Full Judgment Text
$~34 and 35
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ O.M.P.(I) (COMM) 364/2021
KUBER ENTERPRISES ..... Petitioner
Through Mr. Monish Panda, Mr. Mrinal
Bharat Ram and Ms. Priyamwada Sinha,
Advs.
versus
DOOSAN POWER SYSTEMS
INDIA PVT LTD & ANR. ..... Respondents
Through Mr. Tushar Sahu, Adv.
Respondent No. 2
+ O.M.P.(I) (COMM) 365/2021
KUBER ENTERPRISES ..... Petitioner
Through Mr. Monish Panda, Mr. Mrinal
Bharat Ram and Ms. Priyamwada Sinha,
Advs.
versus
DOOSAN POWER SYSTEMS
INDIA PVT LTD & ANR. ..... Respondents
Through Mr. Tushar Sahu, Adv.
Respondent No. 2
CORAM:
HON'BLE MR. JUSTICE C.HARI SHANKAR
J U D G M E N T (Oral)
% 12.11.2021
(Video conferencing)
1. These petitions under Section 9 of the Arbitration and
Conciliation Act, 1996 (“1996 Act”, in short), seek pre-arbitral interim
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reliefs.
2. The facts in the two petitions, though they pertain to different
contracts and different bank guarantees, are more or less identical.
Arguments were principally advanced by Mr. Monish Panda, learned
Counsel for the petitioner by reference to OMP (I) (Comm) 365/2021.
3. As such, the recital hereinafter would be relatable to OMP (I)
(Comm) 365/2021. However, reasoning and the findings would
mutatis mutandis apply to OMP (I) (Comm) 364/2021.
4. Given the narrow confines of the controversy, it is not necessary
to make any detailed allusion to facts. A bare recital would, therefore,
suffice.
5. Respondent 1 was contracted by M/s. Jawaharpur Vidyut
Utpadan Nigam Ltd as an EPC contractor, for construction of a
thermal power project in Uttar Pradesh. Respondent 1 further
subcontracted a part of the work to the petitioner, vide two
th th
Subcontract Agreements dated 27 December, 2017 and 16
November, 2018. Under these subcontracts, the petitioner was
required to undertake the work of civil construction of Coal Handling
System and the erection of Electrostatic Precipitators and Flue Gas
Desulphurization Plants, as part of the larger Thermal Power Project
in respect of which Respondent 1 had entered into the contract with
M/s. Jawaharpur Vidyut Utpadan Nigam Ltd. The substantial
th
completion date of the work, as per the contract, was 12 July, 2020
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nd
and 22 December, 2021.
6. Clause 9.1 of the General Conditions of Contract (GCC), as
amended by the Special Conditions of Contract (SCC), representing
the contractual relationship between the petitioner and Respondent 1,
read thus:
“ 9.1 Performance bond
a) The Subcontractor shall submit to the
Contractor, as a guarantee of the faithful performance
of the obligations under this Subcontract and a
guarantee of the quality of Works and materials
provided by the Subcontractor, an unconditional
Performance Bond acceptable to the Contractor in the
following manner
• Performance Bank Guarantee equivalent
to Two point Five percent (2.5%) of Contract
Value.
• In lieu of Performance Bank Guarantee
equivalent to Two point Five percent (2.5%) of
Contract Value, Signed Cheque without date
equivalent to Two point Five percent (2.5%) of
Contract Value and Five Percent payment hold
from progressive payment.
• Contractor shall return the cheque and
hold amount once Subcontractor submits
Performance Bank Guarantee equivalent to Two
point Five percent (2.5%) of Contract Value.
The Performance Bond shall expire after expiry date of
Warranty Period as defined in Clause 12
[WARRANTY] in this Subcontract. Such guarantee
shall be binding notwithstanding any variations;
alterations or extensions of time that may be given or
be agreed upon. No interest shall be paid for this bond.
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b) The Performance Bond shall be provided by a
first class bank of the Country at Contractor's discretion
in the form attached hereto acceptable to the
Contractor.”
