AI Structured Summary
Not yet generated for this judgment
Judgment
P.K. Jaiswal, J.—Heard.
This appeal is filed by the appellant/contractor against the order dated 13.7.2007, whereby the learned Additional District Judge rejected the application for grant of temporary injunction, restraining the Bank from encashment of the Bank Guarantee furnished by the appellant.
Brief facts of the case are that the appellant is an undertaking of Govt. of India and was awarded contract of construction of Ogee Spillway at Tighra Dam vide order dated 29.7.1995. As per order dated 29.7.1995, the work has to be completed within a period of 30 months. Thus, the work has to be completed by 28.1.1998. Clause 5 of the General Conditions of Contract is security for performance, which reads as under:
Security for Performance:
Within thirty days from the date of receipt of the letter accepting his Bid the contractor shall furnish an initial security deposit (equal to 5% of contract value) plus additional security for unbalanced Bids determined in para 18-c, TIB-8 by
(a) A Demand Draft on any scheduled Bank at Gwalior.
(b) A fixed deposit receipt with any scheduled Indian Bank pledged to the Executive Engineer, or
(c) A Bank Guarantee in the form of Annexure "A-2" from a Scheduled Indian Bank.
In addition to the above initial security deposit, the Executive Engineer shall deduct from the running account bills, an amount at the rate of six percent of the total value of each bill as an additional security deposit subject to the condition that the total amount of such deductions together with the amount of initial security deposit shall not exceed ten percent of the contract value.
If the contractor expressly requested in writing he will be permitted to convert the security deposit from his bills into interest bearing Govt, securities or interest bearing deposits pledged to the Executive Engineer with the scheduled Indian Bank. Bank Guarantee, interest bearing Govt. securities and interest bearing deposits shall remain valid upto 12 months after the date of completion of the work.
The security deposit less any amounts due shall be returned to the contractor after the defects liability period is over and subject to the E.E. certifying that no liability attached to the contractor.
The appellant as per Clause 5 of the contract furnished a Bank Guarantee vide B.G. No. SBB/NPND/BG/RPNN/88/95-96. Clauses 2 and 3 is relevant which reads as under:
We State Bank of Patiala do hereby undertake to pay the amount due and payable under this guarantee without any demur merely on demand from the Govt. stating that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered by the Government by reason of any breach by the said contractor(s) of any of the terms or conditions contained in the said agreement or by reason of the contractor''s failure to perform the said agreement any such demand made to the Bank shall be conclusive as regards the amount due or payable by the Bank under this guarantee. However, our liability under this guarantee shall be restricted to an amount not exceeding Rs. 20,23,675.00 (Rupees twenty lacs twenty three thousand six hundred seventy five only).
3.We State Bank of Patiala undertake to pay to the Govt. any money demanded notwithstanding any dispute/disputes raised by the contractor(s) in any suit or proceedings pending before any Court or Tribunal relating thereto our liability under this present being absolute and unequal. The payment so made by us under this bound shall be valid discharge of our liability for payment there under the contractors, shall have no claim against us for making such payment.
As per General Conditions of Contract in case the work is not completed within a period of 30 months, the appellant is entitled for extension of time subject to penalty. Clauses 46, 50 and 52 read as under:
Liquidated Damages--If the contractor fails to complete the total work by the stipulated completion date for the complete work or fails to complete the work as per designated mile stones given in Clause 3 of GC-2 as per construction programme he shall pay liquidated damages specified below per day of delay in completion and handing over to the Government unless extension of such date is granted by Competent Authority.
Mile Stone 1 Rs. 2,500/- per day.
Mile Stone 2 Rs. 6,000/- per day.
Mile Stone 3 Rs. 10,000/- per day.
Mile Stone 4 Rs. 12,500/- per day.
Mile Stone 5 Rs. 15,000/- per day.
The amount of liquidated damages shall however, be subject to a maximum limitation of ten percent of contract value.
Delays in excess of one hundred days will be cause for termination of the contract and forfeited of all security for performance.
