ORDER
1. The Original Application No. 70 of 1998 is filed by the petitioner against the respondents to pass ad-interim injunction restraining the 1st respondent from enforcing of encashing the Bank Guarantee No.99 of 1992 dated 28.7.92 for a sum of Rs. 1,83,67,800.
2. The Application No. 552 of 1998 is filed by the petitioner to pass appropriate order of protection for the preservation of the Bank Guarantee
furnished by the 2nd respondent for and on behalf the 1st respondent pending final adjudication of the disputes by the arbitral tribunal.
3. The applicant Larsen & Toubro Limited is a Company incorporated under the Companies Act, 1956 and having its registered Office at Mumbai and various group offices all over India. The Engineering Projects and Equipments Group of the applicant has its Head Office at Calcutta. The 1st respondent, Tamil Nadu Minerals Ltd. is a Government of Tamil Nadu undertaking a Government Company having its office at Chennai. The 2nd respondent is the United Commercial Bank which is a nationalised bank having its Head Office at Mumbai.
4. The 1st respondent decided to set up a Graphite Beneficiation Plant in Sivaganga, Sivaganga District to process graphite ore to produce graphite concentrate (96% Fixed Carbon) of 28 tonnes and to process 200 tonnes of graphite ore every day to produce graphite concentration. To set up the proposed plant, the contract was awarded to the applicant at a cost of Rs. 18,36,78,000 as per Government Letter (Ms) No.271 dated 16.7.1992. The guaranteed output is 28 tonnes of Graphite concentrate per day with Fixed Carbon 96% from the input of (ROM) 200 tonnes of ore per day with fixed carbon content of 14.2% and the plaint would stand guaranteed for 20% intermittent overload. The applicant had given a performance Guarantee for Rs. 1,86,67,800 by Bank Guarantee with validity period upto 31.3.1998. The advance payment of 10% of the contract price was made on 31.7.1992 and the said date was fixed as the date of commencement of the contract. When the applicant was contemplating to conduct performance test, there was a fire accident on 5.6.1994 and it resulted in the replacement of some of the mechanical, electrical and instrumentation parts and the trial production commenced from 19.10.1994. However, it was found that the drier was not capable of drying the graphite concentrate at a rate of 1.4 tonnes per hour as envisaged in the agreement but performed only 0.60 tonnes per hour with the result the output of the graphite concentrate was hardly 15 tonnes per day against 28 tonnes envisaged in the agreement. Further the output grade was 91% Fixed Carbon against 96% Fixed Carbon envisaged in the agreement. Though various improvements in the plant have been done, the original objective could not be attained. When the performance guarantee test was conducted, it was found that the objective shown in the agreement had not been achieved. Finally, the Board of Directors took over the plant from 21.8.1997 by that time the applicant was paid towards the contract of total sum of Rs. 2118.07 lakhs. Even after consulting the experts from I.I.T. Madras, there was no improvement. The final performance guarantee test was conducted from 17.12.97 to 20.12.97 and that test also disclosed the short fall in the performance both in grade and quantity, besides poor recovery and enormous loss of graphite in tailing. So 5% payment amounting to Rs. 89.41 lakhs was not released by the 1st respondent as per the Contract. As the final performance guarantee test was not satisfactory, the 1st respondent decided to invoke the Bank Guarantee and accordingly they have sent a letter dated 6.2.1998 to the 2nd respondent to pay a sum of Rs. 1,25,32,268 by invoking the Bank Guarantee.
5. At that stage the applicant Larsen & Toubro Ltd. have filed these two applications –
(1) for ad-interim injunction restraining the 1st respondent from enforcing/encashing the Bank Guarantee; and (2) for appropriate order of protection for the preservation of the Bank Guarantee. 6. The contract between the parties has been entered into at Madras on 20.12.1993. The Article 13 of the agreement says:-
Article-13: Arbitration “The parties agree that any dispute or disagreement in relation to this contract shall be amicably resolved by mutual negotiations. If the dispute or disagreement remains unresolved, either party may refer the dispute or disagreement to arbitration. The other patty shall also be free to submit its counter-claim, if any. The arbitration shall be held by Arbitrators, one nominated by each party. The Umpire shall be selected by the two arbitrators. The arbitration shall be held in accordance with the Indian Arbitration Act, 1940. The venue of arbitration shall be Madras.”