7. As is seen, Clause 9.1(a) refers to the warranty period as
defined in Clause 12 of the GCC. Clause 12 of the GCC, with its sub
clauses 12.1 and 12.2, read thus:
“ 12 WARRANTY
12.1 Warranty Period
a) The warranty period for the Works for the
warranties shall commence at the Substantial
Completion Date (SCD) for a period of twenty four
(24) months thereafter.
b) The Warranty Period with respect to any Work
that is repaired, replaced, modified or otherwise altered
shall be extended for a further period of twenty four
(24) months from the date of completion of such
repair, replacement, modification or alteration [the
“Warranty Period”, which shall include any extensions
to the warranty period of the above paragraph a) under
this paragraph b)]….”
“12.2 Repair of Defects
a) The Contractor shall promptly notify the
Subcontractor in writing of the discovery of any
defects or deficiencies in the Work.
b) In the event of any defects of deficiencies, the
Subcontractor shall, at the Subcontractor's own cost
and expense and in the shortest possible time, but in
any event within three (3) days following occurrence
of such defects or deficiencies that jeopardize the
performance of the Plant or any Section thereof, or
thirty (30) days for other defects or deficiencies
following the Subcontractor's receipt of notice of
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defect or deficiency or the Subcontractor's otherwise
obtaining knowledge of defect or deficiency:
(a) initiate the performance of, and
thereafter diligently pursue the completion of,
any necessary services to correct any defects or
deficiencies;
(b) initiate and thereafter diligently pursue
the completion, repair, replacement, reworking
and retesting (as appropriate) of defective
materials;
(c) provide to the Contractor the relevant
data and records regarding the defect or
deficiency.
c) If the Subcontractor fails to initiate the repair
work required hereunder within the above time periods
or to diligently pursue such repair work, the Contractor
may undertake such repairs at the Subcontractor's
expense, and such work by the Subcontractor or others
on behalf of the Contractor, shall not void the
Subcontractor's warranty hereunder.”
8. For the sake of completion of facts, it may be noted that the
period of 24 months stipulated in Clause 12.1(a) was reduced to 18
months, by an amendment vide the SCC.
9. According to the recitals in the petitions, the respondents
defaulted in making payments to the petitioner, against the work
executed by it. Mr. Monish Panda, learned Counsel for the petitioner,
submits that the undisputed amounts due from the respondents to the
petitioner are in the region of ₹ 4.98 crores, though he submits that
his client has further claims against the respondents, which he would
agitate in arbitration. Additionally, he submits that an amount of ₹
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2.71 crores, which is in excess of the 2.5% envisaged by Clause 9.1(a)
of the GCC as amended by the SCC already stands secured with the
respondents.
10. As required by Clause 9.1, the petitioner submitted, to
Respondent 1, an unconditional and irrevocable bank guarantee dated
th
13 March, 2018. The following recitals and Clauses in the Bank
Guarantee merit reproduction:
“ WHEREAS :
th
(A) By an agreement dated 27 . December 2017 (and
referred to herein as the “Contract/Subcontract”) the
Company/DPSI has appointed Kuber Enterprises, a firm
registered and existing under the laws of India and having its
registered office at Kuber Enterprises, 184-D, Arjun Nagar,
Safdarjung Enclave. New Delhi –110029] (hereinafter
referred to as the "Subcontractor" which expression shall
include its successors and permitted assigns) for CHS Civil
Works Package of Jawaharpur Project (2x660MW).
(B) The Subcontract requires the Subcontractor to deliver
to DPSI a contract performance guarantee (hereinafter
referred to as the “Guarantee”), to guarantee the due
performance of its obligations under the Contract, for an
amount equivalent to 2.5% (two point five percent) of the
Contract Price.
(C) The Contractor has approached us. HDFC Bank
Limited, Trade Desk. UG-14. Ansal Chamber-I, Bhika Ji
Cama Place New Delhi-110066 ("the Guarantor") for
issuance of this Guarantee and at the Subcontractor's request
and in consideration of the premises, the Guarantor has
agreed to provide this Guarantee as hereinafter appearing.
