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Judgment
D.Y. Chandrachud, J.—During the recess of the Court, an ad-interim order has been passed by the Learned Single Judge on 12th November 2007 in terms of prayer Clause (a) of the Notice of Motion in the following terms:
(a) For that pending the hearing and final disposal of the suit, a temporary order and injunction be issued restraining:
(i) Defendant No. 1 its servants, agents and assigns from in any manner making any payment under the Performance Bond/Guarantee dated 21st May 2004 to Defendant No. 2;
(ii) Defendant No. 2 its servants, agents and assigns from in any manner accepting any payment under the Performance Bond/Guarantee dated 21st May 2004 from Defendant No. 1, or in the alternative, if Defendant No. 2 has already received payment from Defendant No. 1, then not to pay over any amount under the Performance Bond dated 21st May 2004 to Defendant No. 3;
(iii) Defendant No. 3, its servants, assigns and successors in office from in any manner accepting any payment under the performance Bond and the Counter Guarantee (Exhibit "B" hereto) from Defendant Nos. 1 and 2.
The order of injunction is to remain in operation until today i.e. 21st November 2007. Accordingly, the Court has been moved for extension of the ad-interim relief. The First and Third Defendants were not present before the Court when the ad-interim order was passed on 12th November 2007. The First and Third Defendants are now appearing in these proceedings.
The Plaintiff entered into a contract with the Third Defendant in the nature of Engineering, Procurement and Construction of a manufacturing facility for a Soda Ash Plant to be set up in Kenya. In pursuance of the contract which was entered into on 26th March 2004, the Plaintiff was required to furnish a Performance Bond representing 10% of the value of the contract which came to the amount of US $ 5,856,050. A Performance Bond was furnished by the Second Defendant, which is a Banking Corporation incorporated under the laws of the United Kingdom. A Counter Guarantee was issued by the First Defendant to the Second Defendant in order to secure the Second Defendant in respect of any claim made under the Performance Bond. The recitals contained in the Performance Bond stipulate that Clause 4.2 of the Contract requires the Plaintiff to provide the Third Defendant with the bond. Clause 2 of the Performance Bond provides for a ''payment undertaking'' and Clause 3 for a ''demand''. The relevant parts of Clauses 2 and 3 were as follows:
PAYMENT UNDERTAKING
Subject as provided in this bond, the Bond Provider irrevocably and unconditionally undertakes to pay to the Employer such part sum or sums as the Employer certifies has or have not been paid by the Contractor when due (the "Bonded Sum").
MAKING DEMAND
3.1 To make a demand on the Bond Provider the Employer must deliver to the Bond Provider a certificate in the form set out in appendix 2 (the "certificate") signed by a director or secretary of the Employer (or its permitted assignee) and attaching to such certificate a copy of any document referred to in the certificate as being so attached.
At this stage, it would also be material to advert to Clauses 8 and 12 which are to the following effect:
ABSOLUTE NATURE OF BOND
8.1 This bond constitutes an absolute, unconditional and irrevocable commitment by the Bond Provider to make payment to the Employer in accordance with, and subject only to, the terms set out in this bond.
8.2 The Employer shall not be required before making demand under and/or enforcing this bond against the Bond Provider to take proceedings against the Contractor or pursue, execute, utilise or exhaust any other rights, remedy or security which it may have against the Contractor.
ENTIRE AGREEMENT
The terms of this bond constitute the entire agreement and understanding between the parties to this bond in connection with the subject matter to this bond. Neither party to this bond has relied upon any representation by the other party except as expressly set out in this bond.
