bank guarantees is also inevitably
taken as a ground for seeking stay of invocation.
35. In view of the well-crystallised law on the subject, any
reference to the original dispute between the parties, relating to the
performance of the contract, is completely irrelevant, insofar as the
issue of stay of invocation of the bank guarantees is concerned.
That dispute has necessarily to form substratum of an entirely
different proceeding, to be resolved either by arbitration or by
adjudication by a court. While I have recorded the submissions of
learned Senior Counsel for the petitioner regarding the petitioner’s
substantive grievances against HPL, I do not, in view of the law
that stands settled in that regard, propose to deal with the said
contentions here.
36. With these prefatory observations, I deem it appropriate,
before applying the law to the facts of the present case, to itemise
the basic principles relating to bank guarantees, their invocation
and the interdiction of such invocation, thus:
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(i) Commercial contracts often contain clauses
requiring the contractor to furnish bank guarantees.
(ii) These bank guarantees are, principally, either bank
guarantees provided towards security, for having been
awarded the contract, or performance bank guarantees, to
guarantee performance of the contract, though, on occasion,
other bank guarantees such as bank guarantees towards
mobilisation advance, etc. may also be required to be
provided.
(iii) The contract, in such cases, also provides for the
circumstances in which the bank guarantees could be
invoked, as well as the purpose for requiring the bank
guarantees to be provided in the first place.
(iv) No bank guarantees payment to anyone gratis.
Every bank guarantee is of necessity issued by a bank on
instructions. In case of a commercial contract, such as the
contract in the present petition, the instruction to the bank,
to provide a bank guarantee, is given by the person to
whom the contract is awarded; in the present case, the
petitioner. The party to whom the contract is awarded, in
other words, instructs the bank, in lieu of having been
awarded the contract, to issue a bank guarantee in favour of
the person awarding the contract. In the present case, as
required by the agreements between the petitioner and the
HPL, and that the petitioner’s instance, bank guarantees
were issued by the bank in favour of HPL which, therefore,
is the beneficiary of the bank guarantee.
(v) These bank guarantees are, however, bilateral
contracts between the bank and the beneficiary i.e. HPL,
even if they were issued at the instance of the petitioner.
The petitioner is not a party to the bank guarantees. It is,
therefore, legally a stranger to the contract, insofar as the
bank guarantees are concerned.
(vi) Like all independent commercial contracts, every
bank guarantee has to abide strictly by its terms. Honour
and compliance of a bank guarantee, as per its terms, is,
therefore, mandatory. In the case of bank guarantees,
especially, the Supreme Court has stressed this aspect, as
there is an overwhelming element of public interest
involved in requiring banks to honor their commitments
towards customers and clients. If a bank is to be interdicted,
at the instance of a third party, who is a stranger to the bank
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guarantee between the bank and the beneficiary, from Signature Not Verified
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honouring the bank guarantee, the Supreme Court has held
in United Commercial Bank v. Bank of India48 and
Hindustan Steelworks Construction Ltd. v. Tarapore &
Co.49, that it would erode the public faith in the banking
institution of the country.
(vii) The bank is, therefore, concerned only with the
terms of the bank guarantee. The elements of any dispute
between the contractor and the beneficiary of the bank
guarantee, or the conditions existing in the contract
between the contract awardee and the beneficiary of the
bank guarantee i.e. in the present case between the
petitioner and HPL, are, therefore, generally irrelevant to
the aspect of invocation of the bank guarantee. Even the
circumstances stipulated in the contract between the
beneficiary and the contract awardee, in which the bank
guarantee could be invoked, are also of no relevance
insofar as the liability of the bank to honour the bank
guarantee is concerned.
(viii) In order for the aspect of performance, or failure of
performance, of the parent contract, by either party, to
become relevant as a consideration for invocation of the
bank guarantee, they have necessarily to be incorporated
by express reference in the bank guarantee itself. In other
words, if the bank guarantee were to stipulate that the bank
would be required to make payment to the beneficiary only
in the event of failure, on the part of the contract awardee,
to abide by its obligations under the contract, then the
aspect of performance of the contract by the contract
awardee would become a relevant consideration, while
assessing the obligation of the bank to make payment to the
beneficiary.
(ix) Similarly, oftentimes, a contract may stipulate the
particular stage at which, or exigency in which, the bank
guarantee could be invoked by the beneficiary. Such a
stipulation in the contract would, however, become relevant
for the bank, when called upon by the beneficiary to honour
the bank guarantee, only if that stipulation figures expressly
in the body of the bank guarantee itself.
(x) Else, the bank is not expected, much less required,
to advert to the covenants of the original contract between
the contract awardee and the beneficiary, to which the bank
48 (1981) 2 SCC 766
49 (1996) 5 SCC 34
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is a stranger — just as the contract awardee is a stranger
to the bank guarantee. Nor is it required to enter into the
disputes between the contract awardee and the beneficiary
of the bank guarantee, or into the aspect of performance, or
non-performance, of the contract. Nor, for that matter, is
the bank entitled to examine whether the stage at which the
contract between the parties envisages invocation, or
enforcement, of the bank guarantee, has, or has not, been
reached. The bank, being a stranger to the contract
between the contract awardee and the beneficiary of the
bank guarantee, has no authority to probe into the said
contract, unless the terms of the bank guarantee expressly
require it to do so. The bank has necessarily to be
concerned only with the terms of the bank guarantee, to
which alone it is a party.
(xi) If the invocation of the bank guarantee by the
beneficiary thereof is, therefore, in terms of the bank
guarantee, the court cannot interdict the bank from
honouring the bank guarantee, by referring to the
covenants in the contract between the contract awardee
and the beneficiary of the bank guarantee. Any such
attempt by the court would amount to directing the bank to
violate the contract, with the beneficiary of the bank
guarantee, to which it is a party and, therefore, to direct the
bank to commit an illegality. This, quite obviously, is
completely impermissible.
(xii) Equally, it is not permissible, either, for the court to
interdict the invocation of a bank guarantee on the ground
that the stage for such invocation, as per the contract, has
not been reached, or that the exigency in which the bank
guarantee could be invoked as per the contract, does not
exist, unless that stage, or that the exigency, is incorporated
as a condition for invocation in the bank guarantee itself.