*
1. Upon receipt by us of a first written demand or
demands from you (a "Demand'" or “Demands"), without
further proof or conditions and without demur, reservation,
contest, recourse or protest and without any enquiry of you or
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reference to the Subcontractor and without the need for you
to take any legal action against or to obtain the consent of the
Contractor and notwithstanding any objection by the
Subcontractor pay you forthwith and in full without any
deductions or set-offs or counterclaim whatsoever the sum
claimed by you in such Demand, subject to the cap mentioned
in paragraph 3 here in below Any such demand in writing
made by DPSI shall be conclusive and binding on us
irrespective of any dispute or difference raised by the
Subcontractor.
2. You shall not be obliged to exercise any right or
remedy which you may have before making a Demand under
this Guarantee.
*
9. This Guarantee shall enter into force on the date hereof
and shall be a continuing irrevocable obligation and shall
remain in force and effect until the 12-JUN-2019 or any
extension thereof.”
11. Mr. Panda submits that, consequent on the allegedly premature
closure of the contract by the respondents, the petitioner
communicated with the respondents, calling on the respondents to
liquidate its dues to the petitioner. According to Mr. Panda, on
repeated communications being thus made by the petitioner, the
respondents threatened the petitioner to invoke the Bank Guarantee
provided by the petitioner. He further points out that the petitioner, in
its communication to the respondents, specifically alleged that the
threat of invoking the Bank Guarantee, as held out by the respondents
to the petitioner, was merely in the nature of a “pressure tactic”, to
pressurize the petitioner into giving up its claim against the
respondents. He seeks to point out that, in their response, the
respondents did not specifically deny this allegation.
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12. While acknowledging that injunction, against the invocation of
an unconditional Bank Guarantee, can be granted only if there exists
egregious fraud, special equities or irretrievable injustice, Mr. Panda
submits that in the present case, special equities do exist, as would
justify injuncting the respondents from invoking the Bank Guarantee
provided by the petitioner. Further, he submits, the invocation of Bank
Guarantee is in the teeth of Clause 9.1(a) read with Clause 12.2 of the
GCC, the protocol stipulated in which would bind the respondent,
once it chose to close the contract. This protocol, submits Mr Panda,
requires an advance notification, by the respondents, to the petitioner,
in writing, of the defects and deficiencies in the work performed by
the petitioner. The respondents not having done so, he submits that
they cannot be permitted to invoke the bank guarantee.
13. Mr Panda pleads the existence of special equities, justifying the
stay of invocation of the Bank Guarantee by the respondents, on the
premise that the respondents owe, to the petitioner, an undisputed
amount of ₹ 4.98 crores, apart from which an amount of ₹ 2.71 crores
of the petitioner is presently lying with the respondents. The
respondents are, therefore, he submits, sufficiently secured against any
claims they may have against the petitioner and, therefore, any
invocation of the Bank Guarantee by the respondents against the
petitioner would be inequitable at this stage. He also points out that
the respondents were seeking to invoke the Bank Guarantees provided
by the petitioner in both the contracts executed with the respondents
and that it could hardly be believed that the petitioner was remiss in
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discharging its obligations under both the contracts. This, he submits,
is an additional fact, which indicates that the respondents were
invoking the bank guarantee not for genuine and bonafide reasons, but
merely to pressurize the petitioner into giving up its claims against the
respondents.
14. The last submission of Mr. Panda, to justify the prayer for
injunction against invocation of the Bank Guarantee, is that the
petitioner is in dire financial straits. He also draws attention to the
financial defects being faced by his client and submits that if the Bank
Guarantee is permitted to be invoked, his client would be
“deoxygenated” and that several of its employees would be laid off. In
the submission of Mr Panda, the parent company of Respondent 1 is
presently facing severe financial constrains, and that Respondent 1 is
dependent on the parent company. In these circumstances, he submits,
an additional ground for a restraint against the respondents from
invoking the Bank Guarantee is that the Bank Guarantee would act as
a security, in the event of an award in the arbitral proceedings
favourable to the petitioner. Otherwise, he submits, if the respondents
are allowed to invoke the Bank Guarantee, there would be no security
which would serve to ensure that, were the petitioner to succeed in
arbitration, the award could be enforced, given the precarious financial
condition of the respondents.
