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Delhi High Court
Ansal Properties & Industries (P) … vs Engineering Projects (India) … on 18 March, 1997
Equivalent citations: 1997 IIIAD Delhi 1003, AIR 1998 Delhi 176, 67 (1997) DLT 231, 1997 (41) DRJ 618
Author: J Goel
Bench: J Goel


JUDGMENT

J.B. Goel, J.

(1) This is a petition under Section 41(b) read with Second Schedule to the Arbitration Act, Order 39 Rules 1 and 2 and Section 151 of the Code of Civil Procedure seeking injunction against the respondent from claiming, demanding or encashing the Bank guarantees No. 27/78 of Rs. 5.45 Lacs and No. 36/78 for Rs. 22.59 Lacs issued by the New Bank of India, Haus Khas Branch, New Delhi on behalf of the petitioner in favour of the respondent.

(2) Briefly, the facts are that the respondent is engaged in the business of execution of turnkey projects of different nature in India and abroad and had been awarded the work by the State Organisation of Grain of the Ministry of Internal Trade of the Republic of Iraq for construction of Iraq Grain Storage Projects at Talafar, Sinjar and Shirkat Sites in Iraq.

(3) The respondent by means of an agreement dated 5th July, 1978 associated the petitioner and gave part of the said project in respect of the work pertaining to Shirkat site to the petitioner on the terms and conditions mentioned in the said agreement.

(4) The petitioner inter alia had agreed to furnish a performance Bank guarantee equal to 5% of the Contract value for implementation of the contract which was to be valid until completion of maintenance period and issuance of the maintenance certificate.

(5) Besides this, the petitioner was also to furnish another Bank guarantee to secure the payment of advance of 5% of the contract price to be paid by the respondent to the petitioner for the execution of the work. This advance amount was to be recovered by the respondent by adjustment in instalments from Running Account Bills commencing from 4th Running Account Bill and in such manner that the entire advance is recovered fully three months prior tot he completion of the petitioner’s portion of the work.

(6) The petitioner had duly furnished two bank guarantees No. MRB-27/78 dated 5-7-1978 in the sum of Rs. 25 Lacs to secure advance mobilisation money and another Performance guarantee No. MRB-36/78, dated 21.8.1978 in the sum of Rs. 22.59 lacs both issued by the New Bank of India Ltd., Hauz Khas, Branch, New Delhi. Both the bank guarantees have been extended from time to time and arc kept alive.

(7) Various amounts against the advance mobilisation had been adjusted during the progress of the work and this bank guarantee had been extended to the extent of unadjusted amount, i.e., in the sum of Rs. 5.45 lacs, while the other bank guarantee of Rs. 22.59 lacs has been extended in full. The disputes had arisen between the parties. According to the respondent the Petitioner did not complete the work and abandoned the same which was awarded to some other person at the risk and cost of the petitioner and also various dues remained due from the petitioner in respect of adhoc advances made etc. The petitioner also raised various claims.

(8) The disputes arising between (he parties have already been referred to an arbitrator in pursuance of arbitration clause contained in the contract and adjudication proceedings are still pending. The respondents by means of two separate letters dated 30th May, 1986 invoked both the aforesaid bank guarantees.

(9) The petitioner has filed the present petition seeking injunction against invocation of the two guarantees. The case of the petitioner is that the stipulated time schedule for the work could not be adhered to due to events not attributable to them and the work was completed by them by 31.12.1982 except certain minor portion of work which could not be taken up as the same overlapped with the extension project undertaken by the respondent and after discussions held during January, 1983 the parties had mutually decided that the petitioner’s work would be foreclosed as on 7.2.1983 with no liability of any kind on the petitioner. Accordingly the contract was considered as finalised and the work was taken over by the respondent. It is thus claimed that the petitioner had fulfillled and performed its part of the contract and had also submitted the 46th R/A Bill as final bill in May, 1983. It is further alleged that for this work done upto 7.2.1983, the respondent had adjusted the balance amount of advance out of the final bill on 15.7.1984 and the amount of advance thus stood adjusted.

(10) It is also alleged that the two guarantees Were being extended as the petitioner had been assured that the two guarantees will not be encashed pending adjudication of disputes by the arbitrator.

