@JUDGMENTTAG-ORDER
P.P.S. Janarthana Raja, J.@mdashThese appeals are preferred against the fair and decrial order dated 17.06.2010 made in Arbitration O.P. No. 3/2009 on the file of the Court of the Principal District Judge, Tiruchirappalli. Since both these appeals have been filed against a common order, they are taken up together and being disposed of by a common judgment.
2. The brief facts arising out of these appeals are as under :
For the sake of convenience, the parties are referred to, as arrayed in CMA (MD) No. 1113 of 2010. The Petitioner is a company incorporated under the provisions of the Companies Act. Also, the first Respondent is a company incorporated under the provisions of the Companies Act and is engaged in manufacturing Industrial Boilers, Power Plants and allied products and supplies the same to the customers all over India and even to foreign customers. Both the Appellant and the first Respondent entered into an agreement for purchase of 2 Nos. 90 Tph, 87 ata 515$5-C superheat steam temperature AFBC STEAM GENERATOR. The said agreement was entered on 09.02.2005. Clause 3.0 of the agreement states that the supply of the above Steam Generators as stipulated in the Contract has to be completed within 15 months for 1st set and 17 months for 2nd set from the effective date on FOT, Ex-works, basis so as to ensure that the boiler with all its auxiliaries included in Supplier''s Scope can be fully erected, trial run, cleaned and be ready to supply steam to OWNER''s TG set. Clause 4.0 is the Contract Price. The Contract price is Rs. 29, 92, 00,000/- (Rupees Twenty Nine Crores Ninety Two Lakhs Only). ED & Education Cess/ Sales Tax shall be payable extra against Form ''C'' and Form XVII on FOT Ex-works/Ex-sub supplier''s works basis. Clause 5.0 - Warranty/Guarantee Period reads as follows :
The Steam Generator and associated equipments supplied by SUPPLIER shall carry a warranty / guarantee period of 12 months from the date of successful commissioning and Performance Guarantee test or 18 months from the date of last dispatch, whichever is later.
Clause 6.0 deals with payment terms, which reads as follows :
For Supply :
(i) 10% of advance against submission of Advance-cum Performance Bank Guarantee of 10% of the order value and release of our payment from the Owner.
(ii) 5% within Thirty (30) days after submission of all engineering documents e.g. Layout, P&ID and loading data and release of our payment from the Owner.
(iii) 85% progressive on account payment shall be released against receipt of the materials in good condition as certified by Purchaser''s Project Manager and on submission of following documents along with invoice.
Apendix - A of the agreement deals with General Conditions of Contract for Supply. The said General Conditions of Contract for Supply shall also form part of the agreement. It is also stated that in the Contract for Supply, that all the plant and equipments supplied under the Contract are to be erected and / or services are to be performed under the Contract at the site of M/s. Indo Rama Synthetics (I) Limited, Butibori, Nagpur Dist., Maharashtra, the above mentioned fourth Respondent. Clause 2.39 deals with Arbitration, which reads as under :
2.39.1 The parties hereto agree that in the event that there is any dispute or difference between them arising out of or in connection with this Contract or in the interpretation of any of the provisions hereof, they shall Endeavour to meet in an effort to resolve such dispute as mentioned above. All disputes arising out of or in connection with this Contract, which can not be settled amicably between the Parties, within a period of thirty (30) days (unless mutually extended) from the date of notice of dispute from one party to the other, shall be finally settled exclusively by Arbitration as per the provisions of the Indian Arbitration and Conciliation Act, 1996 and / or any other statutory modification or re-enactment thereof as in force in India. The ''Arbitration Tribunal'' shall comprise of three arbitrators, one each to be appointed by the parties hereto and third arbitrator shall be appointed by the two arbitrators appointed by the parties.
2.39.2 Progress under the Contract shall be continued by the Supplier during the arbitration proceeding, unless otherwise directed in writing by the PURCHASER or unless the matter is such that the work cannot possibly be continued until the decision of the arbitrators and save as those which are otherwise expressly provided in the Contract, no payment due or payable by the PURCHASER shall be withheld on account of such arbitration proceedings, unless it is the subject matter or one of the subject matter thereof.