15. For this reason, Mr Panda presses his second prayer, in these
petitions, for directing the respondents to secure the claims of the
petitioner by making a deposit in this Court.
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16. Having heard Mr. Panda at considerable length, I am of the
opinion that these petitions are completely misconceived. They seek
to re-agitate issues which, in one judicial decision after another, stand
settled, in law, against the petitioner.
17. Re. prayer for stay of invocation of bank guarantee:
17.1 Admittedly, the Bank Guarantee provided by the petitioner to
the respondents is unconditional. Stay of invocation of an
unconditional bank guarantee can be granted only in exceptional
circumstances. This Court in SES Energy Services India Ltd. v.
1
Vedanta Limited has noted these exceptions and observed thus:-
“9. In cases where the bank guarantee is unconditional, the law
recognizes only three circumstances in which Courts could injunct
invocation or encashment of the bank guarantee. These three
circumstances, essentially, dovetail into two, with the
pronouncement of Courts in that regard. The three circumstances, in
which the Courts may interfere, and may injunct the invocation of
unconditional bank guarantees, is where there is egregious fraud,
special equity exists, or where irretrievable injustice or prejudice is
likely to result, if the bank guarantee is invoked or encashed. The
latter two circumstances have been treated, by the Supreme Court, as
2
well as by the Division Bench of this Court in CRSC Design to be
interconnected, in that special equities would be set to exist if the
invocation of the bank guarantee would result in irretrievable
injustice to the opposite party. The following passage, from BSES
3
Ltd. v. Fenner India Ltd . , neatly encapsulates this position:
“10. 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
1
2021 SCC OnLine Del 4196
2
CRSC Research and Design Institute Group Co Ltd v. Dedicated Freight Corridor
Corporation of India Ltd 2020 SCC OnLine Del 1526
3
(2006) 2 SCC 728
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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 Corpn. v. Sumac International Ltd., (1997) 1
SCC 568 that this Court, correctly declared that the law was
‘settled’.” ”
(Italics and underscoring in original)
Additionally, in para 72 of the report in Svenska Handlesbaken v.
4
Indian Charge Chrome , a bench of three Hon’ble Judges of the
Supreme Court has held that mere irretrievable injustice, in the
absence of established fraud, does not make out a case for injuncting
invocation of an unconditional bank guarantee. Having said that, a
bench of two Hon’ble Judges, in Hindustan Steelworks Construction
5
Co. Ltd v. Tarapore & Co. held, after noticing and interpreting
4 4
Svenska Handlesbaken , that, in Svenska Handlesbaken , the Court
was “not called upon to decide whether apart from the case of fraud
there can be any other exceptional case wherein the Court can
interfere in the matter of encashment of a bank guarantee”. As such, it
was held, “not much importance” could be attached “to the use of the
word ‘and’ in the observation that ‘it cannot be interfered with unless
there is fraud and irretrievable injustice involved in the case”.
6
Vinitec Electronics Private Limited v. HCL Infosystems Limited and
3
BSES Ltd. hold that special equities, if pleaded as ground for stay of
invocation of bank guarantee, should be in the nature of irretrievable
4
(1994) 1 SCC 502
5
(1996) 5 SCC 34
6
MANU/SC/8095/2007
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injustice.
17.2 While, therefore, there appears to be some fluidity in judicial
thinking on the issue of whether the “fraud” element would permeate
the other two considerations of “special equities” and “irretrievable
injustice”, there does appear to be consensus on the position, in law,
that fraud, if pleaded, has to be egregious in nature, and that special
equities, if pleaded, have to be in the nature of irretrievable injustice.
To that extent, therefore, these considerations, to one extent or
another, juxtapose.