Accordingly the applicant herein has already sent a proposal for appointment of an arbitrator and the 1st respondent herein yet to state the name of the arbitrator. It was argued by the learned counsel for the applicant that the shortfall in the performance both in grade and quantity and loss of graphite was due to many reasons and the major reason was that it was due to quality of ore, as the ore taken do not have uniform quality. It was contended on the side of the 1st respondent that as the applicant have already expressed their intention to refer the matter to arbitration and also specified the name of arbitrator, such questions need not be gone into at this stage and it is better to decide the only question whether the 1st respondent has a right to invoke the Bank Guarantee as per law. I see every force in the contention of the 1st respondent. It is desirable to look into the legal position regarding the invoking of Bank Guarantee as there is provision in the Contract for arbitration to decide the reasons for the short-fall and connected matters.
7. Learned Senior Counsel for the 1st respondent Mr.A.L. Somayaji has based his argument on three decisions of the Apex Court which settled the legal position of invoking the Bank Guarantee.
(1) In Hindustan Steelworks Construction Ltd. v. Tarapore & Co. and another, Where bank guarantee is stipulated that the beneficiary shall be the sole and final judge to invoke the bank guarantee and that there are two exceptions (1) fraud in connection with the bank guarantee, and (2) irretrievable harm or injustice to one of the parties. It was further held that it is fraud of beneficiary, not the fraud of somebody else and while discussing irretrievable loss it held –
“In a case where the party approaching the Court is able to establish that in view of special equities in his favour if injunction as requested is not granted then he would suffer irretrievable injustice, the court can and would interfere. It may be pointed out that fraud which is recognised as an exception is the fraud by one of the parties to the underlying contract and which has the effect of vitiating the entire underlying transaction. A demand by the beneficiary under the bank guarantee may become fraudulent not because of any fraud committed by the beneficiary while executing the underlying contract but it may become so because of subsequent events or circumstances. We see no good reason why the courts should
not restrain a person making such a fraudulent demand from enforcing a bank guarantee.”
(2) In U.P. State Sugar Corporation v. Sumac International Ltd., the Apex Court held-
“The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take 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 heads 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.”
“Dealing with the question of fraud it has been held that fraud has to be an established fraud. The following observations of Sir. John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank, 1984 (1) All ER 351, CA are opposite:
“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.”
The aforesaid passage was approved and followed by this Court in V.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., .
The second exception to the rule of granting injunction, i.e., the resulting of irretrievable injury, has to be such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately succeeds. This will have to be decisively established and it must be proved to the satisfaction of the court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution.”
8. When we analyse these applications, there is no allegation of fraud against the beneficiary i.e. 1st respondent herein. The 1st respondent Tamil Nadu
Minerals Ltd. is a Company wholly owned by the Government of Tamil Nadu and as such there is no reason to say that by invoking the bank guarantee irretrievable injury would be caused. When the reasons on which the question of invoking of bank guarantee can be challenged are absent, there is no valid ground to prevent the 1st respondent from invoking into the bank guarantee and to give protection for the preservation of bank guarantee. As the above pronouncements of the Supreme Court are uniform and well settled on the question of invoking the bank guarantee, the various reasons stated by the applicant herein, cannot be accepted.
9. Learned Senior counsel for the 1st respondent has contended that interim relief cannot be granted as per Section 41(b) of Arbitration Act, 1940 as Section 9(2) in Arbitration and Conciliation Act, 1996 is analogous to that of Section 41(b) of the Arbitration Act, 1940.
10. Learned Senior counsel appearing for the applicant has shown Section 9(ii) of Arbitration and Conciliation Act, 1996 which says –
“9. Interim measures etc. by Court – A party, may, before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with Section 36, apply to a Court:-
(i)…..
(ii) for an interim measure of protection in respect of any of the following matters, namely:-
(a) …
(b) …
(c)…
(d) interim injunction or the appointment of a receiver;
(e) …
and the Court shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it”
As the above Section is very clear that the interim order can be passed by the Court as per the Arbitration and Conciliation Act, 1996, I find no force in the argument advanced on the side of the 1st respondent.
11. It was also argued on the side of the 1st respondent that the original Court of jurisdiction to hear the matter will be the Court of Sub-ordinate Judge at Sivaganga and not this Court. However, the Contract was executed at Madras and Article 13 stated supra clearly shows that “The venue of arbitration shall be at Madras.” In such circumstance, the argument advanced on the side of the 1st respondent cannot be accepted. However, these two applications shall fail for the reasons stated above.
In the result O.A.No.70 of 1998 and Application. 552 of 1998 are dismissed. In the circumstance of the case parties shall bear their respective costs.