(11) It is thus alleged that as the advance amount has been fully adjusted and the arbitration proceedings are pending the invocation of the two bank guarantees in the circumstances is impermissible, illegal, fraudulent and coercive and thereby irreparable loss and injuries will be caused to the petitioner if the guarantees are allowed to be encashed.

(12) The respondent has denied that the petitioner has performed its part of the contract as agreed or that the respondent is not entitled to invoke the two guarantees. It is denied that the petitioner had completed its portion of the work around 31.12.1982 or that the work was foreclosed by mutual consent on 7.2.1983. It is stated that the petitioner was also notified by means of their letter dated 22.1.1983 (Annexure R-1) about their incomplete work still they failed to complete the work despite the fact that the respondent had provided all requisite assistance which otherwise they were not bound to do. The work was not completed by the petitioner and as a result of continued serious defaults on their past abnormal delay in completion of the project was caused and accordingly the incomplete work taken over and the same was got completed at the risk and costs of the petitioner. The petitioner thus had failed to fulfilll the contractual obligations. It is also staled that the unadjusted balance amount of the advance bank guarantee of Rs. 5.45 Ides remained unadjusted and that is why its validity was being extended from lime to lime. The other performance bank guarantee was also being extended as the petitioner had not performed their part. It is admitted that disputes arising between the parties have been referred to the arbitrator. But it is denied that invocation of the bank guarantees is illegal, wrongful, coercive, or fraudulent or the petitioner is entitled to the grant of injunction. Besides loss caused due to delay and abandonment of work by petitioner, a balance of 9, 26, 107 dollars also remained unpaid by the petitioner on account of other adhoc advances made by the respondent. And in the circumstances the invocation of the bank guarantees is valid, justified and is in accordance with the terms and conditions agreed between the parties and the terms agreed in the bank guarantees.

(13) It has been contended on behalf of the petitioner firstly that the amount payable under the Bank guarantee against advance has since been paid / adjusted out of the running account bills and nothing is due and as such this guarantee could not be invoked. In any case, there are disputes between parties which arc pending before an Arbitrator. Unless the disputes are decided it cannot be said that any amount is due and recoverable from the petitioner or from the bank guarantees and in the circumstances, the invocation of the bank guarantees is fraudulent, it would be unjust enrichment, and result in irretrievable injustice. Special equities exist in favour of the petitioner. In respect of the performance guarantee it has further been contended that the invocation is not in accordance with the terms of the bank guarantee, as the notice does not specify the amount of loss or damages suffered as required to be staled in the guarantee. These contentions have been denied on behalf of the respondent. Number of case law has been cited on both sides.

(14) The first question is whether the amount of mobilisation advance payable under the bank guarantee stands paid by adjustment and the liability thereunder has been discharged.

(15) The first bank guarantee No. MRB/27/76, dated 5.7.1978 in the sum of Rs. 25 Lacs was given as security for repayment of advance to be made by the respondent to the petitioner in connection with the execution of the work. It is the admitted case of the parties that various amounts had been recovered by adjustment out of the running account bills submitted by the petitioner and the bank guarantee was being extended/ renewed from time to lime to the extent of the unadjusted balance amount due and admittedly the last reduced value of the bank guarantee was Rs. 5.45 Lacs and this had been extended from lime to time and when the present petition was filed on 6.8.1986, this bank guarantee was alive and has been kept alive thereafter as appears from the affidavit dated 19.12.1996 filed by Shri N. Kumar, General Manager of the petitioner.

(16) The case of the petitioner is that except certain small portions of work they had completed the work around 31.12.1982, the parties had mutually decided to foreclose the work as on 7.2.1983 and the balance work was taken over by the respondent without any outstanding liability on the part of the petitioner. It is their further case that they had submitted 46th Final Bill in May, 1983 and the respondent had adjusted the balance unadjusted amount of the bank guarantee out of this bill on 15.7.1984.

(17) Respondents have denied that the petitioner had completed his portion of the work or that there was any mutual decision that the work would be foreclosed as on 7.2.1983 with no liability or the contract was considered as completed/performed by the petitioner.