18. It is, further, a settled principle of law that the stay of invocation
of a Bank Guarantee cannot be sought on the ground that the stage for
invocation, as per the contract, between the parties, has not yet been
reached. A bank guarantee constitutes an independent contract
between the bank and the beneficiary of the guarantee. The bank is not
concerned with the contract that the beneficiary of the guarantee may
have with any third party, unless and until the terms of the contract or
any aspect of violation of the contract is specifically incorporated into
the bank guarantee as a pre-condition for its invocation. Else, where
the bank guarantee is unconditional, the bank cannot be restrained
from honouring the guarantee, on the ground that the aspect of default
of the parent contract, which the bank guarantee seeks to secure, is
disputed. The bank, in the case of an unconditional bank guarantee, is
entirely unconcerned with the disputes between the parties under the
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7
parent agreement. Nor can the Court injunct the invocation of the
bank guarantee on the ground that the stage for such invocation has
not been reached. This opinion, expressed by me in CRSC Research
& Design Institute v. Dedicated Freight Corridor Corporation of
8
India Ltd. , has been upheld by a Division Bench of this Court in
2
CRSC Research and Design Institute , after following several
authoritative pronouncements of the Supreme Court in that regard.
The following passages, from the said decision, may be reproduced, in
this context:
“ 7. The settled law with respect to grant of an injunction
which has the effect of restraining encashment of a bank
guarantee, is (a) 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; (b) the
Bank giving such a guarantee is bound to honour it as per its
terms, irrespective of any dispute raised by its customer; (c)
the very purpose of giving such a bank guarantee would
otherwise be defeated; (d) the Courts should therefore be slow
in granting an injunction to restrain the realization of such a
bank guarantee; (e) the Courts have carved out only two
exceptions i.e. (i) a fraud in connection with such a bank
guarantee would vitiate the very foundation of such a bank
guarantee - if there is such a fraud of which the beneficiary
seeks to take the advantage, he can be restrained from doing
so; fraud has to be an established fraud which the bank knows
of and the evidence must be clear, both as to the fact of fraud
and as to the bank's knowledge; and, (ii) 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 effect[sic] the bank and its customers at
whose instance the guarantee is given, the harm or injustice
contemplated under this head must be of such an exceptional
7
U.P. State Sugar Corporation v Sumac International Ltd. (1997) 1 SCC 568; Ansal
Engineering Projects Ltd. v. Tehri Hydro Development Corporation (1996) 5 SCC 450
8
MANU/DE/1803/2020
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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; 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. We are unable to agree with the contention of the
senior counsel for the appellant that this Court, when
approached for the interim measure of interference with
unequivocal, absolute and unconditional BGs, is required to
interpret the contract and/or form a prima facie opinion
whether the beneficiary of the BGs has wrongfully invoked
the BGs. Such exercise, in our view, is to be done in a
substantive proceeding to be initiated by the appellant for
recovery of the monies of the BGs, if averred to have been
wrongly taken by the respondent No. 1 by encashment of BGs.
If any interim relief is also claimed in the said substantive
proceedings, the need for taking a prima facie view, will arise
therein; however not while dealing with an application for the
interim measure of restraining invocation/encashment of BGs.
In the said proceedings, no question of taking a prima facie
view arises and the enquiry is confined to, whether on the
basis of the documents, a case of fraud of egregious nature in
the matter of obtaining/furnishing BGs, is made out. As far as
the argument of the senior counsel for the appellant, of
special equities is concerned, the same is but a facet of the
second exception aforesaid of irretrievable harm or injustice .
Needless to state that from the entire arguments of the senior
counsel for the appellant, no case of fraud of egregious nature
in the matter of making/obtaining of the BGs is made out. All
that emerges is that there are disputes between the appellant
and the respondent No. 1 and it is not even whispered that the
respondent No. 1 built the entire charade of entering into the
contract, only to obtain BGs and to profiteer from the
appellant. With respect to the ground urged by the senior
counsel for the appellant, of special equities, the Solicitor
General has stated that the appellant is a Chinese entity and if
ultimately in arbitration, which has already commenced
between the parties, the monies are found due to the
respondent No. 1 from the appellant, the respondent No. 1
would have no means or ways available to it for recovering
the same from the appellant and/or to enforce the arbitral
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award in China. On the contrary, it is contended that the
respondent No. 1 is a Public Sector Undertaking and the
monies, if ultimately found due to the appellant from the
respondent No. 1, can always be recovered by the appellant
from the respondent No. 1.