2.39.3 Venue of the arbitration proceedings shall be New Delhi, India.
The purchase order was accepted by the first Respondent which resulted in a Contract Agreement dated 09.02.2005 valued at Rs. 29,92,00,000/- for Design, Engineering, Manufacture, Inspection, Supply and Transportation of 2 Nos. 90 TPH 87KG/cm2 Complete Steam Generator along with auxiliaries. The first Respondent has also agreed to provide a Contract Performance Guarantee for the faithful performance of the entire contract, equivalent to 10% of the value of the contract, to the Appellant. In consequence of the same, the Federal Bank, the above mentioned second Respondent, has undertaken to pay the Appellant herein, on demand, any and all monies payable by the first Respondent to the extent of Rs. 2,34,96,212.79 under BG No. 160/2006 dated 13.12.2006 and later the BG was extended up to 31.01.2009. Likewise, the Canara Bank, the above mentioned third Respondent has also undertaken to pay a sum of Rs. 64,23,787.21 under BG No. ABG/58-2006 dated 13.12.2006 and the same was further extended unto 31.01.2009. The first Respondent supplied the boilers with accessories and components as per the specification made in the purchase order at the work site of the fourth Respondent and the same was also erected. It was alleged that the Appellant has failed to pay the sale balance consideration of Rs. 1, 42, 32,858.18. The first Respondent has supplied the boilers, its accessories, its components as per the specifications made in the purchase order at the work site of the Appellant''s customer and there is no dispute that the Appellant also accepted the supply of two industrial boilers and the same were also commissioned by the Appellant''s customer on 25.12.2006 as well as on 04.08.2007, respectively. The boilers supplied by the first Respondent were all functioning well. In spite of supply and commissioning of the boilers made by the first Respondent as per the agreement, the Appellant defaulted making payment to the tune of Rs. 1, 42, 32,858.18. In spite of repeated requests, there was no response from the Appellant and in turn, the Appellant refused to pay and also threatened to invoke the bank guarantee given by the first Respondent. According to the first Respondent, if the bank guarantee is invoked, the company would be put too much loss and hardship. Therefore, the first Respondent filed a suit before Sub-Court, Tiruchirapalli for permanent injunction in O.S. No. 140/2009 and interim injunction was also obtained. Since the Appellant vehemently objected to the same, the Sub-Judge, Tiruchirapalli, referred the matter to the Arbitrator. Later, the application filed by the first Respondent u/s 9 of the Arbitration and Conciliation Act, 1996 was numbered as Arbitration O.P. No. 3 of 2009 and the application filed for temporary injunction was numbered as I.A. No. 1933 of 2009 in Arbitration O.P. No. 3 of 2009 and another application was filed by the Appellant to vacate the interim injunction granted in I.A. No. 1933 of 2009 in Arbitration O.P. No. 3 of 2009 has been numbered as I.A. No. 417 of 2010. It was stated that the Court granted interim injunction, and thereafter transferred the case to the file of the I Additional District Judge and the learned I Additional District Judge extended the interim injunction. Aggrieved over the same, the Appellant filed C.R.P. (PD) (MD) Nos.786 and 787 of 2010 before the Madurai Bench of Madras High Court, one challenging the transfer of the case to the file of I Additional District Judge and another challenging the order of interim injunction passed by the Court. This Court by order dated 19.04.2010, passed the following order :
In fine, these civil revision petitions are allowed without costs at the stage of admission. Consequently connected M.P. No. 1 of 2010 in both the CR Ps is closed. The order dated 08.03.2010 passed in Arbitration O.P. No. 3 of 2009 by the Principal District Court, Tiruchirappalli is set aside and likewise, the order dated 10.03.2010 passed in I.A. No. 411 of 2009 in Arbitration O.P. No. 3 of 2009 by the First Additional District Court, Tiruchirappalli is also set aside. The First Additional District Court, Tiruchirappalli is directed to transfer Arbitration O.P. No. 3 of 2009 to the Principal District Court, Tiruchirappalli. The Principal District Court, Tiruchirappalli is strictly directed to dispose of the same before the end of July 2010 and report the same to the Registry without fail.
Aggrieved by the order, the first Respondent has filed SLP before the Supreme Court and the Supreme Court, by order dated 10.05.2010, directed the Principal District Judge, Tiruchirappalli to hear the matter and pass appropriate orders before June 30, 2010. In consequence of the above remand, the matter was taken up by the Principal District Judge, Tiruchirappalli. On pleadings, the Trial Court formulated the points for consideration which are as follows :
1) Whether the Petitioner has prima facie case?
2) Whether the dispute between the parties is referable to the Arbitrator and whether the Petitioner who moved the court for interim measure of protection has taken steps for appointment of arbitrator?
3) whether this Court lacks territorial jurisdiction?
4) In whose favor the balance of convenience lies?