(xiii) Interdiction of invocation of unconditional bank
guarantees would be justified, where the invocation is
otherwise in terms of the covenants in the bank guarantees,
only where there is found to exist egregious fraud, or
special equities, or where irretrievable injustice would
ensue were invocation not to be injuncted. In this regard, I
deem it appropriate to reproduce, with humility, the
following passages from my decision in Kuber
Enterprises v. Doosan Power Systems India (P) Ltd.50, in
which I have followed the Division Bench pronouncement
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in CRSC Research and Design Institute Group Co.
Ltd. v. Dedicated Freight Corridor Corpn. of India Ltd:
“18. Admittedly, the bank guarantee provided by
the petitioner to the respondents is unconditional.
Stay of invocation of an unconditional bank
guarantee can be granted only in exceptional
circumstances. This Court in SES Energy Services
India Ltd. v. Vendant A Ltd.51, has noted these
exceptions and observed thus:
“9. In cases where the bank guarantee is
unconditional, the law recognises only three
circumstances in which courts could injunct
invocation or encashment of the bank
guarantee. These three circumstances,
essentially, dovetail into two, with the
pronouncement of courts in that regard. The
three circumstances, in which the courts may
interfere, and may injunct the invocation of
unconditional bank guarantees, is where
there is egregious fraud, special equity
exists, or where irretrievable injustice or
prejudice is likely to result, if the bank
guarantee is invoked or encashed. The latter
two circumstances have been treated, by the
Supreme Court, as well as by the Division
Bench of this Court in CRSC Research and
Design Institute Group Co.
Ltd. v. Dedicated Freight Corridor Corpn.
of India Ltd. to be interconnected, in that
special equities would be set to exist if the
invocation of the bank guarantee would
result in irretrievable injustice to the
opposite party. The following passage,
from BSES Ltd. v. Fenner India Ltd., neatly
encapsulates this position:
“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
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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. , that this Court,
correctly declared that the law was
‘settled’.'”
Additionally, in para 72 of the report in Svenska
Handelsbanken v. Indian Charge Chrome52, a
Bench of three Hon’ble Judges of the Supreme
Court has held that mere irretrievable injustice, in
the absence of established fraud, does not make out
a case for injuncting invocation of an unconditional
bank guarantee. Having said that, a bench of two
Hon’ble Judges, in Hindustan Steelworks
Construction Ltd. v. Tarapore & Co. held, after
noticing and interpreting Svenska Handelsbanken,
that, in Svenska Handelsbanken, the court was ‘not
called upon to decide whether apart from the case of
fraud there can be any other exceptional case
wherein the court can interfere in the matter of
encashment of a bank guarantee’. As such, it was
held, ‘not much importance’ could be attached ‘to
the use of the word ‘and’ in the observation that ‘it
cannot be interfered with unless there is fraud and
irretrievable injustice involved in the case”. Vinitec
Electronics and BSES Ltd. hold that special
equities, if pleaded as ground for stay of invocation
of bank guarantee, should be in the nature of
irretrievable injustice.
19. While, therefore, there appears to be some fluidity
in judicial thinking on the issue of whether the ‘fraud’
element would permeate the other two considerations of
‘special equities̱ and ‘irretrievable injustice’, there does
appear to be consensus on the position, in law, that fraud, if
pleaded, has to be egregious in nature, and that special
equities, if pleaded, have to be in the nature of irretrievable
52 (1994) 1 SCC 502
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injustice. To that extent, therefore, these considerations, to
one extent or another, juxtapose.”
37. In this context, it is necessary to distinguish between
recitals in a bank guarantee which set out the purpose for issuing
the bank guarantee and recitals which set out the conditions for
invoking the bank guarantee. These are aspects which are often
confused with each other. Bank guarantees issued in compliance
with the requirements in commercial contracts often set out, in
their preambular or opening recitals, the fact that they are being
furnished to ensure performance of the contract by the
contractor/contract awardee. That recital, by itself, does not make
performance of the contract by the contract awardee, a condition
for invocation of the bank guarantee. A bank guarantee has,
therefore, to be carefully read in order to understand the exact
governing condition in which the bank guarantee would become
invocable, and in which the bank would be obligated to honor the
bank guarantee.
38. This aspect would become clear if one refers, in the present
case, for example, to the bank guarantee dated 6-10-2018. The
opening preambular recital in the bank guarantee states that the
bank guarantee was being provided, “as a security/guaranteeing
from the contractor(s) for compliance of his obligations in
accordance with the terms and conditions in the said agreement”.
This opening recital does not make the fact of compliance or non-
compliance by the contractor i.e. by the petitioner, of its
obligations under the agreement with HPL, a relevant
consideration, where the aspect of invocability of the bank
guarantee is concerned. That has to be decided by the covenants
governing invocation as contained in the bank guarantee, which
read thus:
“1. We, HDFC Bank Limited, E-13/29, 2nd Floor,
Harsha Bhavan, Middle Circle, Connaught Place, New
Delhi 110 001 (hereinafter referred to as ‘the bank’) hereby
undertake to pay to the employer an amount not exceeding
Rs 7,500,000.00 (rupees seventy-five lakhs only) on
demand by the employer.
2. We, HDFC Bank Limited (indicate the name of the
bank) do hereby undertake to pay the amounts due and
payable under this guarantee without any demure, merely
on a demand from the employer stating that the amount
claimed as required to meet the recoveries due or likely to
be due from the said contractor(s). Any such demand made
on the bank shall be conclusive as regards the amount due
and payable by the bank under this guarantee. However, our
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liability under this guarantee shall be restricted to an Signature Not Verified
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amount not exceeding Rs 7,500,000.00 (rupees seventy-five
lakhs only).
3. We, the said bank further undertake to pay the
employer any money so demanded notwithstanding any
dispute or disputes raised by the contractor(s) in any suit or
proceeding pending before any court or tribunal relating
thereto, our liability under this present being absolute and
unequivocal. The payment so made by us under this bond
shall be a valid discharge of our liability for payment there
under and contractor(s) shall have no claim against us for
making such payment.”
