2019 NearLaw (DelhiHC) Online 146
Delhi High Court

JUSTICE NAVIN CHAWLA

VIJAY NIRMAN COMPANY PVT. LTD. Vs. DELHI METRO RAIL CORPORATION LTD. & ANR.

O.M.P.(I) (COMM.) 3/2019

10th January 2019

Petitioner Counsel: Mr.Ganesh Chandru Mr.Siddharth Agarwal Mr.Prashant Kumar Mr.Avinash Das
Respondent Counsel: Mr.Virender Sood Mr.Anshuman Sood Mr.Sidhartha Barua Ms.Adity Gupta

i. Grant an injunction restraining Respondent No 1 from encashing the two performance bank guarantees, viz., BG No140150IBGP00039 dated 9 May 2014 for Rs5,97,36,279 (extended from time to time) and BG No140150IBGP00040 dated 9 May 2014 for Rs5,97,36,279 (extended from time to time) issued by Respondent No2 in favour of Respondent No1, during the pendency of arbitration proceedings;
The petitioner and the respondent no1 had entered into a contract dated 13.06.2014 for design and construction of elevated viaduct and two elevated stations at Karkardooma Court (2 track) and Maujpur (4 track) each of 140 Rm length including architectural finishing works of stations of Line 7, Phase III of Delhi Mass Rapid Transport System.
the first respondent of the conditions of LoI, the appellant is free to invoke the bank guarantee and the Bank should honour it ... without any demur, merely on a demand from GMB (appellant) stating that the said lead promoter failed to perform the covenants.... It has also been undertaken by the Bank that such written demand from the appellant on the Bank shall be ... conclusive, absolute and unequivocal as regards the amount due and payable by the Bank under this guarantee.
On being satisfied that the first respondent has failed to perform its obligations as covenanted, the appellant cancelled the LoI and resultantly invoked the bank guarantee.
Whether the cancellation is legal and proper, and whether on such cancellation, the bank guarantee could have been invoked on the extreme situation of the first respondent justifying its inability to perform its obligations under the LoI, etc are not within the purview of an inquiry under Article 226 of the Constitution of India.
There shall be no order as to cost.

Cases Cited :
Para 14: Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engineering Works (P) Ltd. and Anr, (1997) 6 SCC 450
Para 14: Svenska Handelsbanken Vs. Indian Charge Chrome,
Para 14: Larsen & Toubro Ltd. Vs. Maharashtra SEB,
Para 14: Hindustan Steel Workers Construction Ltd. Vs. G.S. Atwal & Co. (Engineers) (P) Ltd.,
Para 14: U.P. State Sugar Corpn. Vs. Sumac International Ltd.,
Para 14: Bolivinter Oil SA Vs. Chase Manhattan Bank,
Para 14: U.P. Coop. Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd.,
Para 15: Gujarat Maritime Board Vs. Larsen and Toubro Infrastructure Development Projects Limited and Anr., (2016) 10 SCC 46
Para 15: Himadri Chemicals Industries Ltd. Vs. Coal Tar Refining Co. , (2007) 8 SCC 110] , at para 14: (SCC pp. 117-18)

JUDGEMENT

NAVIN CHAWLA, J.:-

I.A.No. 293/2019 (EXEMPTION)

Exemption allowed subject to all just exceptions.

OMP(I)(Comm.) 3/2019

1. This petition has been filed under Section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the „Act‟) inter alia seeking the following prayer:
i. Grant an injunction restraining Respondent No. 1 from encashing the two performance bank guarantees, viz., BG No.140150IBGP00039 dated 9 May 2014 for Rs.5,97,36,279 (extended from time to time) and BG No.140150IBGP00040 dated 9 May 2014 for Rs.5,97,36,279 (extended from time to time) issued by Respondent No.2 in favour of Respondent No.1, during the pendency of arbitration proceedings;”

2. The petitioner and the respondent no.1 had entered into a contract dated 13.06.2014 for design and construction of elevated viaduct and two elevated stations at Karkardooma Court (2 track) and Maujpur (4 track) each of 140 Rm length including architectural finishing works of stations of Line 7, Phase III of Delhi Mass Rapid Transport System.