(18) The case of the respondent is that the petitioner had failed to complete the work and to fulfilll its obligations under the contract and the respondent got the balance work completed at the petitioner’s risk and cost; the petitioner failed to adhere to the completion schedule and to complete the project due to various defaults on its part. The details of defaults, of incomplete work and the help given to the petitioner which, according to them, they were not bound to give are mentioned and it is alleged that they had notified to the petitioner the incomplete work vide letter dated 22.1.1983 (Annexure R-1) and the amount of the bank guarantee remained unadjusted/undischarged. It is alleged that the petitioner were not having sufficient Funds to meet even their requirements on account of material, wages and other expenses and for that purpose certain adhoc advances were also given to were also given to the petitioner from time to time which amount also remained adjusted/un recovered and in these circumstances the mobilisation advance was not adjusted and only part adjustments were made towards the adhoc advances. In support of this the respondent has also relied on letter dated 9.2.1983 (Annexure R-2) sent by them to the petitioner in reply to latter’s letter dated 24.12.1982 wherein the respondent had not agreed to adjust any amount towards the advance Bank Guarantee as the amount due under the Running Account Bills has not been sufficient even to recover the amounts of adhoc advances. In this letter the petitioner was also required to extend this bank guarantee of Rs. 5.45 Lacs after 4.1.1983 and this extension was done by the Bank as informed in letter No. MRB-BG, dated 9.4.1983 (petitioner’s document on page 47). The respondent in replication has admitted having been paid adhoc payments and that having not been paid or adjusted in full against their bills. The details of adjustments made in respect of the payments made against such ad-hoc advances has not been furnished by the petitioner. On the other hand it is admitted in Para 12 of replication that the petitioner kept the bank guarantees in force subject to the pending disputes about finalisation of the accounts and settlement of the disputes by the arbitrator. Respondent in Para 25 of the reply has pleaded that 9,26, 107 Dollars still remained outstanding towards ad hoc advances. This fact has not been denied by the petitioner and in fact set off of the amounts due to the respondent is being claimed in the disputes pending before the Arbitrator.

(19) The very fact that the bank guarantee is being extended is an admission of the liability by the petitioner under the bank guarantee. In any case the respondent has not admitted that the balance amount of this mobilisation advance covered by the Bank guarantee has been realised from the petitioner and it was specifically agreed in the Bank guarantee that the respondent shall be the sole judge about the extent of losses or damages caused to or suffered by the respondents on account or the amount of advance not recovered.

(20) In the circumstances, on the material on record it cannot be said that the liability undertaken in this Bank guarantee is not outstanding or has been discharged.

(21) The parties had entered into agreement dated 5.7.1978 incorporating terms and conditions to be applicable in the performance of the Contract. Inter alia it provided of furnishing two bank guarantees, one performance guarantee (clause 6) and to other secure advance money to be given by the respondent (clause 2.3), i.e., 5% each of the value of the work, by the petitioner to the respondent as under:- Performance Guarantee

6.1Within 10 days of the signing of the contract, the Associate shall be required to provide a performance bond in Indian Rupees equal to 5% of the contract price. The performance bond is a guarantee for the successful implementation of the contract which will be valid until completion of maintenance period and issuance of the maintenance certificate……….

6.2The performance Bond is a financial guarantee for the proper execution of the contract, completion of the whole works, collection of the penalties and compensation and any other amount due to the Contractor from the Associate thereto, until the contract is complete and the last ‘Final Certificate has been issued for the whole work. Attachments against this performance bond shall be made directly without prior notice to the Associate, or any court action. If the Performance Bond is in the form of Bank Guarantee the Contractor shall have the right at any lime to collect the full amount of the said Bond. The Bank shall not question why this amount has become due and regardless of any obligations or opposition raised by the Associate. The decision of the Contractor shall be final and binding in this regard.