39. Though, therefore, the opening preambular recital,
identifies the purpose for providing of the bank guarantee as
ensuring compliance, by the contractor i.e. by the petitioner, of its
obligations under the agreement with HPL, the only condition
requiring fulfilment, by HPL, to be entitled to the benefit of the
bank guarantee is “a demand … stating that the amount claimed
(was) required to meet the recoveries due or likely to be due from”
the petitioner.
40. To that extent, one may say that the use of the expression,
“unconditional”, in respect of bank guarantees, is actually a
misnomer. Bank guarantees are, etymologically, never
“unconditional”. (Courts have, however, classically referred to
bank guarantees such as those issued in the present petitions as
“unconditional”.) What has to be identified is the condition in the
bank guarantee which governs the obligation(s) of the bank
thereunder. Even in the present case, the bank guarantees furnished
by the petitioner were, stricto sensu, not unconditional; the only
condition was, however, that a demand letter was required to be
issued by HPL.
41. It is important to note the specific stipulation, in the bank
guarantee, that the only requirement to be met by HPL was raising
of a demand on the bank, stating that the amount claimed was
required to meet recoveries due or likely to be due from the
petitioner. Whether these amounts were actually due or likely to be
due is, for the purposes of the bank guarantees forming subject-
matter of the present petition, completely irrelevant. What was
required was a statement from HPL to the bank, stating that these
amounts were due or likely to be due from the petitioner.
42. Once such a statement was made, neither could the bank
refuse to honour the bank guarantee by going behind the statement
or seeking to verify whether the statement was right or wrong, nor
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repeat, what was required by the bank guarantees was a statement
by HPL that the amounts in question were required to meet the
recoveries due or likely to be due from the petitioner, and no more.
Once such a statement was made, any interdiction against
invocation of the bank guarantee by examining whether, in fact,
any such amount was, or was not, due from the petitioner to HPL,
would be an unjustified exercise and would also be in the teeth of
the express covenants of the bank guarantee.
43. A plea for stay of invocation of a bank guarantee would be
predicated either on the premise that the invocation was contrary to
the terms of the agreement between the parties or contrary to the
terms of the bank guarantee itself.
44. Once, however, the beneficiary of the bank guarantee
proceeds towards invocation of the bank guarantee by writing to
the bank, the first argument, of the invocation being contrary to the
terms of the parent contract between the parties, ceases to be
available to the contractor. The reason is simple. Referring to the
facts of the present case, the petitioner has instructed the bank to
issue bank guarantees favouring HPL, for availing the benefit of
which HPL merely had to communicate to the bank stating that the
amount claimed was required to meet the recoveries due from the
petitioner. Once, therefore, such a communication was made by
HPL to the bank, the petitioner could not seek, thereafter, to
interdict invocation of the bank guarantee by referring to the terms
of the original contract. No equities could sway in favour of the
petitioner in such a situation, predicated on the terms of the
contract, breach of the contract, default or absence of default, etc.
The petitioner cannot, in such circumstances, seek to come between
the two independent contractual parties, namely, the bank and
HPL, in the matter of performance of the contract between those
parties, to which the petitioner is a stranger.
45. If, therefore, the grievance of the petitioner is that the
invocation of the bank guarantee by HPL, though otherwise in
accordance with the covenants in the bank guarantee, is contrary
to the covenants in the parent agreement, the remedy with the
petitioner would be to proceed against HPL to recover the monies
released by HPL by invocation of the bank guarantees, not to
interdict such invocation, which is a matter between the bank and
HPL, and to which the petitioner is a complete stranger. The
grievance of the petitioner, in such an event, is vis-à-vis HPL, and
not the bank. The grievance between the petitioner and HPL, being
relatable not to the covenants of the bank guarantee, but to the
covenants of the agreement between the petitioner and HPL, would
have to be decided on the basis of the appropriate protocol in that
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46. In the present case, the covenants in the contract, as well as
the aspect of compliance/non-compliance with the contractual
obligations have not been made conditions governing honouring of
the bank guarantees by the bank. The bank guarantee dated 17-12-
2016, merely requires HPL to demand, of the bank, the amount
governed by the bank guarantee and the bank would become
immediately liable to transmit the amount to HPL. The remaining
three bank guarantees are a trifle more specific, in requiring the
demand from HPL to state that the amount claimed was required to
meet the recoveries due or likely to be due from the petitioner.
Once such a demand, with such a statement, is made by HPL, the
demand is conclusive regarding the amount covered thereby and
operates proprio vigore, rendering the bank liable to honour the
bank guarantee and to pay, to HPL, the amount covered by the
bank guarantee, as demanded by it. All the four bank guarantees
are equally categorical in stipulating that the demand by HPL
would be conclusive regarding the liability of the bank,
notwithstanding any dispute raised by the contractor i.e. the
petitioner.
*****
49. There are, however, as already noted earlier, select
circumstances in which invocation of an “unconditional” bank
guarantee, even if superficially in terms of the covenants in the
bank guarantee governing its invocation, may be interdicted by a
court. These are (ii) where the bank guarantee is vitiated by
egregious fraud, (iii) where irretrievable injustice would result if
the bank guarantee were permitted to be invoked, and; (iv) where
special equities exist, as would justify interdiction or invocation of
the bank guarantees.
*****
51. The petitioner’s contention that HPL owes, to the petitioner,
amounts in excess of the amount covered by the bank guarantees is
obviously completely tangential to the issue at hand. Any amounts
owed by HPL to the petitioner would have to form subject-matter
of resolution by arbitral proceedings. This Court does not require
to return any finding, in the present case, regarding the petitioner’s
entitlements against HPL, or vice versa.
52. Nor can the present case be said to be one of special
equities or irretrievable injustice. Indeed, the contention of learned
Senior Counsel for the petitioner was essentially predicated on the
irretrievable injustice principle, as learned Senior Counsel sought
to contend that the financial condition of HPL was so precarious
that, were the bank guarantees to be permitted to be encashed and
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the amounts credited into the account of HPL, there was every
likelihood of HPL not being financially in a position to restitute the
petitioner, even though the petitioner to succeed in arbitration.
53. I have already alluded to the rival contentions of learned
counsel regarding the financial condition of HPL. Learned counsel
for both sides have invited my attention to certain recitals in the
audited statement of accounts and balance sheet of HPL. They
cannot all be said to be pointing one way, or to be making out a
case of HPL being in such straitened financial circumstances as to
be unable to pay the amount covered by the subject bank
guarantees to the petitioner, if so directed at a later stage in the
arbitral proceedings. No case of irretrievable injustice can,
therefore, be said to exist.