After considering the documentary evidence, i.e. Exs.P1 to P26 and Exs.R1 to R13 and after considering the arguments advanced on either side, the Trial Court, in respect of Point Nos. 1 and 2, held that there is an arbitral dispute between the parties and the first Respondent has prima facie case and the first Respondent has also taken steps to appoint arbitrator to decide the dispute between the parties. In respect of Point No. 3, the Trial Court held that the Court has got territorial jurisdiction. In respect of Point No. 4, the Trial Court held that in view of the existence of arbitral dispute and also the steps taken by the first Respondent to appoint arbitrator to commence arbitral proceedings, there is prima facie case in favor of the first Respondent and therefore, if the Appellant invokes the bank guarantee without paying the balance amount, the first Respondent would be put to much loss and hardship and therefore, the balance of convenience is in favor of the first Respondent, and accordingly granted interim injunction for a limited period, i.e. injecting the Appellant, his men and agent from invoking the bank guarantees for a period of 6 months or till the commencement of arbitral proceedings whichever is earlier. Aggrieved by that order, both the present appeals have been filed by the Appellant and the first Respondent.
3. Mr. K. Subramanian, learned Senior Counsel appearing for the Appellant vehemently contended that the order passed by the Trial Court is contrary to law, facts and circumstances of the case and further contended that the Trial Court failed to note that the contractual obligation of the party in respect of a performance guarantee is independent and distinct and a separate contract, and 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 and in respect of the performance of the contract, a party is absolutely entitled to invoke the bank guarantee unless and until a case of fraud or egregious nature or irretrievable injury is pleaded or proved. He further submitted that the Lower Court has erred in ignoring the well settled position of law laid down in the number of cases by the High Court as well as the Supreme Court. He also further contended that the Lower Court has erred in not appreciating that in course of commercial dealing, an unconditional and irrevocable bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of pending disputes, else the very purpose of providing such a bank guarantee, itself shall be defeated. Further, it is submitted that the second Respondent-Federal Bank also changed the condition of the terms of the bank guarantee and inserted a new clause without informing the beneficiary and it amounts to fraud on the part of the bank. Further the counsel submitted that when there is a bank guarantee, irrespective of any dispute between the Appellant and the first Respondent, the bank has to honor the bank guarantee and relied on the following judgments in support of his contention:
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it is therefore submitted that the order of the Lower Court is not in accordance with law and the same has to be set aside.
4. Learned Counsel for the first Respondent has submitted that if the bank guarantee is invoked, there would be irreparable loss and hardship to the first Respondent. He further stated that when there is a conditional bank guarantee, unless the terms and conditions of the guarantee are satisfied, the Appellant is not entitled to invoke the bank guarantee. Further it is stated that the first Respondent has supplied all the plant and machinery with accessories and the same were installed at the premises of the fourth Respondent, and the fourth Respondent has also given a certificate that the installed plant and machinery were functioning well and also appreciated the work of the first Respondent. In such circumstances, the Appellant is wrong in holding that the supplied plant and machinery are defective and hence they are entitled to invoke the bank guarantee. It is also further submitted that the Appellant has to pay the balance consideration and when the same was demanded, instead of making the payment, the Appellant refused to make payment and tried to invoke the bank guarantee. If the bank guarantee is invoked, the first Respondent would be put to irreparable loss and hardship and further, the first Respondent will lose the bank guarantee amount. Therefore, according to the counsel for the first Respondent, the Lower Court has correctly passed the order. Further it is contended by the counsel that the first Respondent is willing to give consent for appointment of a third arbitrator, if the Appellant suggests any common arbitrator''s name. Therefore, till the matter is taken up and disposed of by the Arbitration Tribunal, the Lower Court should have stayed the matter.
5. Learned Counsel for the second and third Respondents have stated that the bank is right in not honoring the bank guarantee on the ground that the original bank guarantee granted was modified and made a conditional one, and that unless and until the conditions are satisfied, the bank guarantee cannot be invoked. Therefore the second and third Respondent-Banks have correctly rejected the enforcement of the bank guarantee. It is further submitted that the bank has duly intimated the same to the Appellant. Therefore, not honoring the bank guarantee is in accordance with law.
6. Learned Counsel for the fourth Respondent has submitted that the plant and machinery supplied by the first Respondent were defective and there is failure of performance and therefore, the Appellant has correctly invoked the bank guarantee.