On 12th April 2007, a notice was served upon the Plaintiff by the Third Defendant in accordance with Clause 2.5 of the Contract noting that though time for the completion of work under the contract was revised to 28th October 2006, the work was not complete. In the circumstances, a determination of liquidated damages was made by the Third Defendant in the total sum of US $ 5,856,050. Meetings thereafter took place between the parties at Dubai in the month of May 2007 to which a reference would be made at a stage subsequent. On 13th September 2007, the Third Defendant addressed a letter to the Plaintiff recording that there had been no progress in resolving the issues which were discussed at the Dubai meetings and stating that unless further progress was made by 5th October 2007, the Third Defendant would proceed to exercise its right to collect liquidated damages as stated in April 2007. On 11th October 2007, the Third Defendant served a notice in accordance with the provisions of Clause 2.5 of the General Conditions of Contract demanding payment of liquidated damages as quantified on 12th April 2007. On 31st October 2007, the Third Defendant invoked the Performance Bond by a demand served on the Second Defendant in the following terms:
We certify that the Contractor has failed to pay us the sum of USD 5,856,050 (US Dollars five million eight hundred and fifty six thousand and fifty) when due in accordance with the terms of the Contract. We enclose a copy of a letter from us to the Contractor which was sent by courier on 11 October 2007.
We hereby demand that you pay the sum of USD 5,856,050 (US Dollars five million eight hundred and fifty six thousand and fifty) in immediately available funds to the following bank account:
Account Name: Barclays Bank: Liverpool City Branch, MSC Compensation Account.
The suit has been instituted inter alia in order to seek an injunction both in respect of the invocation of the Performance Bond by the Third Defendant and as against the First Defendant from honouring the terms of the Counter Guarantee issued by the First Defendant to the Second Defendant.
On behalf of the Plaintiff, it has been submitted that the invocation of the Bond was not in accordance with the terms of the Bond. To buttress the submission, it was contended that the terms of the underlying contract between the parties must be deemed to have been incorporated in the Performance Bond inasmuch as there is a reference therein to Clause 4.2 of the Contract. Moreover, it is urged that a demand in Clause 2 of the Performance Bond was conditioned by a certification by the Third Defendant that the sums as were due had not been paid by the Plaintiff. Learned Counsel submitted that Clause 4.2 of the underlying contract between the parties inter alia contained conditions subject to which the Guarantee could be invoked and must be read together with the provisions of Clause 2.5 and Clause 3.5 of the Contract. The submission before the Court was that the procedure required to be followed in Clauses 2.5 and 3.5 anterior to the invocation of Performance Bond was not followed and that an injunction must, therefore, be issued restraining the invocation of the Performance Bond and the Counter Guarantee. There was, according to the Plaintiff, no determination by the Third Defendant of the amount of liquidated damages in accordance with the terms of Clause 3.5 and in breach of the understanding that was arrived at in the meetings at Dubai, the Third Defendant proceeded to invoke the Performance Bond.
On the other hand, it has been urged on behalf of the First and Third Defendants that the terms of the Performance Bond in the present case would clearly demonstrate that the bond was independent of the underlying Contract. Hence, it was submitted that an order of injunction cannot be issued on the basis of an alleged breach of the underlying Contract between the parties. Secondly, it was urged that even if the underlying Contract were to be read into the Performance Bond, it is abundantly clear that the invocation has been consistent with the terms of Clauses 2.5, 3.5 and 4.2 of the Contract. Finally, it was submitted that for the purposes of determining whether a case has been made out for the grant of ad- interim relief, it would be open to the Court, at least prima facie, to evaluate as to whether any part of the cause of action has occurred within the jurisdiction of this Court. The submission was that even on a demurer, the averments contained in paragraph 42 of the Plaint would not demonstrate the existence of jurisdiction in this Court to entertain and try the suit.
In considering whether a case has been made out for the continuance of the ad-interim injunction, it would at the outset, be necessary to note that by Clause 2 of the Performance Bond, the Second Defendant irrevocably and unconditionally undertook to pay to the First Defendant such part of the sum or sums as the Third Defendant certifies as not having been paid by the parties when due. The submission of the Plaintiff is that the words "when due" would connote that the sum which has been demanded by the Third Defendant must actually be due in accordance with the terms of the Contract. That would not be a correct reading of the Performance Bond. What Clause 2 stipulates is a certification by the employer the Third Defendant - of the non-payment of a sum due from the First Defendant. Clause 3 requires the Third Defendant to deliver to the Second Defendant a certificate in the form set out in appendix 2 to the Performance Bond. The format of the certificate which is part of the Performance Bond requires a certification by the Third Defendant that the Contractor has failed to pay a sum, to be stipulated, when due in accordance with the terms of the Contract. Once a demand was made of a sum certified by the Third Defendant as being due from the Plaintiff as the Contractor, the Second Defendant irrevocably and unconditionally agreed to pay the amount demanded under the bond. This position is emphasized by Clause 8 under which an absolute unconditional and irrevocable commitment has been made by the bond provider, namely, the Second Defendant to pay in accordance with the stipulations contained in the bond. Clause 8.2, in fact, also provides that the Third Defendant shall not be required, before making a demand, to pursue any other right, remedy or security which it may have against the Plaintiff. Finally, Clause 12 of the Bond stipulates that the terms of the Bond constitute the entire agreement and understanding between the parties to the Bond in connection with the subject matter of the Bond. In view of the specific provisions made in Clauses, 2, 3, 8 and 12 of the Performance Bond, it would not be permissible to this Court to grant an injunction against the invocation or encashment of an unconditional Performance Bond on the basis of the underlying contract between the parties.