54. Special equities, as held by the Supreme Court in U.P.
State Sugar Corpn. v. Sumac International Ltd. and in Svenska
Handelsbanken, have to partake the character of irretrievable
injustice. Even otherwise, it cannot be said that any such case of
special equities has been made out by the petitioner, as would
justify interdicting invocation of the subject bank guarantees.
Indeed, the contentions of learned Senior Counsel for the petitioner
essentially revolved around compliance with the conditions
stipulated in the bank guarantee for transfer of the guaranteed
amount to the credit of HPL, and on the aspect of irretrievable
injustice.
55. In view thereof, it cannot be said that, within the boundaries
of the law relating to interdiction of invocation of the irrevocable
bank guarantees, a case for such interdiction has been made out by
the petitioner in the present case, insofar as the subject bank
guarantees are concerned.”
95. All that is needed, therefore, is application of the above
principles to the facts of the present case.
Was the letter of invocation in terms of the BGs?
PBGs
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96. The opening paragraph of the PBGs merely sets out the
circumstances in which the PBGs were furnished. It is stated that the
appellant had entered into a contract dated 24 October 2017 with the
respondent, for construction of the Outer Harbour for project Varsha
and that the respondent had undertaken to produce a PBG for 10% of
the total contract value amounting to ₹ 292.54 crores to secure its
obligations to the appellant.
97. The second para of the PBGs refers to the express, irrevocable
and unreserved undertaking and guarantee by the Bank to pay to the
appellant, on demand and without demur, any sum upto ₹ 292.54
crores in the event of the appellant declaring to the Bank that the
respondent had not supplied the works according to its obligation
under the contract.
98. Para 1 of the PBGs, which follows, stated that the written
demand of the appellant would be conclusive evidence that the
payment covered by the PBGs was due in terms of the contract. The
Bank undertook to effect payment on receipt of the written demand.
ABG
99. Para 1 of the ABG initially observes that the ABG was being
tendered by the respondent “in consideration of the Employer having
agreed to make an advance payment in accordance with the terms of
the Said Contract” to the respondent. This is a mere recital of the
reason for furnishing of the ABG. The para goes on to state that the
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Bank would, “on demand and without demur”, pay, to the appellant,
the amount covered by the ABG, “if the Said Contractor would have
failed to deliver the Works in accordance with the terms of the said
Contract for any reason whatsoever or failed to perform the Said
Contract in any respect or should whole or part of the said on account
payments at any time the company payable to (the appellant) for any
reason whatsoever”. While this stipulation, seen in isolation, might
make it appear that the contractor, i.e. the respondent, can plead lack
of default, on its part, in complying with its contractual obligations, as
a defence to the invocation of the ABG, this possibility stands
completely dispelled by para 2 of the ABG, in which it is stated, with
no equivocation whatsoever, that the appellant would be the sole
judge as to whether the respondent has failed to deliver the works in
accordance with the contract or has failed to perform the contract is in
respect or whether the whole or part of the advance payment made to
the respondent has become repayable to the appellant. While
examining the aspect of whether the Bank was required to honour the
letter of invocation of the ABG, issued by the appellant, all that was
required to be seen was whether, in the letter of invocation, the
appellant had asserted the existence of one or more of the three
circumstances envisaged in the ABG, in which event the Bank would
be bound to pay, to the appellant, the amount covered by the ABG,
which are (i) failure, on the part of the respondent, to deliver the
contract work in accordance with the contract, (ii) failure, on the part
of the respondent, to perform the contract in any respect, or (iii) the
whole, or any part of the advance payment made by the appellant to
the respondent becoming repayable to the appellant. Of these,
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circumstance (ii) is worded in terms as wide as they can be. They
cover any, and every, default, by the respondent, of the terms of the
contract. Nothing is excluded. The extent of failure to perform is
irrelevant. If the appellant alleges that the respondent is in default of
its obligations under the contract, that is enough. The Bank would be
required, ipso facto, to release, to the appellant, the entire amount of ₹
199,94,47,196/- covered by the ABG. As to whether the respondent
was, or was not, actually in default of its obligations under the
contract, is irrelevant. Equally irrelevant is the reason for such
default, or whether the default is attributable, even in part, to the
appellant. Neither can the Bank, nor can the court, dealing with the
requirement of invocation of the ABG, examine whether the
respondent was actually in default of its obligations under the
contract or, if it was, the reason for such default. The reciprocal
obligations of the appellant and respondent to each other, under the
contract are, therefore, entirely irrelevant.
100. That said, the appellant was, nonetheless, required, in its letter
addressed to the Bank, seeking invocation of the ABG, to aver that
one or more of the circumstances existed, i.e., that the respondent had
failed to deliver the works in accordance with the contract, or that the
respondent had failed to perform the contract in any respect, or that
the whole or part of the advance payment made to the respondent had
become repayable to the appellant.
RBGs
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101. Para 1 of the RBGs noted the fact of awarding of the contract
by the appellant to the respondent, and the value of the contract. Para
2 states that the Bank had been informed by the respondent that
Retention Money was required to be deducted, from each Interim
Payment Certificate, at the rate of 10%, subject to a maximum of 10%
of the Accepted Contract Amount, but that no such deduction would
take place if the respondent would submit an unconditional RBG
equal to the retention money to be withheld. These paragraphs do not,
in any way, refer to the circumstances or conditions in which the
RBGs would become invocable.
102. Para 3 is, however, important, significant and in fact dispositive
of the issue. It contains the guarantee, by the Bank that, “merely on
the written demand from (the appellant) stating that the claimed
amount is due by way of breach by (the respondent) of any of the
terms of conditions contained in the contract or by reason of the
(respondent’s) failure to perform the contract”, the Bank would,
“without any demur, reservations, recourse, contest or protest and
without referring to any other sources including the (respondent)”,
pay, to the appellant, the amount covered by the RBGs. Thus, all that
was required, for the Bank to be contractually obligated to pay, to the
appellant, the amount covered by the RBGs, was a statement, by the
appellant, that the amount claimed was due to the appellant from the
respondent, by reason of breach, by the respondent, of the contract,
irrespective of the nature or extent of breach. Once such a statement
was made, the amount became payable. Of greatest significance, in
this regard is, probably, the stipulation that the Bank would not, prior
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to making payment to the appellant of the amount covered by the
RBGs, “refer to any sources including the contractor”. This indicates
that the respondent has no role to play in the invocation of the RBGs.