16. Fraud, as an exception to the rule of non-interference
with encashment of BGs, is not any fraud but a fraud of an
egregious nature, going to the root i.e. to the foundation of
the bank guarantee and an established fraud. The entire case
of the appellant, we are afraid, fails to qualify so. The Single
Judge has written at length on the subject and save for as
aforesaid, we need not say more.
17. Irretrievable injustice, as an exception to the rule of
non-interference with encashment of BGs, is again not a mere
loss, which any person at whose instance bank guarantee is
furnished, suffers on encashment thereof. It is always open to
such person to sue for recovery of the amount wrongfully
recovered. What has to be proved and made out to obtain an
injunction against encashment, is that it will be impossible to
recover the monies so wrongfully received by encashment.
There is not even a whisper to this effect, neither in the
pleadings nor in the arguments.”
(Emphasis supplied)
19. Mr. Panda sought to rely on the following passages from the
judgment of a coordinate Single Bench of this Court in Larsen &
9
Toubro Ltd v. Experion Developers Pvt. Ltd. :
“31. As far as reliance on Sub-Clause 4.2(d) is concerned, it
authorizes the Employer to make a claim against the
“Performance Security” where circumstances exist entitling
the Employer to terminate the Agreement under Sub-Clause
15.2 of the Agreement. Sub-Clause 15.2 of the Agreement
entitles the Employer to terminate the contract, inter alia,
where the Contractor fails to proceed with the work in
accordance with Clause 8 or comply with a notice issued
under Sub-Clause 7.5 or Sub-Clause 7.6 within 28 days of
receiving such notice without reasonable excuse.
9
2019 SCC OnLine Del 9097
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32. Sub-Clause 8 of the Agreement deals with the
“Commencement, Delays and Suspension” of work. The
question of extension of time for completion has to be
considered by the Engineer under Sub-Clause 8.4 read with
Sub-Clause 20.1 of the Agreement. Sub-Clause 8.7 of the
Agreement further provides for delay damages to be paid by
the Contractor in case it fails to comply with the time for
completion. Such damages are to be again made subject to
Sub Clause 2.5, that is, determination of Employer’s claims
by the Engineer.
33. Sub-Clause 7.5 of the Agreement provides for
rejection of the Plant, materials, design or workmanship, if
found defective by the Engineer. While Sub-Clause 7.6
empowers the Engineer to instruct the Contractor to remove
or replace any plant or material which is not in accordance
with the contract or re-execute the work which is not in
accordance with the contract. It is not the case of the
respondent no.1 that the Engineer has made any
determination of delay damages in terms of Sub-Clause 8.7 of
the contract and/or the Engineer has made any determination
under Sub-Clause 7.5 or 7.6 of the Agreement. On the other
hand, it is the case of the petitioner (and not denied by the
respondent no.1) that for the first time, the defects in the work
have been alleged by the respondent no.1 only by its letter
dated 28.06.2019, that is, after the invocation of the Bank
Guarantees. Learned senior counsel for the respondent no.1
has not been able to refute the said submission of the
petitioner. Therefore, at least prima facie, stage of invoking
Sub-Clause 4.2(d) of the Agreement has also not arisen as on
the date of the invocation of the Bank Guarantees .”
(Emphasis supplied)
20. A reading of paras 31 to 33 of the said decision indicate that the
learned Single Judge, in that case, proceeded on the ground that “at
least prima facie , stage of invoking sub-clause 4.2(d) of the
Agreement [had] also not arisen as on the date of the invocation of the
Bank Guarantees.”