The law indeed is well settled. The terms of a Bank Guarantee or, as in the present case, a Performance Bond issued by the banker constitute a bargain between the Bank and the beneficiary. The party at whose behest the bond has been issued is not a party to the Contract between the Bank and the beneficiary. Such a Guarantee or Bond is independent of the underlying Contract between the beneficiary and the party at whose behest the bond is issued. In a sense, a bank guarantee or a Performance Bond is issued in order to fulfill the obligations contained in the agreement between the beneficiary and the party at whose behest the Bank has issued the Bond. However, the underlying Contract does not, therefore, become incorporated ipso facto into the terms of the Bond unless an express stipulation to that effect is contained in the Bond itself. A mere reference in the recitals to the underlying Contract would not constitute an incorporation for that purpose. The judgment of the Supreme Court in Hindustan Construction Co. Ltd. Vs. State of Bihar and Others, was a situation in which the terms of the underlying Contract had expressly been incorporated in the Bank Guarantee issued by the issuing Bank. In paragraph 13 of the judgment, the Supreme Court observed as follows:
The Bank, in the above guarantee, no doubt, has used the expression "agree unconditionally and irrevocably" to guarantee payment to the Executive Engineer on his first demand without any right of objection, but these expressions are immediately qualified by following:
...in the event that the obligations expressed in the said clause of the above-mentioned contract have not been fulfilled by the contractor giving the right of claim to the employer for recovery of the whole or part of the advance mobilisation loan from the contractor under the contract.
The Court then observed thus:
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 mobilisation 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 mobilisation 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 mobilisation loan". It is in these circumstances that the aforesaid clause would operate and the whole of the amount covered by the "mobilisation advance" would become payable on demand. The bank guarantee thus could be invoked only in the circumstances referred to in Clause 9 whereunder 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.
The terms of the Performance Bond in the present case are clearly to be distinguished from those which arose before the Supreme Court in Hindustan Construction. The judgment in HCC dealt with a situation where the terms of the underlying contract relating to the recovery of a mobilisation advance were expressly incorporated into the bank guarantee. In the present case, it needs reiteration , that Clauses 2, 3, 8 and 12 are altogether of a distinct nature. A certification of the amount due made by the employer binds the issuing bank and the bank had made an absolute and unconditional promise to pay upon a certification by the employer.
