M/S
Bses Ltd. (Now Reliance Energy Ltd.) Vs. M/S Fenner India Ltd. & Anr [2006]
Insc 63 (3 February
2006)
H.
K. Sema & B. N. Srikrishna
(arising
out of S.L.P. (C) No. 20062/2004) SRIKRISHNA, J.
Leave
granted.
This
is one more instance of an injunction being sought against a beneficiary
seeking to enforce his/her rights under a bank guarantee, albeit with a novel
averment that "lack of good faith" or "enforcing with an oblique
purpose" constituted further exceptions to the general rule against
intervention.
The
Facts M/s Godavari Sugars Ltd. awarded a contract for a captive power plant to
M/s BSES Ltd. (now Reliance Energy Ltd.) (hereinafter "the
Appellant"). The Appellant, in turn, awarded a part of that work to M/s
Fenner India Ltd. (hereinafter "the First Respondent"). In connection
with this, the Appellant issued to the First Respondent, four work orders/
purchase orders, as follows:
-
" Work
Order No. 2245 dated 15.3.2000/ 4.5.2000 for a sum of Rs.70,00,000/-
-
Work Order No.
2246 dated 15.3.2000/ 4.5.2000 for a sum of Rs.5,57,00,000/-
-
Work Order No.
2247 dated 15.3.2000/ 4.5.2000 for a sum of Rs.90,00,000/-
-
Work Order No.
2248 dated 15.3.2000/ 4.5.2000 for a sum of Rs.50,00,000/-" As required by
the terms and conditions of the said work/ purchase orders, the First
Respondent submitted four bank guarantees from the State Bank of India
(hereinafter "the Second Respondent-Bank"), dated 23.3.2000 bearing
Nos. 288/99, 289/99, 290/99 and 291/99 in sums of Rs. 7,00,000/-, Rs.
9,00,000/-, Rs. 55,70,000/- and Rs. 38,35,000 respectively.
They
were unconditional irrevocable bank guarantees, under which the Second
Respondent-Bank agreed to pay to the Appellant the amount claimed or demanded
by the Appellant. The amounts guaranteed thereunder were payable with or
without any reason in writing from the Appellant, without protest or demur or
proof of satisfaction, and without reference to the First Respondent, upon
being called by the Appellant, irrespective of any dispute between the
Appellant and the First Respondent with regard to or touching any of the
contractual terms between them. They were, of course, subject to the aggregate
limits stipulated in each of the bank guarantees.
On
10.5.2000, the Appellant and the First Respondent entered into a
"wrap-around agreement", under which it was agreed that the First
Respondent would perform its contractual obligations on a turnkey basis viz. as
a composite one. This principle was also made applicable to the bank
guarantees. Thus, Clause (4) of this agreement in terms says:
"In
case of any material breach of any or all the Contracts, BSES shall have the
right to embark upon the retentions and encashment of Bank Guarantees of all
the contracts." On 4.12.2003, the Appellant invoked the four bank
guarantees. On 7.12.2003, the First Respondent invoked the arbitration clause,
as provided in the work/ purchase orders. On 8.12.2003, the First Respondent
moved a petition under Section 9 of the Arbitration and Conciliation Act, 1996
(hereinafter "the Arbitration Act") before the District Court, Madurai, seeking a declaration that the
Appellant was not entitled to invoke the four bank guarantees. The First
Respondent also sought an interim injunction against the Appellant restraining
them from encashing or receiving any amount under the bank guarantees, pending
disposal of the arbitration proceedings.
On
22.3.2004, the learned Principal District Judge, Madurai, dismissed the First
Respondent's petition by holding that this was not a case where
"irretrievable injustice" would be done by enforcement of the bank
guarantees, nor was it a case where a strong prima facie case of fraud had been
made out. Despite this finding, the learned District Judge took the view that,
although the Appellant was not entitled to an order of injunction, the
Appellant's rights would have to be safeguarded till the matter was disposed of
in the arbitration proceedings. Accordingly, the learned District Judge
directed the Appellant to maintain status quo for a period of one month (from
the date of the order), within which the arbitral proceedings were to be
disposed of. The parties were directed to seek their remedies before the
arbitrator.