7. Heard the learned Counsel on both the sides and perused the materials available on record. There is no dispute that the first Respondent has supplied the steam boilers as per the specification provided in the agreement and the equipments were also erected and has started functioning. It is also not in dispute that the Appellant has made a part-payment and only the balance part-payment alone is due. The first Respondent has also given a Performance Guarantee as per the agreement (Performance Bank Guarantee No. 160/2006 dated 13.12.2006). The Performance Bank Guarantee was given in favor of the Appellant herein and the Federal Bank has also undertaken to pay the Appellant, on demand, all the monies payable to the extent of Rs. 2,3 4,96,212.79. The said Bank Guarantee was valid up to 31.01.2007. The Canara Bank has also given a Bank Guarantee (Bank Guarantee No. APG/58-2006 dated 13.12.2006) to the extent of Rs. 64, 23,787.21 and the guarantee was valid up to 31.01.2007. Subsequently, the Federal Bank, the second Respondent herein, has also extended the Performance Bank Guarantee No. 160/2006 dated 31.01.2007 for the same amount up to 31.07.2007. Further, there was extension of the bank guarantee up to 31.01.2008 and the same was intimated by the Federal Bank to the Appellant herein, vide letter dated 27.07.2007. Later, the said bank guarantee was extended up to 31.07.2008. Subsequently, the Appellant wrote a letter dated 24.07.2008 to the Federal Bank requesting to extend the bank guarantee up to 31.01.2009 and also stated as follows:
In case the Supplier agrees to extend the bank guarantee up to 31.01.09. Before its expiry and complies with the same, this claim may be treated as withdrawn. Otherwise, our claim stands as it is and you are requested to remit Rs. 2,34,96,212.79 by a demand draft favoring The Indure Private Limited payable at New Delhi. Kindly acknowledge receipt of this letter.
The Federal bank, by letter dated 29.07.2008, considered the above request and sent another letter stating that it had inserted the following clause:
The operation of this Guarantee will commence only after receiving the payment of Rs. 2,34,96,212.79 (Rupees Two Crores, Thirty Four Lakhs, Ninety Six Thousand, Two Hundred and Twelve and Paise Seventy Nine Only)
in the above letter, the Federal Bank has also stated that the bank guarantee was valid up to 31.01.2009. Before the insertion of this clause, the earlier bank guarantee given by the Federal Bank was an unconditional one. By inserting the above clause, the bank guarantee has become a conditional one. Only on 16.10.2008, the Appellant protested that the bank ought not to have inserted the said clause and the same was not acceptable to them. Therefore, the Appellant requested the bank to delete the conditional clause and if the same is not possible, the bank may remit the bank guarantee amount by way of a demand draft. On 13.01.2009, the Appellant sent another reminder to the Federal Bank, the above mentioned second Respondent, and the Federal bank, by letter dated 24.03.2009, sent a letter to the Appellant stating as follows:
As regards payment of the guaranteed amount we may inform you that the same will be subject to the satisfaction of the terms contained in our last renewal letter dated 29.07.2008, accepted by you. (Please note that we cannot make payment in terms of your invocation letter dated 24.07.2008 as the same stands withdrawn by you, on the basis of the instruction in the last paragraph of your said invocation letter, which reads as follows:
In case the supplier agrees to extend the bank guarantee up to 31.01.09 before its expiry and complies with the same, this claim may be treated as withdrawn.
From a reading of the above, it is clear that the bank refused to invoke the bank guarantee on the ground that the bank guarantee is a conditional one. The Appellant has not challenged the said rejection order in the manner known to law, but only sent a representation to the Headquarters of the Federal Bank and also Reserve Bank of India stating that the insertion was done without the knowledge and hence the same is not binding on them and the bank ought to have honored the invocation of the bank guarantee. In respect of the bank guarantee given by the Canara Bank, it was also extended up to 31.03.2009. Subsequently, the first Respondent filed a suit in the Lower Court and also filed Arbitration O.P. No. 3 of 2009 u/s 9 of the Arbitration and Conciliation Act, 1996, before the Principal District Judge, Tiruchirappalli and got the stay and in view of that stay, the bank has not entertained invocation of the bank guarantee by the Appellant. It is pertinent to point out that the bank guarantee given by the Federal Bank as on today, is a conditional one and the same was not challenged in the manner known to law by the Appellant. Further, another important factor that has to be taken into consideration in the present case is that the fourth Respondent-Indorama Synthetics (P) Ltd. has given a certificate stating that 2 Nos. boilers and accessories supplied by the first Respondent and commissioned on 25.12.2006 and 04.08.2007 respectively have been running satisfactorily since then. The said letter dated 19.01.2009 reads as under :
This is to certify that M/s. Cethar Vessels Limited, Tiruchirappalli has supplied us two boilers and accessories of 90 TPH, 87 at a pressure, 515$5oC superheated steam temperature through our EPC contractor M/s. The Indure (P) Limited against their Contract agreement dated 09/02/2005 for our 2 X 15 MW Captive Co-generation Power Plant at Butibori, Nagpur.
Both the boilers were commissioned on 25/12/2006 and 04/08/2007 respectively and have been running satisfactory since then.
Performance test for the boilers have been conducted on 21/08/2008 and the results satisfy all the required parameters in line with the specifications. Their services and response during execution and after the commissioning are quite appreciable. We place on record the efforts and quality of workmanship by CVL.