Extension of rime:- Time shall be considered as the essence of the contract. If, however, the failure of the contractor to complete the total work or designated part thereof as per the stipulated dates of milestones referred to in Clause 3 of GC-2 arises from delays on the part of the Government, in handing over site or from increases in the quantity of work to be done under the contract, or force manure an appropriate extension of time will be given. The contractor shall request such extensions within one month of the cause of such delay and in any case before expiry of the contract period.
Arbitration:
(1) All the disputes or differences where valued amount of claims is less than Rs. 50,000/- and in respect of which the decision has not been final and conclusive shall be referred to a sole Arbitrator appointed as follows:
Within thirty days of receipt of notice from the contractor of his intention to refer the dispute to arbitration the Chief Engineer Y.B.W.R. Deptt. GWL, shall sent to the contractor a list of three officers not below the rank of Superintending Engineer or higher, who have not been connected with the work under this contract. The contractor shall within fifteen days of receipt of this list of select and communicate to the Chief Engineer the name of one officer from the list who shall then be appointed as the sole Arbitrator. If the contractor fails to communicate his selection of name, within the stipulated period, the Chief Engineer shall without delay select one officer from the list and appoint him as the sole Arbitrator. If the Chief Engineer fails to send such a list within thirty days, as stipulated, contractor shall send a similar list to the Chief Engineer within 15 days. The Chief Engineer shall then select one officer from the list and appoint him as the sole Arbitrator within fifteen days. If the Chief Engineer fails to do so; the contractor shall communicate to the Chief Engineer the name of one officer from the list, who shall then be the sole Arbitrator.
The arbitration shall be conducted in accordance with the provisions of Indian Arbitration Act, 1940 or any statutory modification thereof. The decision of the sole Arbitrators shall be final and binding on the parties thereto. The Arbitrators shall determine the amount of costs of arbitration to be awarded to either parties.
Performance under the contract shall continue during the arbitration proceedings and payments due to the contractor shall not be withheld unless they are the subject matter of the arbitration proceedings.
All awards shall be in writing.
Neither party is entitled to bring a claim to arbitration if the Arbitrator has not been appointed before the expiration of thirty days after defer'' liability period.
The work has not been completed in time i.e. upto 28.1.1998. The respondent granted an extension upto 30.6.2002 without imposing any penalty and, thereafter extension was granted upto 30.7.2006 by imposing penalty as per Clause 46 of the contract. It is averred by the respondent that the total amount of penalty comes to Rs. 40.47 lakh. In spite of demand, the penalty amount has not been paid and, therefore, the respondent Nos. 1 and 3 vide letter dated 30.6.2006 lodged a claim and wrote a letter to the respondent No. 2-Bank for enchashment of Bank Guarantee No. SBB/NPND/ BG/RPNN/88/95-96 for an amount of Rs. 20,28,675/- and pay the amount to the authorised signatory of the department.
It is this action by which appellant is aggrieved and filed a suit for declaration and permanent injunction before the Tenth Additional District Judge, Gwalior vide Civil Suit No. 49-A/2006 and also filed an application for grant of temporary injunction restraining the respondent Nos. 1 and 3 to encash the Bank Guarantee.
The respondent Nos. 1 and 3 filed their written statement and raised a preliminary objection regarding maintainability of the suit on the ground that as per Clause 52 of the General Conditions of Contract, in respect of disputes relating to any claim, the appellant has to file a reference in writing before the MP. Arbitration Tribunal, u/s 7 of M.P. Madhyastham Adhikaran Adhiniyam, 1983 (for short ''the Act'') and the suit filed by the appellant is not maintainable u/s 20 of the Act of 1983.
It was also averred that the Bank Guarantee was furnished as per Clause 5 of the general Conditions of Contract for performance of the contract which is an independent contract between the Bank and the beneficiary i.e. the Department and as per the terms of the Bank Guarantee, the Bank is liable to encash the same, unconditionally immediately on the demand made by the department. In respect of loss, it is averred that four extensions were granted on 31.7.1998, 31.7.1999, 31.10.2000 and 21.7.2002 and while granting the said extension, penalty has been imposed as per Clause 46 and total amount of penalty comes to Rs. 40.47 lakh whereas the Bank Guarantee is only for a sum of Rs. 20,23,675/- and, therefore, as per terms of the Bank Guarantee, Bank is liable to encash the same.