Sometime
in April 2004, an application was made under Section 17 of the Arbitration Act
before the Arbitral Tribunal. The First Respondent preferred an appeal before
the High Court of Madras challenging the order and judgment dated 22.3.2004 of
the learned District Judge. On 24.5.2004, even while the arbitral proceedings
were pending, the High Court made an interim order. Further, by the impugned
judgment dated 30.7.2004, the High Court allowed the appeal preferred by the
First Respondent and granted the injunction as prayed for, and set aside the
order of the learned District Judge.
The
Rule and its Exceptions Mr. Rohtagi, learned Senior Counsel for the Appellant,
urged that the settled law in this country is that a bank guarantee is an
independent contract between the bank and the beneficiary thereof. Accordingly,
irrespective of any dispute between the beneficiary and the party at whose
instance the bank has given the guarantee, the bank is obliged to honour its
guarantee, as long as the guarantee is unconditional and irrevocable. Our
attention was drawn to the judgment of this Court in U.P. Cooperative
Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. (hereinafter
"U.P. Cooperative Federation"). It was pointed out in that case that
a bank guarantee must be honoured in accordance with its terms as the bank,
which gives the guarantee, is not concerned with the relations between the
supplier and the customer. Neither is the bank concerned with the question
whether any of them have failed in their contractual obligations or not. In
other words, the bank must pay according to the tenor of its guarantee, on
demand, without proof or condition.
There
are, however, two exceptions to this rule. The first is when there is a clear
fraud of which the bank has notice and a fraud of the beneficiary from which it
seeks to benefit. The fraud must be of an egregious nature as to vitiate the
entire underlying transaction. The second exception to the general rule of
non-intervention is when there are "special equities" in favour of
injunction, such as when "irretrievable injury" or
"irretrievable injustice" would occur if such an injunction were not
granted.
The
general rule and its exceptions has been reiterated in so many judgments of
this Court, that in U.P. State Sugar Corporation v. Sumac International Ltd.,
(hereinafter "U.P. State Sugar Corporation") this Court, correctly declared
that the law was "settled" .
Mr.
Sorabjee, however, tried to expand upon the settled exceptions to the rule by
first, relying on an order of this Court in State of Haryana v. Continental Construction Ltd.
(hereinafter "Continental Construction Ltd."). We are afraid that the
short order in Continental Construction Ltd. (supra) appears to have been made
on the narrow facts of that case and does not constitute a precedent binding
us. Moreover, as mentioned earlier, a line of judgments of this Court have long
settled the law relating to the invocation of bank guarantees.
Second,
Mr. Sorabjee placed reliance on a number of foreign judgments, especially that
of the Queen's Bench Division in TTI Team Telecom Ltd. v. Hutchison 3G UK Ltd.,
wherein, the rule and its exceptions in England have been elegantly summarized.
Mr. Sorabjee placed special emphasis on the following propositions:
-
"The basis
for a contention of a breach of faith must be established by clear evidence
even for the purposes of interim relief. A breach of faith can arise in such
situations as: a failure by the beneficiary to provide an essential element of
the underlying contract on which the bond depends; a misuse by the beneficiary
of the guarantee by failing to act in accordance with the purpose for which it
was given; a total failure of consideration in the underlying contract; a
threatened call by the beneficiary for an unconscionable ulterior motive; or a
lack of an honest or bona fide belief by the beneficiary that the
circumstances, such as poor performance, against which a performance bond had
been provided, actually exist.
-
In addition,
where it appears that the call would be a nullity, a court will intervene to
restrain that invalid call.
Examples
are where a condition precedent to a call has not yet been fulfilled; where the
bond is a 'see to it' bond necessitating prior proof of loss by the beneficiary
or poor performance by the third party which has not yet been established; or
where the demand or the supporting documents show that the demand does not
conform to the requirements imposed by the bond for a valid demand.