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21. The aforesaid case had also been relied upon by the learned
Counsel for the petitioner before me in CRSC Research & Design
8
Institute Co. Ltd. , which was upheld in appeal. In the said judgment,
too, I had expressed my inability to subscribe to the aforesaid view,
for which purpose I had relied on para 22 of the report of judgment of
Supreme Court in Mahatma Gandhi Sahakra Sakkare Karkhane v
10
National Heavy Engg. Coop. Ltd. which may be reproduced thus:-
“22. In our considered opinion if the bank guarantee furnished is an
unconditional and irrevocable one, it is not open to the bank to raise
any objection whatsoever to pay the amounts under the guarantee.
The person in whose favour the guarantee is furnished by the bank
cannot be prevented by way of an injunction in enforcing the
guarantee on the pretext that the condition for enforcing the bank
guarantee in terms of the agreement entered between the parties has
not been fulfilled. Such a course is impermissible. The seller cannot
raise the dispute of whatsoever nature and prevent the purchaser
from enforcing the bank guarantee by way of injunction except on
the ground of fraud and irretrievable injury.”
(Emphasis supplied)
22. The view expressed in CRSC Research & Design Institute Co.
8
Ltd. having been upheld by the Division Bench in CRSC Research &
2
Design Institute Co. Ltd. , I regret my inability to follow the decision
9
in Larsen & Toubro .
23. In the present case, as already noted, the Bank Guarantee was
unconditional. The arguments of Mr. Panda essentially pare down to
contending that the manner in which the Bank Guarantee was being
sought to be invoked was not in accordance with Clause 12.2, in as
much as, prior to such invocation, the respondents were required to
10
(2007) 6 SCC 470
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issue a notice to the petitioner, setting out the defaults committed by
the petitioner. This argument, in my view, has no substance. Clause
12.2 of the Contract has not been incorporated either expressly or by
reference, into the Bank Guarantee provided by the petitioner to the
respondents. If, therefore, the invocation of the Bank Guarantee by the
respondents is in violation of Clause 12.2, or any other clause of the
contract between the petitioner and the respondents, that may provide
the petitioner a ground to seek restorative relief in arbitral
proceedings. Injunctive interdiction of invocation of the bank
guarantee, cannot, however, in view of its unconditional character, be
directed in law.
24. The submission of Mr. Panda that the respondents stand
sufficiently secured, as they have, in their possession, ₹ 2.71 crores
and, additionally, owe ₹ 4.98 crores to the petitioner, again cannot be
a ground to restrain invocation of the Bank Guarantee by the
11
respondents. These are claims which have to be taken up and
agitated in arbitral proceedings. They cannot restrain the bank from
honouring its commitment to the respondents under an unconditional
and irrevocable Bank Guarantee.
25. Similarly, Mr. Panda’s submission regarding the financial
condition in which his client is placed, and the hardship that it would
have to undergo, were the Bank Guarantee to be invoked, as also its
reference to the allegedly precarious financial condition of the
11
Hindustan Steel Works Construction Ltd. v. Tarapore & Co. and Anr.: AIR 1996 SC 2268;
Consortium Of Deepak Cable India Limited & Abir Infrastructure Private Limited (Dcil-
Aipl) Thr Abir v. Teestavalley Power Transmission Limited: 2014 SCC Online Del 4741;
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respondents, cannot constitute grounds to stay invocation of the Bank
Guarantee. Mr. Panda sought to submit that the Bank Guarantee, if
allowed to remain in place, would secure the dues of the petitioner
against the respondents which, otherwise, may be frustrated, given the
financial condition of the respondents.
26. There is another factor, which deserves to be taken into account.
This is not the first occasion when, in the context of the present
contract, the petitioner is approaching this Court with a prayer for stay
of invocation of the bank guarantee. Earlier, the petitioner had
approached this Court by means of OMP (I) (Comm) 158/2021. In that
case, too, the prayer, which has been agitated in the present case, was
specifically urged, as is noted in para 3 of the judgment of this Court,
which reads thus:
“3. Mr Nath, learned counsel appearing for the petitioner
has, essentially, stressed on two reliefs. First, that this Court
should restrain the invocation of the bank guarantee in
question (Performance Bank Guarantee No.