“23.1ADVANCE Payment The Associate shall be paid a total advance of 5% of the contract price after signing of the contract against an irrevocable bank guarantee in favour of (he Contractor from an approved nationalised bank in India of the equivalent amount at the official exchange rate specified elsewhere in the agreement. 23(1)(D) The recovery of the advance paid in India and in Iraq shall be made in such a manner that the entire advance is recovered fully three months prior to the completion of Associate’s portion of work. The recoveries will be made in same currencies in equivalent instatments and shall commence from fourth running account bill. (In this agreement contractor’ means the respondent and Associate means the Petitioner) The petitioner had furnished performance guarantee No. MRB/36/78 dated 21.8.1978 of the New Bank of India, Hauz Khas, New Delhi Branch in the sum of Rs. 22.59 Lacs., and the bank had agreed as under:- We, the New Bank of India Limited, M-5, Hauz Khas, Mehrauli Road, New Delhi (hereinafter called ‘The Bank” which expression shall include its successors. and assigns) hereby jointly and severally undertake and guarantee to pay to the company in rupees forthwith on demand in writing and without protest or demur or any and all moneys anywise payable by the Contractor to the company under, in respect of or in connection with the said contract inclusive of all the company’s losses and damages and costs, (inclusive between attorney and client) charge and expenses and other moneys anywise payable in respect of the above as specified in any notice of demand made by the company to the Bank with reference to this guarantee upto an aggregate limit of Rs. 22.59 (Lacs)…. (v) The Bank hereby waives all right at any lime inconsistent with the terms of this Guarantee and the obligations of the Bank in terms hereof shall not be anywise affected or suspended by reason of any dispute or disputes having been raised by the contractor (whether or not pending before any arbitrator officer, Tribunal or Court) or any denial of liability by the Contractor or slopping or preventing or purporting to slop or prevent any payment by the Bank to the company in terms hereof. . (vi) The amount staled in any notice of demand addressed by the Company to the Guarantor as liable to be paid to the company by the Contractor or as suffered or incurred by the company on account of any losses or damages or costs, charges and/or damages or costs, charges and/or expenses shall as between the Bank and the company be conclusive of the amount so liable to be paid to the company or suffered or incurred by the company, as the case may be, and payable by the Guarantor to company in terms hereof.”

(22) And Bank guarantee No. 27/78 dated 5.7.1978 against advance provided as under:-

“WE, the New Bank of India Limited…… do hereby guarantee the recovery by the E.P.I, of the said advance with interest thereon…… If the said contractor fails to utilise the said advance for the purpose of the contract and/or the said advance together with interest thereon as aforesaid is not ‘ fully recovered by Epi, we…… hereby unconditionally and irrevocably undertake to pay to the Epi as demanded and without demure to the extent of the said sum of Rs. 25 Lacs any claim made by the Epi on us for loss or damage caused to or suffered by the Epi by reason of the Epi not being able to recover in full the said sum of Rs. 25 Lacs with interest, as aforesaid. 2. We……. further agree that the Epi shall be the sole Judge of…… the extent of loss or damage caused to or suffered by the Epi on account of the said advance together with interest not being recovered in full and the decision of the Epi ……. shall be final and binding on us. Petitioner is the Contractor and the respondent is Epi in this document)”.

(23) The respondent has invoked both these bank guarantees. Performance bank guarantee was invoked vide letter No. FIN(IQ)/P-79/Ansals dated 30.5.1986 which reads as under:-

“YOU (New Bank of India) had executed in our favour a bank guarantee No. MRB/36/78 dated 21.8.1978 for a sum of Rs. 22,59,000.00 on behalf of M/s. Ansal Properties & Industries Pvt. Lid. for due performance of their obligations under the contract between them and ourselves. M/s. Ansal Properties & Industries Pvt. Ltd., the contractor abovenamed have failed to perform their obligations under the contract and as such we call upon you to pay to us the guaranteed amount of Rs. 22,59,000.00 .”

(24) The other bank guarantee has been invoked by separate letter No. FIN(10)P- 79/Ansals dated 30.5.1986 which reads as under:-

“THE above mentioned bank guarantee is valid upto 4.7.1986. Since the advance paid to M/s. Ansal Properties & Industries Pvl. Ltd. against the above guarantee has not been recovered. We request you to please arrange to remit us the guaranteed amount of Rs. 5,45,000.00 immediately.”