-
Otherwise, a
threatened call will not be restrained. In particular an allegedly incorrect
calling of a performance bond will not be restrained merely because the factual
basis of the call arising out of the underlying contract is disputed. Thus
disputes as to whether a breach of contract, a determination of a contract for
cause, a repudiation of a contract or the incurring of loss have occurred,
where these are events covered by the performance guarantee, will not be
allowed to found an application to restrain a call unless these disputes reveal
a breach of faith by the beneficiary. Any consequent payment under the bond to
the beneficiary which over-compensates the beneficiary may be recouped in the
'accounting' exercise that the third party may claim in subsequent litigation
against the beneficiary under the underlying contract" Mr. Sorabjee,
finally contended that in Singapore, where commercial cases are expeditiously
disposed of, the Court of Appeal in Samwoh Asphalt Premix Pte. Ltd. v. Sum
Cheong Piling Pte. Ltd. has held that calling a performance guarantee for an
oblique purpose was not permissible.
Specifically,
using it as a "bargaining chip", as a "deterrent" or in an
"abusive" manner, would invite an injunction from the court. He
submitted that the Singapore court has gone so far as to say
that the unconscionable calling of a bank guarantee was an exception
independent of fraud.
We are
afraid that in the face of the law succinctly laid down in U.P. Cooperative
Federation (supra) and reiterated in numerous judgments of this Court referred
to earlier, we are unable to accept the wide proposition of law laid down in
the foreign judgments cited by Mr. Sorabjee. Whatever may be the law, as to the
encashment of bank guarantees in other jurisdictions, when the law in India is clear, settled and without any
deviation whatsoever, there is no occasion to rely upon foreign case law.
Contentions
of the First Respondent A reading of the impugned judgment of the High Court
shows that the learned Judge was cognizant of the settled rule relating to bank
guarantees, but came to the conclusion that the encashment of the bank
guarantees by the Appellant would present a case under one of the exceptions to
the rule viz. would cause "irretrievable injustice" to the First
Respondent.
Learned
counsel for the First Respondent strongly supported this line of argument of
the High Court. He contended that the bank guarantees were for different
purposes, either to:
-
secure the
payment of advances or
-
secure
performance. As far as the bank guarantees to secure advance payments were
concerned, he contends that there is a provision in the contract that the
amount of advance was to be recovered by deduction from the gross accepted
amount of any running bill. The contract stipulates two modes of recoveries:
-
By deduction
from the gross amount from the running bill, and
-
By invocation of
the bank guarantee. Mr. Sorabjee further urged that it had been found by the
District Court and the High Court concurrently that the entire amount of the
bank guarantee had been recovered from the running bills of the First
Respondent. Accordingly, he argued that, encashing the bank guarantee after
having recovered the full amount of advances from the running bills was an
"egregious fraud" or at any rate, created a situation of
"special equities" in favour of the First Respondent. The High Court,
he submits, was fully justified in granting an injunction since these facts
were prima facie established as triable issues.
Further,
Mr. Sorabjee submitted that the fourth bank guarantee (No. 291/99 dated
23.3.2000) was further qualified by "due and faithful performance of the
contract", and that the contract had been admittedly performed. In the
circumstances, he submits that, the encashment of this guarantee was fraudulent
or created a situation of special equities, which was covered by U.P.
Cooperative Federation Ltd. (supra). Mr. Sorabjee's assertions, however, need
closer scrutiny through examining the contractual clauses, as well as through
examining the conduct of the First Respondent.