Where the Bank was not entitled even to make a reference to the
respondent, there is no question of the respondent being able to
advance any submission in its defence, or obstructing the invocation
of the RBGs. The issue was entirely bilateral, between the Bank and
the appellant, with the respondent playing no part. The obvious
sequitur is that no defence of the respondent, to any assertions made
by the appellant to the Bank, while invoking the RBGs, was
permissible.
Do the letters of invocation conform to the requirements of the BGs?
103. The learned Arbitral Tribunal has, in holding that the letters of
invocation had not been issued in terms of the BGs themselves,
restricted its consideration to paras 3 and 4 of the letters of invocation
(in para 87 of the impugned Order). This, according to Mr.
Venugopal, is an error on the part of the learned Arbitral Tribunal and
– again, with greatest respect to the learned members of the Arbitral
Tribunal – I am inclined to agree with him.
104. Indeed, had the learned Arbitral Tribunal taken into
consideration para 1 of the letters of invocation, it is doubtful, in my
opinion, if it would have taken the view that it ultimately did.
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105. I am in agreement with Mr. Venugopal that there is really no
scope for applying, in the facts of this case, the principles of
incorporation by reference, to which Mr. Agrawal alluded. Para 1 of
the letters of invocation clearly invite reference to the notice of
termination dated 6 July 2022 addressed by the appellant to the
respondent, terminating the contract. The notice of termination was,
moreover, annexed to the letter. The contents of the notice of
termination have, therefore, clearly to be read along with the
assertions contained in the letters of invocation. There is no inflexible
principle that the recitals required to be contained in the letters of
invocation, as per the BGs, were expressly to be found in the letters of
invocation themselves. There was clearly nothing irregular, much less
erroneous, in the respondent referring to the allegations contained in
the notice of termination dated 6 July 2022 and annexing the said
notice with the letters of invocation. Needless to say, the invitation, in
para 1 of the letters of invocation, to refer to the notice of termination,
issued on the same day, required the Banks to read both documents
together. Thus, read, it is clear that all requirements of the PBGs, ABG
and RBGs were contained in the communications from the appellant
to the Banks, for invocation of the BGs.
106. Among the three of them, the BGs required the appellant to
aver/assert that (i) the respondent had not supplied the works
according to its obligations under the contract, and (ii) the claimed
amount was due to the appellant because of breach, by the respondent,
of any of the terms and conditions contained in the contract or because
the respondent had failed to perform the contract. Nothing else was
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required to be alleged, or averred, by the appellant, in its letters of
invocation, in order for the Banks to be obligated to make payment of
the amounts covered by the BGs. Once these assertions were
contained in the communications made by the appellant to the Banks,
the obligation of the Banks to pay, to the appellant, the amounts
covered by the BGs ipso facto followed as a natural consequence.
Neither could the Banks refuse to do so nor, more importantly, could
the learned Arbitral Tribunal, or this Court in appeal against the
decision of the learned Arbitral Tribunal, injunct or restrain the Bank
from doing so.
107. The reliance, by Mr. Agrawal, on Zillion Infraprojects is, in
this context, inapt. Zillion Infraprojects addressed the issue of
whether, in a case in which the parties entered into two agreements,
and one made reference to the provisions of the other, the reference
could also be said to incorporate, ipso facto, the arbitration clause
contained in the latter. The Supreme Court held that, in the absence of
specific incorporation, by reference, of the arbitration clause, it could
not be said to have been incorporated by implication. The present
case does not deal with two contracts, or any need to read into one
contract the provisions of the other; moreover, as already noted, it is
not a case of incorporation by reference at all. As such, Zillion
Infraprojects cannot apply.
108. It is clear, on a plain reading of the notice of termination dated 6
July 2022, that there are more than sufficient assertions regarding
failure, on the part of the respondent, in complying with its obligations
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under the contract, and the resultant entitlement, of the appellant, to be
paid the amounts covered by the BGs. In this context, Clause 15.4 of
the contract is also relevant. The said clause ipso facto entitled the
appellant to be paid the amounts covered by all BGs as a consequence
of termination of the contract. The right was, as Mr. Venugopal
correctly submits, absolute and indefeasible. The only caveat on the
said right was the requirement of the letters of invocation conforming
to the stipulations contained in the BGs. That requirement, when one
reads the letters of invocation which the notice of termination dated 6
July 2022, is amply met.
109. It is hardly necessary to refer, in any detail, to the allegations
contained in the notice of termination. Suffice it to state that the said
notice alleges, inter alia, that
(i) the respondent was in breach of the conditions of
confidentiality contained in Clause 1.15 of the contract, as was
conveyed to the respondent by the Engineer vide letter dated 4
May 2022,
(ii) in this context, the Engineer had also issued a Notice to
Correct to the respondent under Clause 15.1 of the contract on 3
December 2021, despite which the respondent failed to make
good its failures and remedy its defaults,
(iii) the respondent’s progress was abysmal to the extent that,
as on 31 May 2022, the respondent had achieved only 25.47%
of overall works and 6-7% of OH works,
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(iv) the letter dated 18 February 2020, from the Engineer to
the respondent illustrated the failures of the respondent, for
which the respondent alone was responsible,
(v) despite the respondent having been granted extension of
time, extending the date of completion of the contract till 28
April 2022, the progress was so alarming that the potential for
levy and exhaustion of delay damages amounting to 10% of the
contract price was inevitable,
(vi) the respondent was, therefore, notified that it was liable
to pay delay damages @ 10% of the contract price from 29
April 2022 till the notice of termination became effective,
(vii) the lack of willingness and intent, on the part of the
respondent, to adhere to the terms and conditions of the contract
was demonstrated by inordinate delays in the preparatory
works, abysmal progress, lack of comprehensive/cohesive
methodology, insufficient quarry production and transportation,
insufficient mobilization of resources and manpower, and other
issues of appalling inadequacy and deficiency in the
respondent’s progress, and
(viii) the contractor also exhibited lack of due diligence during
the construction period.