(25) The principles governing the invocation of the bank guarantees are well settled. These have been reaffirmed in a recent judgment of the Supreme Court in Ansal Engineering Project Ltd. Vs. Tehri Hydro Development Corporation Ltd. & Am. where it has been laid down as under:

“4. It is settled law that bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person on whose instance the bank guarantee was given and the beneficiary. Unless fraud or special equity exists, is pleaded and prima facie established by strong evidence as a triable issue, the beneficiary cannot be restrained from encashing the Bank guarantee even if dispute between the beneficiary and the person at whose instance the bank guarantee was given by the Bank, had arisen in performance of the contract or execution of the works undertaken in furtherance thereof. ……”

(26) The object behind is to inculcate respect for free flow of commerce and trade and faith in the commercial banking transactions unhedged by pending disputes between the beneficiary and the Contractor.

“5. It is equally settled that in terms of the bank guarantee the beneficiary is entitled to invoke the bank guarantee and seek encashment of the amount specified in the bank guarantee. It does not depend upon the result of the decision in the dispute between the parties, in case of the breach. The underlying object is that an irrevocable commitment either in the form of Bank guarantee or letters of credit solemnly given by the Bank must be honoured. The Court exercising its power cannot interfere with enforcement of Bank guarantee/letters of credit except only in cases where fraud or special equity is prima facie made out in the case as a triable issue by strong evidence so as to prevent irretrievable injustice to the parties. The trading operation would not be jettisoned and faith of the people in the efficacy of banking transactions would not be eroded or brought to disbelief.”

(27) In this case two contentions were raised (1) that it was a fraud because after promise to extend the time for completing the work, and the terms of the Bank guarantee were extended, that contract was terminated. It was held that it was not a case of fraud but one of acting in terms of contract.

(28) Second contention was that unless the amount due and payable is determined by a competent Court or tribunal by mere invocation of bank guarantee or letter of credit pleading that the amount is due and payable by the petitioner which was disputed cannot be held to be due and payable in .a case. This contention was rejected. It was held that the bank guarantee/letter of credit is an independent contract between the bank and final adjudication of the disputes between the parties is not a pre condition to invoke the bank guarantee.

(29) In Hindustan Steel Work Construction Ltd. Vs. Tarapore & Co. &Anr. , injunction was sought against invocation of the Bank guarantee on the ground that there was counter claim which was referred to the Arbitrator. It was held that the circumstance that there was serious dispule on the question as to who has committed the breach of the contract and that whether the amount is due and payable by the Contractor to the appellant till the Arbitrator declares the Award, was not sufficient to make the case an exceptional one or of special equity justifying interference restraining the appellant from enforcing the bank guarantee. It was further laid down in this case that whether the bank guarantee is towards security deposit or mobilization advance or working funds or for due performance of the Contract, if the same is unconditional and if there is a stipulation in the bank guarantee that the bank should pay on demand without demur and that the beneficiary shall be the Sole Judge not only on the question of breach of contract but also with respect to the amount of loss or damages, obligation of the bank would remain the same and that obligation has to be discharged in the manner provided in the bank guarantee.

(30) Following U.P. Co-operative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd. and General Electric Technical Services Co. Inc. Vs. Punj Sons (P) Ltd. and Anr. , it was reiterated that the fraud must be of an egregious nature as to vitiate the entire underlying transaction of the bank guarantee. It was emphasized that it is settled that the Court, before issuing the injunction under Order 39 Rules I and 2C.P.C. should prima facie be satisfied that there is triable issue, strong prima facie case of fraud or irretrievable injury and balance of convenience is in favour of issuing injunction to prevent pre medial injury. The Court should normally insist upon enforcement of bank guarantee and should not interfere with the enforcement of the contract of guarantee unless there is specific plea of fraud or special equities in favour of the plaintiff. He must necessarily plead and produce all the necessary evidence in proof of the fraud in execution of the contract.

(31) English and Indian case law relied on behalf of the petitioner has been considered in one or the other of those cases.

(32) Relevant clause of the bank guarantee in respect of the advance given by the respondent has been reproduced earlier. This bank guarantee in absolute terms gives discretion to the respondent/beneficiary to invoke the same by making a demand, without demur, for loss or damages caused to or suffered by the respondent by reason of their being unable to recover in full the said amount and the respondent is the sole judge of the extent payable and the decision of the respondent is final, conclusive and binding on them. Thus the beneficiary has been made sole judge as to whether the contractor has or has not committed default in payment of the advance amount and the decision of the beneficiary is final and binding on the bank. In the letter invoking bank guarantee dated 30.5.1986 reproduced above it has been clearly mentioned that the advance paid to the petitioner against the bank guarantee in question has not been recovered and it called upon them to arrange to remit the guarantee amount of Rs. 5.45 lacs.