3. Admittedly, certain work awarded to the petitioner under the contract was withdrawn by the respondent no.1 and was thereafter executed at the risk and cost of the petitioner from a third party.

4. In the meeting held on 27.12.2018, the respondent informed the petitioner as under:

1. Risk and cost amount The risk and cost amount for left
over work by VNC and nallah
cleaning has been given to VNC.
However, some minor works are
yet to be completed. In addition to
above M/s VNC has also
requested DMRC to pay the
outstanding amount of their
vendors directly. As the payable amount to M/s VNC is less than risk and cost amount, M/s VNC was asked to deposit extra amount or DMRC will have to process for encashment of Bank Guarantee. M/s VNC mentioned that they will discuss with their management about it.

5. The said minutes also enclose the details of the recoverable amount for risk and cost to be Rs.10,72,41,894.01.

6. The petitioner vide its letter dated 31.12.2018, as far as the claim of the respondent no. 1 for risk and cost was concerned, stated as under:
“1. Risk and cost amount-
i. The Risk and Cost Statement for Rs. 10.72 crores handed over by DMRC is not acceptable to us and we are disputing the said statement. This involves issues which are to be sorted out and hence we request that this may be treated as disputed issue and submitted to the Dispute Resolution Process as provided under the contract. We undertake to keep the performance bank guarantee extended and alive until such time this issue is sorted out and in the light of our assurance, a request not to encash the bank guarantee is submitted to the DMRC.”

7. The petitioner also requested the respondent no.1 to dispense with the conciliatory proceedings and proceed for resolution of the disputes through arbitration.

8. In the subsequent meeting held on 31.12.2018 between the parties, it was recorded that the petitioner does not agree to the risk and cost amount claimed by the respondent no.1.

9. By the letter dated 07.01.2019, the petitioner again protested against the amount claimed by the respondent no.1 towards risk and cost, contending as under:
“We indicated at the meeting held on 27/12/2018 that the Risk and Cost Statement for Rs. 10.72 crores handed over by you is not acceptable to us and we are disputing the said statement. We also mentioned in our written comments that this involves issues which are to be sorted out and requested for the details to cross verify our records and also the rates which are applicable for the respective works.
We are aware that certain works removed from our scope had been executed by you through other agencies at our risk and cost and that wherever is found to be payable by us in accordance with the contract and the normal procedure, we shall be bound to pay the same. Only the difference in the cost of execution of the works by us and the execution undertaken by other agencies will be to our liability.
We are prepared to extend our full co-operation to sort out the issue by deputing our representative to your office to reconcile the statement given to us by you by verifying the figures with the records available in your office.”
(emphasis supplied)

10. The petitioner also extended the Bank Guarantee on 08.01.2019. However, the respondent no.1 by the letter dated 09.01.2019 has invoked the Bank Guarantee and sought encashment thereof from the bank.

11. Learned counsel for the petitioner submits that the claim of the respondent no.1 is for unliquidated damages which are yet to be ascertained through the process of arbitration. He submits that though, it is not denied that certain work has been carried out by the respondent no.1 at the risk and cost of the petitioner, the amount being claimed by the respondent no.1 is highly exorbitant and cannot be sustained in the eyes of law. He further submits that as the work in question is complete and only a completion certificate is remaining to be issued, the petitioner shall suffer grave irreparable injury incase the encashment of the Bank Guarantees is allowed to take place.

12. I have considered the submissions made by the learned counsel for the petitioner, however, find no force in the same. It is not denied that the respondent no.1 has carried out the work at the risk and cost of the petitioner. The Bank Guarantees in question are unconditional in nature and inter alia read as under:
“5. After the Contractor has signed the aforementioned Contract with the Employer, the Bank is engaged to pay the Employer, any amount up to and inclusive of the aforementioned full amount upon written order from the Employer to indemnity the Employer for any liability of damages resulting from any defects or shortcoming of the Contractor or the debts he may have incurred to any parties involved in the Works under the Contract mentioned above, whether these defects or shortcomings or debts are actual or estimated or expected. The Bank will deliver the money required by the Employer immediately on demand without delay and demure and without reference to the Contractor and without the necessity of a previous notice or of judicial or administrative procedures and without it being necessary to prove to the Bank the liability or damages resulting from any defects or shortcomings or debts of the Contract. The Bank shall pay to the Employer any money so demanded notwithstanding any dispute/disputes raised by the Contractor in any suit or proceedings pending before any Court, Tribunal or Arbitrator/s relating thereto and the liability under this guarantee shall be absolute and unequivocal.”
(Emphasis Supplied)