These assertions more than sufficiently alleged breach, by the
respondent, of its contractual obligations, failure to complete the
contracted works and deliver them in time and resultant liability, of
the respondent to make payments to the appellant, including delay
damages quantified @ 10% of the contract price.
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110. Thus, when the letters of invocation are read along with the
notice of termination, the requisite assertions and allegations, as
envisaged by the BGs, were duly communicated by the appellant to
the Banks.
111. In this context, I am in full agreement with the view expressed
by the Division Bench of the High Court of Bombay in Reliance
Infrastructure which read thus:
“54. An invocation letter is a commercial document and its
interpretation has to take a common-sense approach, without being
bogged down by unnecessary semantics. Even assuming that Shri
Kadam is correct in his submission that the Invocation Letters
dated 24th December, 2021 ex-facie do not contain the exact
language required by the Bank Guarantees, we find that the
demand made by the letter dated 27th December, 2021 meets the
requirements of the Bank Guarantees in so far as it advises the
Banks of “failure on the part of the Contractor viz. Reliance
Infrastructure Limited to fulfil its obligations stipulated in the
Contract.”
55. We need not examine the Invocation Letters dated 27th
December 2021 with a fine toothed comb to conclude whether they
are fresh invocation letters or curative notices/ addendums to the
Invocation Letters dated 24th December, 2021. This question would
be relevant only if the law prevented a party from issuing a
curative notice/ addendum to overcome a defective invocation
letter.
56. In this regard, Shri Dhond has relied upon the decision of
the Supreme Court of India in Standard Chartered Bank. In this
case, the Supreme Court has expressly held that even if the first
invocation letter is found to be defective, it must be read along
with subsequent correspondence to ascertain whether the
invocation is in terms of the Bank Guarantee. The Court held that:
“15. The learned counsel further submits that the bank
guarantees are in reference to two category of losses (i)
non-supply/defective supply of plant and equipment (ii)
“other contractual deficiencies” and by the invocation vide
letter dated 19-12-1998 claims caused by “non-
supply/defective supply of plant and equipment and other
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contractual deficiencies” is outside the purview of the bank
guarantee. Further, assuming the correctness of the claim,
the 1st respondent if suffered loss for both (i) non-
supply/defective supply of plant and equipment (ii) “other
contractual deficiencies”, it is difficult to determine the
apportionment between the two categories, because the
invocation does not state how they are apportioned. The
invocation is thus inchoate and incomplete and this
according to the appellant does not constitute a valid
invocation at all and it has not been properly appreciated by
the Division Bench of the High Court in the impugned
judgment [Heavy Engg. Corpn. Ltd.] and has to be
interfered by this Court.”
25. From the correspondence that has been exchanged
by and between them pertaining to invocation of the said
guarantees, it clearly manifests that the initial letter of
invocation written by the 1st respondent-plaintiff dated 6-
11-1998 indeed was per se inadequate and did not
enumerate any condition for invocation of said guarantees
save and except a reference to “a substantial amount to be
recovered from SCIL”. However, in the later
correspondence exchanged between the parties dated 19-
12-1998 followed by a letter dated 28-12-1998, 1st
respondent informed the appellant Bank that due to
defective supply of plant and equipment as well as non-
supply of plant and equipment and also other contractual
deficiencies of SCIL, losses had been suffered by the 1st
respondent and it was duly informed to the appellant Bank
that the losses had been incurred both on account of supply
of plant and equipment and on account of performance of
the supply of plant and equipment. On reading of letters
exchanged by and between 1st respondent and the appellant
Bank pertaining to invocation of the guarantees, the
condition of the guarantees had been duly complied with.”
57. Therefore, the Supreme Court in Standard Chartered Bank has
rejected the hyper-technical approach towards construing invocation
letters, and has expressly recognised that a defective invocation letter may
be cured by a subsequent addendum, which may be read along with it.”
112. As is unexceptionably held by the High Court of Bombay in the
afore extracted passages from Reliance Infrastructure, the
requirement of the letters of invocation being in terms of the BGs has
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to be realistically applied. The Court cannot expect word to word,
comma to comma, reproduction, in the letters of invocation, of the
stipulations contained in the BGs. The allegations, if any, which the
BGs envisage as being communicated by the beneficiary to the Bank,
must be so communicated. There is, however, no pristine form in
which this communication should take place. What has to be seen is
whether, in substance, the required assertion/allegation was made in
the letters of invocation. Those allegations/assertions may equally be
made in a document annexed to the letters of invocation, to which the
letters of invocation invite reference, as in the present case.
113. In that view of the matter, it cannot be said that the letters of
invocation dated 6 July 2022, addressed by the appellant to the Banks,
whereby the appellant sought invocation and encashment of the PBGs,
ABG and RBGs, did not conform to the stipulations contained in the
BGs.
114. The finding of the learned Arbitral Tribunal to the contrary
cannot, therefore, sustain.
Can the invocation of the BGs be injuncted by applying the principle
of special equities?
115. The impugned order of the learned Arbitral Tribunal also
applies the principles of special equities, to justify injuncting
invocation of the BGs. In doing so, however, the learned Arbitral
Tribunal has proceeded on considerations which are not forthcoming
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from the material on record and are, with greatest respect, presumptive
in nature.
116. As has been held by the Supreme Court in Svenska
Handelsbanken and Fenner India, special equities must partake of
the character of irretrievable injustice. In other words, the equities in
favor of the party restricting invocation of the BGs must be so
overwhelming that they must predominate and override the obligation
of the Bank to honour its commitment to the beneficiary under the
BGs. They cannot be ordinary equities. The burden of proving the
existence of special equities is on the party so asserting. It has to be
proved, by cogent and convincing evidence, that the invocation of the
BGs is so thoroughly and fundamentally inequitable that the Bank
cannot be permitted to honour its obligations thereunder.
117. Para 72 of the decision in Svenska Handelsbanken, rendered
by three Hon’ble Judges of the Supreme Court, merits reproduction in
this context:
“72. Again in this very judgment Shetty, J. referred to the
observations of Mukharji, J. that 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
restraining the encashment of bank guarantee.”