(33) Prima facie there is no illegality or infirmity on the face of this invocation letter in invoking the bank guarantee. The plea of the petitioner that the demand is fraudulent and nothing is due, in view of the facts and circumstances noticed above has no force and is not supported by any material on record and thus to that extent has no merit.

(34) As regards the performance guarantee it has been contended on behalf of the petitioner that one of the situation which obligates a bank to refuse payment upon invocation of bank guarantee is where the invocation is not in accordance with the terms of the bank guarantee, and in the present case the requirements for invoking the bank guarantee are not fulfillled as it is not mentioned if any loss was caused nor the amount of loss suffered has been mentioned in the invocation letter. For this reliance has been placed on United Commercial Bank Vs. Bank of India , M/s. Rawla Construction Company Vs. Union of India and M/s. Har Prashad & Co. Vs. Sudershan Steel Mills and Others .

(35) The relevant portion of the bank guarantee No. 36/78 and the letter of invocation have already been reproduced. The bank guarantee contemplated that the bank had undertaken to pay to the respondent forthwith on demand in writing and without protest or demur any or all moneys anywise payable by the contractor to the Company made inrespect of or in connection with the said contract…… as specified in any notice of demand made by the company to the bank with reference to this guarantee….. .

(36) It is apparent from this that the invocation can be resorted to if any money is payable by the contractor and the money payable has to be specified in the letter of invocation. The letter of invocation in this case only states that the contractor failed to perform their obligations under the contract and as such the amount of the bank guarantee was recalled. This invocation is not in terms of the guarantee. In United Commercial Bank vs. Bank of India it has been held that a bank issuing or confirming a Letter of Credit is not concerned with the underlying contract of the seller and the buyer and must honour the liability undertaken according to its terms. However, it is not bound or entitled to honour the same unless the documents are in exact compliance of with the terms of the credit. In M/s. Har prashad & Co. Ltd. Vs. Sudershan Steel Mills and Others (Supra) it was held that the duty of the beneficiary in making the demand on the bank is like the duty of the plaintiff to disclose the cause of action in the plaint. Just as a plaint is liable to be rejected for non disclosure of the cause of action a demand by the beneficiary of the bank guarantee is liable to be rejected by the bank if it docs not state the facts showing that the conditions of the bank guarantee have been fulfillled. If this obligation is not performed by the beneficiary he is not entitled to the payment of the amount of the bank guarantee.

(37) In M/s. Rawla Construction Co. (Supra) also it was held that as it was not stated in the demand made by the beneficiary as required in clause 2 the amount claimed is due either by way of loss or damage caused to or would be caused to or suffered by the Government by reason of any breach, it was not a valid invocation and accordingly injunction was granted against invocation of the bank guarantee. .

(38) The invocation letter does not fulfilll the requirements agreed in the bank guarantee for invoking the same and as such this performance bank guarantee has not been validly invoked. The petitioner is not stranger to the transaction of the bank guarantee as it is part of the agreement between the petitioner and the respondent and it has a right to say that the invocation of the bank guarantee is not in accordance with the terms and conditions agreed and incorporated in the guarantee. In the invocation letter the respondent has no where stated whether they have suffered any loss or damage and if so to what extent whether that is to the extent of the bank guarantee or less or more.

(39) In the circumstances, the bank guarantee has not been validly invoked by letter dated 30.5.1986.

(40) I accordingly partly allow this petition. The invocation of the bank guarantee No. Mrb 27/78 of Rs. 5.45 lacs furnished secure the repayment of the balance advance amount given by the respondent to the petitioner is upheld. However, the second invocation letter not being legal and valid, as such the respondent is not entitled to invoke the bank guarantee on the basis of this letter. Respondent is accordingly hereby restrained from invoking the second bank guarantee No. Mrb 36/78 on in view of the circumstances, the parties are left to bear their own costs.


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