After giving the certificate the fourth Respondent made a complaint only on 01.04.2009 to the Appellant. It is in Volume-I of the typed set of papers given by the Appellant at Page 193, in which it is stated as under:
With reference to your letter dated 31st March please note that through the referred Certificate dated 19th Jan 2009 issued to M/s. Cethar Vessels Limited (CVPL), Tiruchirappalli, we have only elaborated the general running status as on the date given on the certificate for the boilers supplied by Cethar Vessels Limited.
Further to above Certificate we would like to elaborate the following points:
a) After the commissioning of 2nd boiler there has been major mishap in the form of a blast of Detractor due to poor quality of welding and workmanship and tube leakage etc, which caused a considerable loss and disruption in the Plant apart from numerous instances of supplies erection delays on the part of CVPL.
b) There had been considerable delays in furnishing required documentation and data book by CVPL which resulted in delay in taking necessary approvals from concerned government authorities.
c) The response of CVPL during execution was extremely poor and several meetings had to be held at CVPL plant and at site to expedite supply of equipments at our time and cost. Moreover, CVPL execution team at site was inadequately staffed and due to which their presence at site meetings failed to expedite the supply and erection work.
d) Even till date CVPL has not completed the supply of O&M spares.
e) The guarantee period for boiler are still not over as the guarantee is required to be available up to 18 months from the date of last dispatch as 12 months from the date of commissioning which ever is later.
f) The order to CVPL was directly placed by your company M/s The Indure Private Limited, New Delhi. All commercial obligation/matters with regard to the contract between Indure & CVPL has to be settled therefore, only by Indure.
Further, it is relevant to note that the typed set filed by the first Respondent contains the minutes of meeting held between the first Respondent, Appellant, fourth Respondent and M/s. Design O&M and the same is available in pages 226 to 228 of Volume-II of the typed set of papers filed by the first Respondent. From the above minutes it is clear that the boilers were installed and operated. If really the boilers were defective and there occurred any mishap as alleged at the premises of the fourth Respondent, the fourth Respondent would have objected earlier, whereas the fourth Respondent had only given a Certificate that the installed plant and machinery performed well. Also, there are no details available on record with regard to any correspondence between the fourth Respondent and the Appellant in respect of the defects. Only after the installation of the plant and boilers at the premises of the fourth Respondent, much later, the Appellant came with the complaint that the supplied boilers have not performed as per the Specification and that they were defective. When the Appellant tried to invoke the bank guarantee, immediately, the first Respondent approached the Lower Court u/s 9 of the Arbitration and Conciliation Act and obtained injunction. It is very pertinent to note that there is Performance Guarantee as contemplated under the agreement, i.e. Clause-5.0 of the agreement. Appendix-A of the Contract deals with General Conditions of contract for supply. Clause 2.23.8.1.11 deals with Performance Test. Clause 2.39.0 deals with Arbitration and the same reads as follows:
2.39.1 The parties hereto agree that in the event that there is any dispute or difference between them arising out of or in connection with this Contract or in the interpretation of any of the provisions hereof, they shall Endeavour to meet in an effort to resolve such dispute as mentioned above: All disputes arising out of or in connection with this Contract, which can not be settled amicably between the Parties, within a period of thirty (30) days (unless mutually extended) from the date of notice of dispute from one party to the other, shall be finally settled exclusively by Arbitration as per the provisions of the Indian Arbitration and Conciliation Act, 1996 and/or any other statutory modification or re-enactment thereof as in force in India The ''Arbitration Tribunal'' shall comprise of three arbitrators, one each to be appointed by the parties hereto and third arbitrator shall be appointed by the two arbitrators appointed by the parties.
2.39.2 Progress Under the contract shall be continued by the Supplier during the arbitration proceeding, unless otherwise directed in writing by the PURCHASER or unless the matter is such that the work cannot possibly be continued until the decision of the arbitrators and save as those which are otherwise expressly provided in the Contract, no payment due or payable by the PURCHASER shall be withheld on account of such arbitration proceedings, unless it is the subject matter or one of the subject matter thereof.