The Trial Court after appreciating the documents as well as arguments of the parties came to the conclusion that due to non-completion of the work in time, the Department imposed a penalty of Rs. 40.47 lakh and as per terms and conditions of the contract, action of respondent for encashment of the Bank Guarantee is just and proper and rejected the application for grant of injunction vide order dated 13.7.2007.
learned Counsel for appellant drew my attention to the letters issued by the department as well as by the appellant and has submitted that Trial Court committed legal error in rejecting the application for grant of injunction, He also drew my attention to the letters dated 4.2.2004 and 28.1,2004 filed along with the application and has submitted that the penalty imposed by the department is contrary to the terms and conditions of contract and in no case, the penalty amount comes to Rs. 40.47 lakh. It is also submitted that in case Bank Guarantee is v} encashed, the irretrievable damage would be caused to the appellant. He further '' submitted that this Court in the case of MA. A.S. Motors Pvt. Ltd. v. Union of India and Ors. passed in I (2008) BC 546 : W.P. No. 720/2007 on 18.6.2007, restrain the Bank from encashment of Bank Guarantee and case of the appellant is squarely covered by the said decision.
In the case of A.S. Motors Pvt. Ltd. (supra), it is held that normally in cases arising of contract and when a Bank Guarantee is proposed to be revoked a Writ Court will not normally interfere as the matter is as per the agreement however if one of the party to the contract is the Government or a statutory authority as contemplated under Article 12 of the Constitution, action of the State or authority has to be judged on the touch stone of the requirement as contemplated under Article 14 of the Constitution, it is further held that the Bank Guarantee is furnished only to compensate for the loss or damage, in this case, no damage or loss is established or proved, if revocation of the Bank Guarantee is permitted it would amount to an unfair and unjust treatment on the petitioner and a consequent enrichment of the respondents authority, the respondents have already received the following amount, Rs. 7,33,33,750/- till January 2007, Rs. 2,20,00,125/- by forfeiting of the performance security Under Clause 18 and penalty of Rs. 2,41,097/- that is a total sum of Rs. 9,55,74,970/- which is more than the contract amount of Rs. 8,80,00,500/- that apart user fee for the remaining period of the contract is already recovered by the respondents and, therefore, has held that in the matter of issuing order for revoking the Bank Guarantee, respondent Nos. 2 to 5 have acted, in a manner which is to be termed as unreasonable and unfair and, therefore, hit by Article 14 of the Constitution.
With the above facts, this Court I quashed the letter by which request was made to the respondent No. 6 for '' revocation of Bank Guarantee. Here, in the present case, the facts are quiet different and, therefore, the decision cited by the learned Counsel for the appellant in the case of MA. A.S. Motors Private Limited (supra) will not be applicable.
It is further submitted by the learned Counsel for appellant that in an appeal filed by the appellant in case of MA. A.S. Motors Pvt. Ltd. (supra) vide Writ Appeal No. 491/07, the Division Bench of this Court vide Order dated 8.8.2007 affirmed the order of the learned Single Judge and dismissed the appeal.
On the other hand, learned Counsel for respondent has submitted that Bank Guarantee is an independent contract between a Bank and the beneficiary i.e. the department and if appellant commits any breach then the decision of the department is final so far as it relates to encashment of the Bank Guarantee and Trial Court has not committed any error in rejected the application.
His next submission is that by reasons of the provisions of M.P. Madhyastham Adhikaran Adhiniyam, 1983, the suit filed by the appellant is not maintainable as the remedy is available to the appellant to raise a dispute by filing a reference petition as per the Act of 1983. He raised this objection in the written statement before the Trial Court. The said contention of the respondent cannot be accepted at this stage. The respondent Nos. 1 and 3 can raise this objection by filing an application under Order 7 Rule 11(d) of CPC for rejection of plaint. No appeal has been filed by the respondent Nos. 1 and 3 regarding maintainability of the suit and, therefore, at this stage, the issue regarding maintainability of suit of the appellant raised by the respondent/State cannot be decided in this appeal.