Be that as it may, for the purposes of considering whether a case has been made out for the grant of relief, it would also be appropriate to proceed on the hypothesis that the terms of the underlying Contract were incorporated in the Performance Bond as averred on behalf of the Plaintiff. Even so, under Clause 4.2 of the underlying contract, the Third Defendant could make a claim under the performance security inter alia upon a failure by the Contractor to pay to the Third Defendant an amount due as agreed or as determined under Clause 2.5. Under Clause 2.5 if the Third Defendant considered itself to be entitled to any payment, it was required to furnish a notice and particulars to the Contractor. After furnishing such a notice, the employer was then empowered to proceed to make a determination under Clause 3.5 if an agreement was not arrived at. In the present case, it is not disputed by Learned Counsel for the Plaintiff that a notice in terms of Clause 2.5 was furnished by the Third Defendant on 12th April 2007 specifying the amount of liquidated damages due and payable. Thereafter, as noted earlier, meetings took place at Dubai on 9th and 10th May 2007. At the meeting held on 9th May 2007, the Third Defendant made a proposal on a without prejudice basis under which the Plaintiff was to inter alia pay an amount of approximately US $ 1 million which was due to the Third Defendant under a separate supply contract. In return, the Third Defendant agreed inter alia to refrain from encashing the security to the extent of the value of the liquidated damages. The offer was that the dispute resolution procedure between the parties would continue and the time frame would be extended as reasonably necessary, providing progress was maintained. However, the Third Defendant retained its right to recover the liquidated damages already established and stated that it would not be required to give further notice in exercise of the recovery rights. On 10th May 2007, the Plaintiff made a revised counter proposal stating that it would accept the terms of the proposal of the Third Defendant subject to the Third Defendant postponing redemption of the amount of the liquidated damages until the later of (i) completion of dispute resolution procedure discussion or (ii) taking over of the work. The revised counter proposal was accepted by the Third Defendant. On 13th September 2007, the Third Defendant complained to the Plaintiff that there was no progress in resolving various issues which were discussed at Dubai primarily due to the failure of the Plaintiff to submit necessary information. The Plaintiff on its part denied by a letter dated 19th September 2007, the absence of progress. Correspondence was exchanged between the parties. Eventually, by a letter dated 11th October 2007, the Third Defendant reiterated its entitlement to recover an amount of US $ 5,856,050 towards liquidated damages as quantified on 12th April 2007. This was followed by an invocation which is addressed to the Second Defendant on 31st October 2007. The Second Defendant has in turn made a demand under the counter guarantee upon the First Defendant. There is at the highest an underlying contractual dispute between the Plaintiff and the Third Defendant. That cannot be a ground to restrain the encashment of an unconditional performance bond.
This is not a case where an injunction has been sought on the invocation of an unconditional Performance Bond on the ground of fraud or irretrievable injustice. There is neither any allegation of fraud, nor for that matter is there an allegation of irretrievable injustice in the submission urged by Learned Counsel before the Court. The only submission is that the invocation was not in accordance with the terms of the Guarantee. The submission is lacking in substance. The invocation was made in accordance with the terms of the guarantee and the demand made by the Third Defendant upon the Second Defendant was in compliance with the conditions contained in Clause 3 of the Performance Bond read with the format prescribed in appendix 2. As already noted earlier, the terms of the underlying contract, in the present case, cannot be regarded as being incorporated into the terms of the Performance Bond. However, even on the hypothesis that the terms of the underlying contract were to be read as a part of the Performance Bond, the conditions precedent for the invocation of the Performance Bond have been duly fulfilled. A prima facie case has, therefore not been made out for the purposes of ad-interim relief. The balance of convenience is against the grant of an ad-interim injuction. Finally, it must be noted that the First Defendant has made an unconditional commitment to the Second Defendant to honour a demand made by the Second Defendant in terms of the counter guarantee without any "contestation".
At the hearing of the application for ad-interim relief, the Third Defendant has also urged that for the purposes of considering whether ad-interim relief should be granted, it would be open to the Court to scrutinise prima facie as to whether this Court would have jurisdiction to entertain and try the suit. In paragraph 42 of the Plaint, it has been averred that the contract was awarded and negotiated in Chennai. The Performance Bond was issued by the Second Defendant which carries on business in the United Kingdom. The Third Defendant is a Company based in the United Kingdom which is stated to have entered into an agreement with the Plaintiff which was signed at Chennai. The only part of the cause of action that has arisen in Mumbai is the issuance of a counter guarantee by the First Defendant to the Second Defendant from Mumbai. At the present stage, however, it would not be either necessary or appropriate for this Court to make a determination in regard to the jurisdiction of the Court which will decide at the appropriate stage upon an issue being raised. No case has been made out for the grant of ad-interim relief. Ad-interim relief is refused.
During the course of the recess of the Court, an ad-interim order was passed by the Learned Single Judge on 12th November 2007 which is to be in operation until 21st November 2007. On the oral request of Counsel appearing on behalf of the Plaintiff and in order to enable the Plaintiff to avail of its remedy in appeal, the ad- interim order dated 12th November 2007 shall be extended until 26th November 2007.