2.39.3 Venue of the arbitration proceedings shall be New Delhi, India.
From a reading of the above clauses, it is clear that, in the event there is any dispute or difference between them arising out of or in connection with this Contract or in the interpretation of any of the provisions hereof, they shall endeavor to meet in an effort to resolve such dispute by referring the matter to the Arbitration. It is also stated that the Arbitration Tribunal shall comprise of three arbitrators, one each to be appointed by the parties hereto and the third arbitrator shall be appointed by the two arbitrators appointed by the parties. In the present case, it is very relevant to note that the Appellant failed to make the payment of Rs. 1, 42, 32,858.18. After making that demand, the Appellant tried to invoke the bank guarantee. In view of this dispute, the first Respondent already appointed one Arbitrator, namely, one Thiru. Manivasagam, retired Commissioner of Customs and Central Excise and the Appellant had also appointed one Arbitrator, namely, Justice R.P. Bhat, retired High Court Judge, Bombay. Due to the reasons best known to them, till today, the third Arbitrator has not been appointed. Both the Appellant as well as the first Respondent also have not taken any steps to appoint a third Arbitrator, by filing a petition u/s 11 of the Arbitration and Conciliation Act. The Court also specifically asked the counsel whether they are interested to appoint a third Arbitrator by consent, but only the counsel for the first Respondent suggested a name. Further, the Court asked the counsel for the first Respondent whether he is taking any steps to appoint a third Arbitrator by filing a petition u/s 11 of the Arbitration and Conciliation Act before the Honorable Chief Justice, but the counsel for the first Respondent also stated that they are taking steps. Under the circumstances, the only point that arises for consideration is whether the bank guarantee can be invoked by the Appellant or not. Considerable arguments were advanced at some length by the counsel for both the parties. A number of judgments were cited by the counsel on both sides in respect of invoking the bank guarantee. It is not necessary to consider all the cases cited supra, except the following three cases :
1)
2)
3) Unreported judgment of this Court made in Original Application No. 66 of 2010 dated 16.06.2010, in the case of Ajay Kumar v. Oil and Natural Gas Corporation Ltd.
In
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 un-conditional bank guarantee. When in the course of commercial dealings, unconditional guarantees have been given or accepted the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. In U.P. State Sugar Corporation v. Sumac International Ltd., this Court observed that:
2. The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honor it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. 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 over ride the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may coexist in some cases.
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 honor 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 Limited (Now Reliance Energy Ltd.) v. Fenner India Ltd. and Anr. this Court held:
10. There are, however, two exceptions to this Rule. The first is when there is a clear fraud of which the Bank has notice and a fraud of the beneficiary from which it seeks to benefit. The fraud must be of an egregious nature as to vitiate the entire underlying transaction. The second exception to the general rule of non- intervention is when there are ''special equities'' in favor 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
13. In Himadri Chemicals Industries Ltd. v. Coal Tar Refining Company, this Court summarized the principles for grant of refusal to grant of injunction to restrain the enforcement of a bank guarantee or a letter of credit in the following manner:
14 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 a Letter of Credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.
(ii) The Bank giving such guarantee is bound to honor 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 a Letter of Credit.
(iv) Since a Bank Guarantee or a Letter of Credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of Bank Guarantees or Letters of Credit.
(v) Fraud of an egregious nature which would vitiate the very foundation of such a Bank Guarantee or Letter of Credit and the beneficiary seeks to take advantage of the situation.
(vi) Allowing encashment of an unconditional Bank Guarantee or a Letter of Credit would result in irretrievable harm or injustice to one of the parties concerned.
14. In Mahatma Gandhi Sahakra Sakkare Karkhane v. National Heavy Engg. Coop. Ltd and Anr., this Court observed:
Para 22. 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 favor the guarantee is furnished by the bank cannot be prevented by way of an injunction from enforcing the guarantee on the pretext that the condition for enforcing the bank guarantee in terms of the agreement entered between the parties has not been fulfilled. Such a course is impermissible. The seller cannot raise the dispute of whatsoever nature and prevent the purchaser from enforcing the bank guarantee by way of injunction except on the ground of fraud and irretrievable injury.
Para 28. What is relevant are the terms incorporated in the guarantee executed by the bank. On careful analysis of the terms and conditions of the guarantee in the present case, it is found that the guarantee is an unconditional one. The Respondent, therefore, cannot be allowed to raise any dispute and prevent the Appellant from encashing the bank guarantee. The mere fact that the bank guarantee refers to the principle agreement without referring to any specific clause in the preamble of the deed of guarantee does not make the guarantee furnished by the bank to be a conditional one.
[Emphasis supplied]
In
10. The law relating to grant or refusal to grant injunction in the matter of invocation of a Bank Guarantee or a Letter of Credit is now well settled by a plethora of decisions not only of this Court but also of the different High Courts in India. In
11. Except under these circumstances, the courts should not readily issue injunction to restrain the realization of a Bank Guarantee or a Letter of Credit. So far as the first exception is concerned, i.e. of fraud, one has to satisfy the court that the fraud in connection with the Bank Guarantee or Letter of Credit would vitiate the very foundation of such a Bank Guarantee or Letter of Credit. So far as the second exception is concerned, this Court has held in that decision that it relates to cases where allowing encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. While dealing with the case of fraud, this Court in the case of
The fraud must be of an egregious nature such as to vitiate the entire underlying transaction. While coming to a conclusion as to what constitutes fraud, this Court in the above case quoted with approval the observations of Sir John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank (1984) 1 All ER 351 at p.352which is as follows,
The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear both as to the fact of fraud and as to the bank''s knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank''s Credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it discharged.