13. Whether the claim of the respondent no.1, as far as its quantification is concerned, is justified or not, is a dispute to be determined through arbitration, however, this cannot be a ground for restraining the encashment of the Bank Guarantees at this stage.

14. The law of injunction in the case of Bank Guarantees is no longer res integra. In Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. and Anr, (1997) 6 SCC 450, Supreme Court reiterated this law as under:
“21. 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 Handelsbanken v. Indian Charge Chrome , Larsen & Toubro Ltd. v. Maharashtra SEB , Hindustan Steel Workers Construction Ltd. v. G.S. Atwal & Co. (Engineers) (P) Ltd. and U.P. State Sugar Corpn. 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 Corpn. 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 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 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 Donaldson, 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.
22. 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.”

15. In Gujarat Maritime Board v. Larsen and Toubro Infrastructure Development Projects Limited and Anr., (2016) 10 SCC 46, the Supreme Court once again cautioned that Bank Guarantee is a separate contract and is not qualified by the contract under which it is given. Whether the cancellation was just and proper is a question to be decided by the Arbitrator and not by this Court under Section 9 of the Act. I would only quote the relevant paragraphs of the said Judgment:
“9. Unfortunately, the High Court went wrong both in its analysis of facts and approach on law. A cursory reading of LoI would clearly show that it is not a case of forfeiture of security deposit “… if the contract had frustrated on account of impossibility…” but invocation of the performance bank guarantee. On law, the High Court ought to have noticed that the bank guarantee is an independent contract between the guarantor Bank and the guarantee appellant. The guarantee is unconditional. No doubt, the performance guarantee is against the breach by the lead promoter viz. the first respondent. But between the bank and the appellant, the specific condition incorporated in the bank guarantee is that the decision of the appellant as to the breach is binding on the Bank. The justifiability of the decision is a different matter between the appellant and the first respondent and it is not for the High Court in a proceeding under Article 226 of the Constitution of India to go into that question since several disputed questions of fact are involved.
xxxxx
11. It is contended on behalf of the first respondent that the invocation of bank guarantee depends on the cancellation of the contract and once the cancellation of the contract is not justified, the invocation of bank guarantee also is not justified. We are afraid that the contention cannot be appreciated. The bank guarantee is a separate contract and is not qualified by the contract on performance of the obligations. No doubt, in terms of the bank guarantee also, the invocation is only against a breach of the conditions in the LoI. But between the appellant and the Bank, it has been stipulated that the decision of the appellant as to the breach shall be absolute and binding on the Bank.
12. An injunction against the invocation of an absolute and an unconditional bank guarantee cannot be granted except in situations of egregious fraud or irretrievable injury to one of the parties concerned. This position also is no more res integra. In Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co. , (2007) 8 SCC 110] , at para 14: (SCC pp. 117-18)
“14. From the discussions made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement of a bank guarantee or a letter of credit, we find that the following principles should be noted in the matter of injunction to restrain the encashment of a bank guarantee or a letter of credit:
(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the beneficiary is entitled to realise such a bank guarantee or a letter of credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.
(ii) The bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.
(iii) The courts should be slow in granting an order of injunction to restrain the realisation of a bank guarantee or a letter of credit.
(iv) Since a bank guarantee or a letter of credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of bank guarantees or letters of credit.
(v) Fraud of an egregious nature which would vitiate the very foundation of such a bank guarantee or letter of credit and the beneficiary seeks to take advantage of the situation.
(vi) Allowing encashment of an unconditional bank guarantee or a letter of credit would result in irretrievable harm or injustice to one of the parties concerned.”
13. The guarantee given by the Bank to the appellant contains only the condition that in case of breach by the lead promoter viz. the first respondent of the conditions of LoI, the appellant is free to invoke the bank guarantee and the Bank should honour it “… without any demur, merely on a demand from GMB (appellant) stating that the said lead promoter failed to perform the covenants…”. It has also been undertaken by the Bank that such written demand from the appellant on the Bank shall be “… conclusive, absolute and unequivocal as regards the amount due and payable by the Bank under this guarantee”. Between the appellant and the first respondent, in the event of failure to perform the obligations under the LoI dated 6-2-2008, the appellant was entitled to cancel the LoI and invoke the bank guarantee. On being satisfied that the first respondent has failed to perform its obligations as covenanted, the appellant cancelled the LoI and resultantly invoked the bank guarantee. Whether the cancellation is legal and proper, and whether on such cancellation, the bank guarantee could have been invoked on the extreme situation of the first respondent justifying its inability to perform its obligations under the LoI, etc. are not within the purview of an inquiry under Article 226 of the Constitution of India. Between the Bank and the appellant, the moment there is a written demand for invoking the bank guarantee pursuant to breach of the covenants between the appellant and the first respondent, as satisfied by the appellant, the Bank is bound to honour the payment under the guarantee.”