The
Contractual Clauses Mr. Sorabjee is correct in that both the District Court and
the High Court have concurrently held that the documents placed on record do
bear out that the entire guarantee amount had been recovered. We are, however,
unable to accept Mr. Sorabjee's contention that the bank guarantees were given
only for the purpose of security as against the advance paid to the First
Respondent. Indeed, Mr. Rohtagi is justified in his submission that the final
contract was a "wrap-around agreement". The terms of the agreement
signed on 10.5.2000 make it clear, after referring to the four contract
agreements for work/ purchase orders, that: "It is specifically agreed
between the parties that CONTRACTOR is not only responsible and liable for its
scope of supplies in Contract No. I and for its scope of services in the
Contract Nos. II, III and IV, but also to perform and take care of all such
works which though are not specifically mentioned in these four contracts, but
are essential to complete the "BAGASSE HANDLING SYSTEM PACKAGE" as a
whole in its true intent and requirement unless the exclusion(s) are
specifically agreed by BSES. Contract-III shall also include unloading of plant
and equipment supplied under Contract-I consequent to receipt at site, movement
within site to stores and/or to intermediate location and/or to final location,
co- ordination with Owner for entry in their store documents, issue of Store
Issue Voucher, etc." The agreement further provides vide Clause (2):
"The successful and timely completion of the 'BAGASSE HANDLING SYSTEM
PACKAGE' by CONTRACTOR and its performance thereof under Contract-I, Contract-II,
Contract- III and Contract-IV shall be jointly and severally bound by the terms
of the "Contract" and shall be jointly and severally liable to BSES
for the performance of all obligations under the "Contract". Clause
(3) of the agreement declares:
"CONTRACTOR
agrees that if liquidated damages for delay and/or performance guarantees,
claim on warranty/workmanship, punch lists and any breach of contract by
CONTRACTOR are applied under the provisions of any of the four
"Contracts", it automatically shall be construed that the same
provision can be applied on all the four contracts as read together. BSES shall
have the right to treat the contracts jointly as turnkey contract and money can
be recovered by BSES including but not limited to liquidated damages, fines or penalties
of whatever nature as per the "Contract" and any excess costs and
expenses associated with the completion of the job by BSES for the
"BAGASSE HANDLING SYSTEM PACKAGE"." Clauses (4) and (5) in
express terms respectively state:
"In
case of any material breach of any or all the Contracts, BSES shall have the
right to embark upon the retentions and encashment of Bank Guarantees of all
the contracts." "Notwithstanding the works undertaken by the
designated sub- contractor(s) of the Contractor subject to provisions of the
contract, the Contractor shall remain wholly liable to perform, fulfill and
discharge all the obligations and responsibilities under this contract on a
turnkey basis and the same shall in no way be reduced or diminished for any
reasons whatsoever." Upon a careful reading of this agreement, we are
satisfied that the contract though, for the sake of convenience, was split up
into four sub- contracts (viz. the four work/ purchase orders), was a composite
contract executable on a turnkey basis. The terms of this turnkey contract were
reduced into writing by the "wrap-around agreement" of 10.5.2000. We
are of the definite view that under the "wrap-around agreement", the
Appellant had the right to encash any or all of the guarantees for any breach
in any of the terms of the four contracts. Hence, we are unable to accept the
submission of Mr. Sorabjee that the first three bank guarantees were only for
securing the advances paid and that it was only the fourth bank guarantee (No.
291/99 dated 23.3.2000) that was liable to be called for failure to perform the
contract. In fact, an appraisal of the terms of the contract leads us to the
conclusion that the bank guarantees were intended for both purposes: for
securing the advances paid to the First Respondent and also for securing due
performance of the contract.
Renewal
of the Guarantees Our conclusions as to the real purpose of the bank guarantees
are fortified by our examination of the conduct of the First Respondent.
Indeed, we repeatedly asked Mr. Sorabjee as to why and under what circumstances
the First Respondent continued the first three guarantees, purportedly
pertaining to advances, even after the First Respondent knew that the advance
amount had been fully recovered. Mr. Sorabjee claimed sometime to put an
Additional Affidavit to deal with this query, which according to him, had been
raised by this Court for the first time. In the Additional Affidavit (dated
11.11.2005) filed on behalf of the First Respondent, the explanation given for
the continuation of bank guarantees even after full recovery of the advances is
that:
"the
petitioner (the Appellant) has been insisting on extension of bank guarantees
and threatened to encash them if they were not extended, Thus under
petitioner's threat of encashment of the bank guarantees, and in the hope of
amicably settling the issue with the petitioner, the first respondent (sic)
felt compelled to extend the bank guarantees." In our view, this is an
unsatisfactory explanation in the circumstances of the case and in any event,
this explanation neither establishes "egregious fraud" by the
Appellant nor creates a situation of "irretrievable injury".
The
Fourth Bank Guarantee Finally, Mr. Sorabjee tried to intervene in the fourth
bank guarantee (No.291/99 dated 23.3.2000) and contended that this was the only
bank guarantee intended to secure "due and faithful performance of the
contract".
He
further urged that the performance had been duly satisfied and, therefore,
there was no warrant for calling this bank guarantee. Mr. Sorabjee turned to a
certificate issued by M/s Godavari Sugar Mills Ltd. (dated 18.3.2003) to
contend that there had been due and satisfactory performance of the contract.