[Emphasis supplied]
12. In
13. So far as the second exception is concerned, this Court in U.P. State Sugar Corporation v. Sumac International Ltd. (1997) 1 SCC as considered herein earlier, at para 14 on page 575 observed as follows:
14. On the question of irretrievable injury which is the second exception to the rule against granting of injunctions when unconditional bank guarantees are sought to be realized the court said in the above case that the irretrievable injury must be of the kind which was the subject matter of the decision in the Itek Corpn. Case (566 Fed Supp 1210). In that case an exporter in USA entered into an agreement with the Imperial government of Iran and sought an order terminating its liability on stand by letter of credit issued by an American Bank in favor of an Iranian Bank as part of the contract. The relief was sought on account of the situation created after the Iranian revolution when the American Government cancelled the export licenses in relation to Iran and the Iranian government had forcibly taken 52 American citizens as hostages. The US Government had blocked all Iranian assets under the jurisdiction of United States and had cancelled the export contract. The court upheld the contention of the exporter that any claim for damages against the purchaser if decreed by the American courts would not be executable in Iran under these circumstances and realization of the bank guarantee/letters of credit would cause irreparable harm to the Plaintiff. This contention was upheld. To avail of this exception, therefore, exceptional circumstances which make it impossible for the guarantor to reimburse himself it he ultimately succeeds will have to be decisively established. Clearly, a mere apprehension that the other party will not be able to pay, is not enough. In Itek case, there was certainty on this issue. Secondly, there was good reason, in that case for the Court to be prima facie satisfied that the guarantors i.e. the bank and its customer would be found entitled to receive the amount paid under the guarantee.
(Emphasis supplied)
14. From the discussions made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement of a bank guarantee or a letter of credit, we find that the following principles should be noted in the matter of injunction to restrain the encashment of a bank guarantee or a letter of credit:
(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the beneficiary is entitled to realize such a Bank Guarantee or a Letter of Credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.
(ii) The Bank giving such guarantee is bound to honor 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 a Letter of Credit.
(iv) Since a Bank Guarantee or a Letter of Credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of Bank Guarantees or Letters of Credit.
(v) Fraud of an egregious nature which would vitiate the very foundation of such a Bank Guarantee or Letter of Credit and the beneficiary seeks to take advantage of the situation.
(vi) Allowing encashment of an unconditional Bank Guarantee or a Letter of Credit would result in irretrievable harm or injustice to one of the parties concerned." In an unreported judgment of this Court made in Original Application No. 66 of 2010 dated 16.06.2010, in the case of Ajay Kumar v. Oil And Natural Gas Corporation Ltd., the learned Single Judge has also considered the scope of invocation of the bank guarantee and also relied on number of Apex Court judgments and held that the law is well settled that the contents of the contract or failure of performance and responsibilities of the parties under the contract have nothing to do with the bank guarantee and invocation of the same, which is an independent contract, except, of course, in cases where the bank guarantee is subject to certain conditions which may be relating to the performance of various terms of the contract underlining the bank guarantee or otherwise, is independent.
8. There is no quarrel as regards the principles enunciated in the above judgments. The Court has to see whether those principles are applicable to the facts of the present case or not. There is no dispute that the bank guarantee is a distinct and different and a separate contract, and 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. It is also pertinent to note that the above case law deals with only unconditional bank guarantees. In the present case, originally there was an unconditional bank guarantee and later, the same was converted into a conditional one by the Federal Bank, the above mentioned second Respondent, by inserting the clause, by letter dated 29.07.2008. By that letter, it was informed to the Appellant that the operation of the bank guarantee will commence only after receiving the payment of Rs. 2, 34, 96,212.79. Therefore, the bank guarantee in the present case is a conditional one and the copy was given to the Appellant, even though the insertion was made by the bank unilaterally. The validity of the insertion of the new clause in the bank guarantee cannot be gone into by this Court in the present proceedings. It is too late in a day for this Court to go into the validity of the conditional bank guarantee existing today. It is for the Appellant to challenge the modified bank guarantee, the moment when it was informed to them about the insertion. The Appellant ought to have challenged the same in the manner known to law. There is only mere protest by way of a representation to the higher official of the Federal Bank, the above mentioned second Respondent and also to the Reserve Bank of India. After that, they have not challenged the conditional bank guarantee, in which a new clause was inserted without their consent. When there is existence of a conditional bank guarantee, the principles enunciated in the above stated judgments, cannot be pressed into service. In the case of
14. This condition clearly refers to the original contract between HCCL and the Defendants and postulates that if the obligations, expressed in the contract, are not fulfilled by HCCL giving to the Defendants the right to claim recovery of the whole or part of the "advance mobilization loan", then the Bank would pay the amount due under the guarantee to the Executive Engineer. By referring specifically to Clause 9, the Bank has qualified its liability to pay the amount covered by the guarantee relating to "advance mobilization loan" to the Executive Engineer only if the obligations under the contract were not fulfilled by HCCL or HCCL has misappropriated any portion of the "advance mobilization loan". It is in these circumstances that the aforesaid clause would operate and the whole of the amount covered by the "mobilization advance" would become payable on demand. The bank guarantee thus could be invoked only in the circumstances referred to in Clause 9 where under the amount would become payable only if the obligations are not fulfilled or there is misappropriation. That being so, the bank guarantee could not be said to be unconditional or unequivocal in terms so that the Defendants could be said to have had an unfettered right to invoke that guarantee and demand immediate payment thereof from the Bank. This aspect of the matter was wholly ignored by the High Court and it unnecessarily interfered with the order of injunction, granted by the Single Judge, by which the Defendants were restrained from invoking the bank guarantee.