The terms of the document on the basis of which the respondent Nos. 1 and 3 has claimed the amount from the Bank Guarantee constitute a contract of guarantee and not a contract of indemnity. Under the Bank Guarantee in question, the Bank has undertaken to pay any amount not exceeding Rs. 20,23,675/- to the respondent Nos. 1 and 3 immediately on demand without any demur and the payment of the amount guaranteed by the Bank is not made dependent upon the proof of any default on the part of the appellant, the Bank was to pay the amount due under the letter of guarantee given by it to the respondent/State. The respondent No. 2-Bank immediately after receipt of such demand has to pay the amount to the State which is not under any obligation to prove any default on the part of the appellant before the amount demanded is paid.
The Apex Court in the case of Ansal Engineering Projects Ltd. Vs. Tehri Hydro Development Corporation Ltd. and Another, , has held that beneficiary cannot be restrained from encashing the Bank Guarantee unless fraud or special equity exists is pleaded and prima facie established by specific pleading strong evidence as a triable issue so as to prevent irretrievable injustice to the parties and Bar1'' has only to verify whether the amount claimed was within the terms of the Bank Guarantee or not. Paras 4 and 5 are relevant which read as under:
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 at 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. The Bank unconditionally and irrevocably promised to pay, on demand, the amount of liability undertaken in the guarantee without any demur or dispute in terms of the Bank Guarantee. 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.
It is equally settled law 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 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. The question, therefore, is whether the petitioner had made out any case of irreparable injury by proof of special equity or fraud so as to invoke the jurisdiction of the Court by way of injunction to restrain the first respondent from encashing the Bank Guarantee. The High Court held that the petitioner has not made out either. We have carefully scanned the reasons given by the High Court as well as the contentions raised by the parties. On the facts, we do not find that any case of fraud has been made out. The contention is that after promise to extend time for constructing the buildings and allotment of extra houses and the term of Bank Guarantees was extended, the contract was terminated. It is not a case of fraud but one of acting in terms of contract. It is next contended by Mr. G. Nageshwara Rao, the learned Counsel for the petitioner, that unless the amount due and payable is determined by a competent Court or Tribunal by mere invocation of Bank Guarantee or letters 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. The Court has yet to go into the question and until a finding after trial, or decision is given by a Court or Tribunal that amount is due and payable by the petitioner, it cannot be held to be due and payable. Therefore, the High Court committed manifested error of law in refusing to grant injunction as the petitioner has made out a prima facie strong case. We find no force in the contention. All the clauses of the contract of the Bank Guarantee are to be read together. Bank Guarantee/letters of credit is an independent contract between the Bank and the beneficiary. It does not depend on the result of the dispute between the person on whose behalf the Bank Guarantee was given by the Bank and the beneficiary. Though the question was not elaborately discussed, it was in sum answered by this Court in Hindustan Steel Workers Construction. Ltd. v. G.S. Atwal and Co. (Engineers) (P) Ltd. This Court has held in para 6 that the entire dispute was pending before the Arbitrator. Whether, and if so, what is the amount due to the appellant was to be adjudicated in the arbitration proceedings. The order of the learned Single Judge proceeds on the basis that the amounts claimed were not and cannot be said to be due and the Bank has violated the understanding between the respondent and the Bank in giving unconditional guarantee to the appellant. The learned Judge held that the Bank had issued a guarantee in a standard form, covering a wider spectrum than agreed to between the respondent and the Bank and it cannot be a reason to hold that the appellant is in any way fettered in invoking the conditional Bank Guarantee. Similarly, the reasoning of the learned Single Judge that before invoking the performance guarantee the appellant should assess the quantum of loss and damages and mention the ascertained figure, cannot be put forward to restrain the appellant from invoking the unconditional guarantee. This reasoning would clearly indicate that the final adjudication is not a precondition to invoke the Bank Guarantee and that is not a ground to issue injunction restraining the beneficiary to enforce the Bank Guarantee. In Hindustan Steelworks Construction Ltd. v. Tarapore and Co. it was contended that a contractor had a counterclaim against the appellant that disputes had been referred to the Arbitrator and no amount was said to be due and payable by the contractor to the appellant till the Arbitrator declared the award. It was contended therein that those were exceptional circumstances justifying interference by restraining the appellant from enforcing the Bank Guarantee. The High Court had issued, interim injunction from enforcing the Bank Guarantee. Interfering with and reversing the order of the High Court, this Court has held in para 23 that a Bank must honour its commitment free from interference by the Courts. The special circumstances or special equity pleaded in the case that there was a serious dispute 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 justifying interference by restraining the appellant from enforcing the Bank Guarantee. The order of injunction, therefore, was reserved with certain directions with which we are not concerned in this case.