(Emphasis supplied)
118. In the above passage, the Supreme Court has effectively
conflated the concepts of fraud, irretrievable injustice and special
equities, while examining the aspect of injunction against invocation
of unconditional BGs. The position that seems to emerge from the
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above passage is that all three circumstances must coalesce. The
Supreme Court holds, in the first sentence of para 72 of Svenska
Handelsbanken that “there should be prima facie case of fraud and
special equities in the form of preventing irretrievable injustice
between the parties”, for an invocation of an unconditional BG to be
stayed. In other words, the Supreme Court observes that the
considerations of fraud and special equities, with special equities
being in the form of irretrievable injustice, must be conjointly found to
exist for invocation of an unconditional BG to be injuncted. This
position is reiterated in the second sentence of para 72, which
emphasizes that even if there is irretrievable injustice, that alone
cannot be sufficient to restrain the encashment of a BG, unless there is
simultaneously, a prima facie case of established fraud.
119. If one were to apply the principle enunciated in para 72 of
Svenska Handelsbanken, the impugned decision of the learned
Arbitral Tribunal in the present case would straightaway have to be set
aside, as the respondent has never even alleged, much less pleaded,
fraud against the appellant. Applying para 72 of Svenska
Handelsbanken, in the absence of an allegation of fraud, even if
special equities or irretrievable injustice are found to exist, there can
be no injunction of an unconditional bank guarantee.
120. Even if, for a moment, one were to wish away the requirement
of alleging fraud, and treat the existence of special equities as
sufficient to injunct invocation of an unconditional bank guarantee,
those special equities must necessarily be in the form of irretrievable
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injustice. The learned Arbitral Tribunal is clearly conscious of this
legal position, which is why it has not held special equities to be
existing in favour of the respondent on the basis of the allegations and
counter allegations relating to the merits of the dispute before it, but
has concentrated on the aspect of irretrievable injustice. The learned
Arbitral Tribunal holds that, if the appellant were to be permitted to
encash the BGs, it would result in “immediate and huge financial
distress”, resulting in irretrievable injustice to the respondent. Further,
in para 109 of the impugned order, the learned Arbitral Tribunal
observes that special equities emerged in favor of the respondent “as
its financial position shall definitely become precarious and it will be
left crippled, financially speaking”, if the appellant were permitted to
encash the BGs.
121. No basis for these findings is available on the record. There is
no empirical data, to which the learned Arbitral Tribunal makes
reference, which would support its finding that encashment of the BGs
would leave the respondent financially crippled or render its financial
position precarious. The appellant had, for its part, specifically
traversed this position in para 151 of its reply to the Section 17
application of the respondent, as reproduced in para 80 supra. It was
pointed out by the appellant, in the said paragraph, that the respondent
and its members were engaged in over a dozen projects across states,
involving tens of thousands of crores of rupees, of which the amounts
covered by the BGs constituted only a miniscule fraction. The learned
Arbitral Tribunal has not taken this aspect into consideration at all, but
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has held, without any supportive material that invocation/encashment
of the BGs would financially cripple the respondent.
122. I am entirely in agreement with Mr. Venugopal that, if this line
of reasoning were to be accepted, every BG would become vulnerable
to injunction against invocation, on the ground that the invocation
would result in serious financial prejudice.
123. The learned Arbitral Tribunal further holds, again without any
supportive material or evidence, in para 109 of the impugned order,
that allowing the appellant to realize the amounts covered by the BGs
would result in a position in which restitution of the respondent would
become nearly impossible.
124. Mr. Venugopal correctly submits that, as the appellant is a wing
of the Indian Navy, there is no question of restitution of the
respondent becoming impossible in the event it succeeds in the arbitral
proceedings, even if the BGs were to be allowed to be encashed by the
appellant. This aspect hardly merits further discussion. Suffice it to
state that, even on facts, the observation of the learned Arbitral
Tribunal that allowing the appellant to encash the BGs would render
restitution of the respondent at a later stage impossible, cannot sustain
on facts or in law.
125. The effort of Mr. Agrawal to make out a case of existence of
special equities in favour of the respondent, justifying injunction of
invocation of the BGs, on the basis of the facts of the case, cannot
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sustain. Aspects such as the alleged withholding, by the appellant, of
amounts due to the respondent, the perceived impossibility of
performing the contract within the stipulated time owing to
circumstances beyond the respondent’s control, and the purported
discussions which were in progress regarding extension of the contract
period, are all matters which are highly disputed and require a detailed
trial and leading of evidence. Needless to say, the appellant disputes
these assertions of the respondent, as is amply evident even from the
allegations contained in the notice of termination dated 6 July 2022.
Such disputed factual claims cannot constitute “special equities”, as
understood in law as a consideration on which the invocation of
unconditional BGs can legitimately be injuncted. Nor is it open to
seek injunction against invocation of an unconditional BG on the
ground that the stage for such invocation, as envisaged by the
contract, had yet to reach.
126. The reliance, by Mr. Agrawal, on Clause 15.6 of the contract is
also, with respect, misplaced. Clause 15.6 no doubt entitles the
appellant, in the event of invocation of the BGs being injuncted, to
recover the injuncted amounts with interest at a later stage. That
cannot, however, determine whether a case for grant of injunction did,
or did not, exist. The injunction was sought by the respondent, not the
appellant. It was for the respondent to make out a case justifying
injunction, within the parameters of the applicable law.
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127. That, in my considered opinion, the respondent has not
succeeded in doing, either before the learned Arbitral Tribunal or
before this court.
The sequitur
128. The sequitur is apparent. The findings of the learned Arbitral
Tribunal are unsustainable in law or on facts. No case for injuncting
invocation of the BGs furnished by the respondent to the appellant can
be said to exist.
129. Neither of the grounds which have persuaded the learned
Arbitral Tribunal to grant injunction against invocation of the BGs can
be said to be sustainable on facts or in law. The requirements of the
BGs were clearly satisfied in the letters of invocation read with the
notice of termination issued on the same day, i.e., 6 July 2022. It
cannot be said that any case for grant of injunction on the principle of
special equities or irretrievable injustice exists. Besides, if one were
to apply the law, as stated in para 72 of Svenska Handelsbanken, in
the absence of a prima facie sustainable allegation of fraud, injunction
against invocation of unconditional BGs cannot be granted even if
special equities in the form of irretrievable injustice are found to exist.