Taking into consideration of the principles enunciated in the above judgment of the Supreme Court, if the bank guarantee is a conditional one, unless the condition is satisfied, the bank guarantee cannot be invoked, and if it is unconditional and unequivocal in terms, the bank guarantee can be invoked. One other factor that has to be taken into consideration is that there is only a belated complaint given by the fourth Respondent in whose premises the boilers were installed at the instance of the Appellant, and the fourth Respondent also had given a Certificate that the equipments were functioning well. Only at a later point of time, they alleged that the equipments supplied were defective and a mishap occurred in the premises. This creates some doubt as well as suspicion about the allegation made by the fourth Respondent. There is also no concrete material evidence available on record to substantiate the claim. It is only a mere allegation. If the same is not true, the same would certainly vitiate the very foundation of the bank guarantee. It would certainly cause irretrievable harm or injustice to one of the parties and also the beneficiary should not be allowed to take advantage. Therefore, the present case comes within the four corners of the principles enunciated in Paragraph-14 (v) and (vi) of the Apex Court judgment in the case of Himadri Chemicals Industries Limited v. Coal Tar Refining Co., cited supra. In respect of the conditional bank guarantee, unless the condition is satisfied, the bank guarantee cannot be invoked and also further, other factors like non-payment as well as belated complaint cannot be disregarded. They all are well interconnected with one another. After considering the facts and circumstances of the case, especially taking into consideration of the following factors, viz.
1) Insertion of a new clause in the Performance Bank Guarantee made the unconditional bank guarantee a conditional bank guarantee.
2) The said conditional bank guarantee was not at all challenged by the Appellant in the manner known to law.
3) Certificate given by M/s. Indorama Synthetics (P) Ltd., the above mentioned fourth Respondent stating that the supplied plant and machinery were functioning well.
4) The fourth Respondent-M/s. Indorama Synthetics (P) Ltd. had given the complaint belatedly, and also there is lack of concrete evidence available on the record to prove the same.
5) Arbitration Clause in the agreement.
6) Appointment of Arbitrator by both the Appellant as well as the first Respondent, respectively.
7) As per the agreement, only the third Arbitrator has to be appointed by the two arbitrators appointed by the parties / appointment of third arbitrator by either of the parties by filing application u/s 11 of the Arbitration and Conciliation Act.
8) No steps have been taken to appoint the third arbitrator by either of the parties.
This Court is of the view that all the above factors are interconnected with each other and the same can be resolved only by Arbitration, as contemplated in the agreement. The Trial Court has correctly held that a third Arbitrator has to be appointed and the whole issue can be resolved by the Arbitration Tribunal. The Trial Court has also given time to proceed further in appointing the third Arbitrator. Under the circumstances, this Court is of the view that the order passed by the Trial Court, which is impugned in these appeals, is in accordance with law and hence the same is confirmed. It is also pertinent to note that the counsel for the first Respondent has stated that the matter may be remitted to the Trial Court with a direction to rehear the matter, since the Trial Court has not given a finding in respect of the merits of the case. This Court feels that it is not necessary to go into the merits of the case in view of the observations made earlier. It is also made clear that whatever observations made above in disposing of the present appeals shall not be relied on by the parties in any other proceedings.
9. With the above observation, the Civil Miscellaneous Appeals are dismissed. Consequently, M.P. (MD) Nos. 1 and 1 of 2010 in C.M.A. (MD) Nos. 1113 and 1390 of 2010 are closed. No costs.