Similar view is taken by the Apex Court in the case of Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engineering Works (P) Ltd., and another, reads as under:
Numerous decisions of this Court rendered over a span of nearly two decades have laid down and reiterated the principles which the Courts must apply while considering the question whether to grant an injunction which has the effect of restraining the encashment of a Bank Guarantee. We do not think it necessary to burden this judgment by referring to all of them. Some of the more recent pronouncements on this point where the earlier decisions have been considered and reiterated are Svenska Handeisbanken v. Indian Charge Chrome, Larsen & Toubro Ltd. v. Maharashtra SEB, Hindustan Steel Workers Construction Ltd. v. G.S. Atwal and Co. (Engineers) (P) Ltd. and U.P. State Sugar Corporation v. Sumac International Ltd. The general principle which has been laid down by this Court has been summarised in the case of U.P. State Sugar Corporation as follows : SCC p.574, para 12.
The law relating to invocation of such Bank Guarantees is by now well-settled. When in the course of commercial dealings an unconditional Bank Guarantee is given or accepted, the beneficiary is entitled to realise such a Bank Guarantee in terms thereof irrespective of any pending disputes. The Bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a Bank Guarantee would otherwise be defeated. The Courts should, therefore, be slow in granting an injunction to restrain the 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 the advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional Bank Guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a Bank Guarantee would adversely affect the Bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country.
Dealing with the question of fraud it has been held that fraud has to be an established fraud. The following observations of Sir John Donaidson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank are apposite:
...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)
The aforesaid passage was approved and followed by this Court in U.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.
We are constrained to make these observations with regard to the manner in which the High Court had dealt with this case because this is not an isolated case where the Courts, while disobeying or not complying with the law laid down by this Court, have at times been liberal in granting injunction restraining encashment of Bank Guarantees.
It is unfortunate, that notwithstanding the authoritative pronouncements of this Court, the High Courts and the Courts subordinate thereto, still seem intent on affording to this Court innumerable opportunities for dealing with this area of law, thought by this Court to be well-settled.
When a position, in law, is well-settled as a result of judicial pronouncement of this Court, it would amount to judicial impropriety to say the least, for the subordinate Courts including the High Courts to ignore the settled decisions and then to pass a judicial order which is clearly contrary to the settled legal position. Such judicial adventurism cannot be permitted and we strongly deprecate the tendency of the subordinate Courts in not applying the settled principles and in passing whimsical orders which necessarily has the effect of granting wrongful and unwarranted relief to one of the parties. It is time that this tendency stops.
The Apex Court has carved out only two exceptions. A fraud in connection with such a Bank Guarantee would vitiate the very foundation of such a Bank Guarantee. The fraud should of an "egregious nature as to vitiate the entire underlying transaction". It is fraud of the beneficiary, not the fraud of some body else. If the Bank defects with a minimal investigation on the fraudulent action of the seller, the payment could be refused. The Bank cannot be compelled to honour the credit in such cases. But it may be very difficult for the Bank to take a decision on the alleged fraudulent action. In such cases, it would be proper for the Bank to ask the buyer to approach the Court for an injunction. Hence if there is such a fraud of which the beneficiary seeks to take the 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 irretrievable harm or injustice to one of the parties concerned. The harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealing in the country. Here, in the present case, both the conditions are not satisfied.
For the aforementioned reasons, the Trial Court has not committed any error in rejecting the application for grant of temporary injunction. The appeal filed by the appellant has no merit and is accordingly dismissed with cost. Court fee Rs. -3,000/-, if pre-certified.