16. The only averments in relation to “fraud” that can be found in the petition are in paragraph 16 thereof which is reproduced as under:
“16. During the meeting held on 27 December 2018, Respondent No. 1 took the Petitioner by surprise by mentioning that a huge amount of over Rs. 10 Crores was recoverable from the Petitioner on account of risk and cost and demanded deposit of the said amount or in the alternative they would encash the performance bank guarantees. This was not acceptable to the Petitioner. Even though certain works which were removed from the scope of the Petitioner were executed through other agencies engaged by Respondent No.1, they can claim only the difference in the cost payable to the Petitioner for the said work and the actual cost paid to the other agency, for which they were required to provide all the necessary details such as work order issued on the other agencies, the basis of DSR (Delhi Schedule of Rates) which would be the same whether the works are executed by the Petitioner or any other contractor and hence there will not be any risk and cost amount payable for the same, unless and until there had been any change in the DSR rates. All these have to be provided to the Petitioner. On the other hand, Respondent No. 1 demanded the deposit of a huge amount of Rs10.72 Crores as payable towards risk and cost for the works that they executed through other agencies with a hold on the two bank guarantees in their possession to the tune of Rs. 11.90 Crores. Contractually, Respondent No.1 cannot seek to recover any illusory cost alleged to have been paid to the other agency for the work done at the cost of the Petitioner without providing the details and an opportunity to reconcile the same. The Petitioner has requested Respondent No.1 to furnish all the details for verification and the Petitioner will have no hesitation to agree for the actual amount that may be found to be payable by them. Until such time the issue of risk and cost and the amount spent by Respondent No.1 towards the same are finalized, the same cannot be treated as an amount due and payable to Respondent No.1 and the Petitioner cannot be directed to deposit the said amount, nor Respondent No. 1 can encash the bank guarantees for the same. Any encashment of bank guarantees for the unliquidated and disputed amounts would amount to a fraud of an egregious nature and would destroy the very purpose for which the performance bank guarantees were furnished by the Petitioner. This would also result in irreparable harm and injustice to the Petitioner, especially when the project is fully completed and the parties are going through the process of final take over, and issuance of completion certificate. The act of Respondent No.1 in threatening to encash performance bank guarantee for purpose other than performance by the Petitioner under the Contract will not only go against the terms of the guarantee but would also amount to serious fraud. Further, the above circumstances create special equities in favour of the Petitioner.”

17. I do not find the above to meet the test laid down by the Supreme Court in the above referred judgments.

18. In view of the above, I find no merit in the present petition and the same is dismissed, however, making it clear that the Arbitral Tribunal while adjudicating the claims and counter claims of the parties shall remain uninfluenced by any observation made in the present order. I also note the submission made by the learned counsel for the respondent no.1 that the respondent no.1 would ensure that the Arbitral Tribunal is appointed as expeditiously as possible.

19. There shall be no order as to cost.