We
are, however, not impressed with Mr. Sorabjee's argument because the evidence
on record is precisely to the contrary. In fact, the certificate, in terms,
says that there was a technical defect found:
"for
which correction will be done by Fenner representative (sic) as assured by him.
After completion of all those points further tests can be carried out."
Accordingly, we are prima facie not satisfied that performance had been duly
and satisfactorily certified. Under the terms of the "wrap-around
agreement", the Appellant was entitled to encash all or any of the bank guarantees
for breach of the First Respondent's obligations under any one of the
contracts. In our view, it is the case of the Appellant that there was no
satisfactory performance of the contract, as a result of which, the Appellant
was justified in encashing the concerned bank guarantee. Indeed, as per the
terms of the bank guarantee itself, the Appellant is the best judge to decide
as to when and for what reason the bank guarantees should be encashed.
Further,
it is no function of the Second Respondent-Bank, nor of this Court, to enquire
as to whether due performance had actually happened when, under the terms of
the guarantee, the Second Respondent-Bank was obliged to make payment when the
guarantee was called in, irrespective of any contractual dispute between the
Appellant and the First Respondent. Indeed, in similar circumstances, this
Court in General Electric Technical Services Company Inc. v. Punj Sons (P)
Ltd., held:
"the
Bank must honour the bank guarantee free from interference by the courts. Otherwise,
trust in commerce internal and international would be irreparably damaged. It
is only in exceptional cases that is to say in case of fraud or in case of
irretrievable injustice, the court should interfere.The nature of the fraud
that the courts talk about is fraud of an "egregious nature as to vitiate
the entire underlying transaction". It is fraud of the beneficiary, not
the fraud of somebody else." This was also a case where, after having
recovered certain amount from the running bills, a call was made on the bank
guarantee in respect of the full guaranteed amount. In an observation with
direct relevance for the present case, this Court pointed out that the bank was
not concerned with the outstanding amount payable under the running bills:
"The
right to recover the amount under the running bills has no relevance to the
liability of the Bank under the guarantee. The liability of the Bank remained
intact irrespective of the recovery of mobilisation advance or the non-payment
under the running bills. The failure on the part of (the Beneficiary)to specify
the remaining mobilisation advance in the letter for encashment of bank
guarantee is of little consequence to the liability of the bank under the
guarantee." Irretrievable Injury As we have stated repeatedly, the First
Respondent can succeed only if the case can be brought under the two accepted
exceptions to the general rule against intervention. Evidently, there is no
"egregious fraud" so as to fall within the first exception. Hence, only
one more point remains: whether encashment of the guarantees will create
special equities (in particular, "irretrievable injury") in favour of
the First Respondent? We are not satisfied on facts that such is the present
situation.
There
is no dispute that arbitral proceedings are pending. In fact, we were shown
that one of the disputes referred to arbitration is whether the bank guarantees
are null and void. Further, one of the substantive prayers in the arbitration
made on behalf of the First Respondent, is to make an award declaring the four
bank guarantees unenforceable, illegal, void and liable to be discharged.
Further, there is also a prayer for permanent injunction to restrain the
Appellant from encashing the bank guarantees. Therefore, since this prayer is already
pending before the Arbitral Tribunal, we see no situation of
"irretrievable injustice" if, at the present moment, the Appellant is
allowed to encash the bank guarantees. For justice can always be rendered to
the First Respondent, if he succeeds before the Arbitrators. Nor do we see any
special equity in favour of the First Respondent, when there is in fact a
dispute that performance was prima facie not satisfactory, which enabled the
Appellant to encash all or any of the four bank guarantees.
The Final
Findings In this view of the matter, we see no merit in the stand taken by the
First Respondent. In our judgment, the Madras High Court erred in interfering
with the bank guarantees and in granting injunction as sought for.
In the
result, the impugned judgment of the High Court is set aside and the judgment
of the learned District Judge, Madurai is
affirmed, except with regard to the maintenance of status quo directed on the
encashment of guarantees. It is made clear that the Appellant is entitled to encash
the bank guarantees and the Second Respondent-Bank shall be free to honour its
guarantees, subject to adjustment in the arbitral proceedings.
The
appeal is accordingly allowed with costs quantified at Rupees Twenty Thousand.
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