130. Special equities, in any case, have to partake of the character of
irretrievable injustice. The court is empowered to injunct the
invocation of an unconditional bank guarantee by applying the
consideration of special equities only if it is necessary so to do in
order to prevent irretrievable injustice. The finding of the learned
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Arbitral Tribunal that permitting invocation of the BGs would result in
irretrievable injustice and irreparable prejudice to the respondent is
unsupported by any material on record, and constitute the mere ipse
dixit of the learned Arbitral Tribunal. In arriving at the said finding,
the learned Arbitral Tribunal has not taken into consideration the
assertions to the contrary, contained in para 151 of the reply filed by
the appellant to the Section 17 application of the respondent.
131. The merits of the claims of the respondent against the appellant
are totally foreign to the aspect of stay of invocation of the BGs.
Neither could the learned Arbitral Tribunal, nor can this Court, delve
into the various covenants of the contract, to examine whether the
invocation of the BGs by the appellant was justified, or even whether
the stage for invocation had arisen.
132. The impugned order of the learned Arbitral Tribunal is,
therefore, liable to be set aside.
Re. other contentions advanced by Mr. Agrawal
133. Detailed and copious arguments were advanced by Mr. Agrawal
on the merits of the disputes between the parties. He took me through
several communications in which the respondent had alleged that,
owing to defaults on the part of the appellant, as well as other
unavoidable circumstances, including the COVID-19 pandemic, it had
become impossible for the respondent to complete the contract within
the originally contracted period. This, he submits, was an issue which
was under active consideration by the parties, who were engaged in
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the process of examining whether the time for completion of contract
could be extended. He also sought to claim the benefit of the DOE
OM dated 12 November 2020, submitting that, applying the said OM,
the respondent was entitled to reduction of the quantum of the PBGs
from 10% to 3% of the contract value.
134. Though Mr. Venugopal has traversed the submission of Mr.
Agrawal regarding the merits of the dispute, and has submitted that it
was the respondent which had not been able to complete the progress
in time owing to its own fault, no occasion arises for me to return any
finding on this aspect, given the limited nature of the controversy.
135. The notice of termination dated 6 July 2022 clearly finds the
respondent to be at fault throughout. This is an aspect which,
nonetheless, is under consideration by the learned Arbitral Tribunal
and, in the event of the learned Arbitral Tribunal holding in favour of
the respondent, the respondent would always be in a position to
recover the amounts credited to the account of the appellant
consequent on encashment of the BGs. Any expression of opinion by
this Court on these aspects would not only be completely foreign to
the dispute at hand, but would also be pre-emptive of the legitimate
exercise of jurisdiction by the learned Arbitral Tribunal.
136. Insofar as the claim for reduction of the BGs amount from 10%
to 3% of the contracted price is concerned, as Mr. Venugopal correctly
points out, this principle would not apply where arbitration was
contemplated.
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137. The word “contemplate” is wide in its scope and ambit. It
would not be possible to hold, on facts, that arbitration was not in
contemplation between them. The parties were unquestionably at issue
on the rights and liabilities of each towards the other. It is difficult,
therefore, to hold that arbitration was not contemplated at the time
when the BGs were invoked.
138. Besides, this again is an issue which cannot impact the decision
of this Court on the correctness of the impugned order. The impugned
Order does not even advert to the DOE OM dated 12 November 2020.
Besides, what was in consideration before the learned Arbitral
Tribunal – and is under consideration before this Court – was whether
the invocation of the BGs, as sought by the appellant, could be
injuncted. It has again to be remembered in this context that a BG
constitutes a bilateral contract between the bank and the beneficiary,
i.e. the appellant. On the satisfaction of the conditions envisaged by
the BGs, the banks were bound, contractually, to honour the BGs.
139. Mr. Agrawal has sought to contend that the failure, on the part
of the appellant, to reduce the BG amount from 10% to 3% itself
constituted special equities in favour of the respondent, justifying
injunction against invocation of the BGs. Given the understanding of
the expression “special equities” as contained in the various decisions
of the Supreme Court, this contention cannot be accepted. Special
equities could be said to exist only where invocation of the BGs would
result in irretrievable injustice to the respondent. I have already found
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that no such case of irretrievable injustice can be said to exist. The
inaction of the appellant in reducing the BGs from 10% to 3% of the
contracted value cannot, therefore, constitute “special equities”, as
legally envisaged as a ground on which invocation of the BGs could
be injuncted. At the highest, this may be a ground available to the
respondent to be urged in the arbitral proceedings, while seeking
restitution at a later stage. No final opinion needs to be expressed on
this issue.
140. Suffice it to state, however, that it cannot be said at this stage,
prima facie, that the respondent is entitled to the benefit of the DOE
OM dated 12 November 2020 or that the appellant had defaulted in
not extending the said benefit to the respondent.
141. It is clarified, however, that this observation is only for the
purpose of examining the merit of the contention of the respondent
predicated on the DOE OM dated 12 November 2020 as a ground to
justify injuncting invocation of the BGs and is not dispositive of the
issue.
Conclusion
142. For all the above reasons, I am of the opinion, with greatest
respect to the learned members of the Arbitral Tribunal, that the
impugned decision to stay the invocation of the PBGs, ABG and
RBGs furnished by the respondent to the appellant, pending disposal
of the arbitral proceedings, is not sustainable on facts or in law.
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Inasmuch as it is contrary to the law laid down by the Supreme Court,
this Court has no option but to interfere.
143. Resultantly, the impugned order is quashed and set aside. The
stay of invocation of the BGs furnished by the respondent to the
appellant, as granted by the impugned order, stands vacated.
144. In parting, this Court records its appreciation for the manner in
which Mr. Saurav Agrawal presented the case, though pitted against
the senior and venerated Mr. Venugopal. He argued with unruffled
confidence and poise and, if he was not ultimately successful in
steering his client’s cart up the hill, it was only because the hill was
too steep, and not owing to any want of effort on his part.
145. The appeal stands allowed in the aforesaid terms, with no order
as to costs.
146. Let a copy of this judgment be provided dasti and e-mailed to
learned Counsel for both sides today itself.
C. HARI SHANKAR, J
SEPTEMBER 17, 2024
yg/dsn/aky
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