003GT02180720033 of Rs.1,18,75,000 – hereinafter ‘the
Bank Guarantee’); and second, that the respondent be directed
not to encash the cheque furnished by the petitioner (Cheque
bearing No. 000209 amounting to Rs.1,18,75,000/-) till
further orders.”
27. Paras 11 to 22 of the said decision merit reproduction, thus:
“11. This Court has examined the averments made in the
present petition and there is no ground alleging any fraud on
the part of the respondent. Mr Nath, learned counsel
appearing for the petitioner, submits that the petitioner is not
seeking an order restraining invocation of the Bank Guarantee
on the ground of any alleged fraud. He states that the
petitioner rests its case only on the ground of special equities.
He submits that the petitioner had invoked clause 25 of the
Agreement and sought an amicable resolution of the disputes.
However, the respondent has not joined the said resolution
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process and this, itself, is a ground of special equities in
favour of the petitioner. He submits that since the petitioner
has invoked the disputes resolution clause and the respondent
has not offered an amicable resolution of the disputes, the
same would provide the petitioner sufficient grounds for
seeking interdiction of the Bank Guarantee. He also relied on
an order dated 31.12.2020 passed by this Court in O.M.P. (I)
(COMM) 442/2020 captioned ISGEC Heavy Engineering
Ltd. v. Indian Oil Corporation Ltd. & Anr. . He also relies on
the decision of a Division Bench of this Court in Hindustan
Construction Co. Ltd. v. National Hydro Electric Power
Corporation Ltd. : 2020 SCC OnLine (Del) 1214 , which was
referred by a Coordinate Bench of this Court in ISGEC
Heavy Engineering Ltd. v. Indian Oil Corporation Ltd. &
Anr ( supra ).
12. The contentions advanced on behalf of the petitioner
are unmerited. The proposition that the reluctance of any
party to join a dispute resolution process as claimed by the
party under a contract, itself, gives a ground of special
equities for interdicting the bank guarantee is fundamentally
flawed.
13. The grounds on which a bank guarantee can be
interdicted are extremely limited. In Svenska Handelsbanken
v. M/s. Indian Charge Chrome and Others: (1994) 1 SCC
502 , the Supreme Court had held as under:-
“...in case of confirmed bank guarantees/irrevocable
letters of credit, it cannot be interfered with unless
there is fraud and irretrievable injustice involved in the
case and fraud has to be an established fraud …
irretrievable injustice which was made the basis for
grant of injunction really was on the ground that the
guarantee was not encashable on its terms.......
..there should be prima facie case of fraud and special
equities in the form of preventing irretrievable
injustice between the parties. Mere irretrievable
injustice without prima facie case of established fraud
is of no consequence in restraining the encashment of
bank guarantee.”
14. In Consortium Of Deepak Cable India Limited &
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Abir Infrastructure Private Limited (Dcil-Aipl) Thr Abir v.
11
Teestavalley Power Transmission Limited , the Division
Bench of this Court had held as under:
“145.The legal position which can be summarized
would be that a bank guarantee is an independent
contract between the bank and the beneficiary and
disputes pertaining to bank guarantees have to be
resolved de-hors the terms of the main contract
between the parties or disputes relatable to the main
contract between the parties. Where a bank guarantee
is a conditional guarantee invocation thereof would
have to be in strict conformity with the conditions on
which the guarantee is issued. In such a case an
injunction can be granted against payment under the
bank guarantee if it is found that the condition upon
which the guarantee was issued has not been complied
with or met. But where the guarantee is unconditional
and/or the bank has agreed to make payment without
demur or protest, on the beneficiary invoking the bank
guarantee the bank is obliged to honour the same for
the reason like letters of credit, a bank guarantee if not
honored would cause irreparable damage to the trust in
commerce and would deprive vital oxygen to the
money supply and money flow in commerce and
transaction which is necessary for economic growth.
Disputes pertaining to the main contract cannot be
considered by a court when a claim under a bank
guarantee is made and the court would be precluded
from embarking on an enquiry pertaining to the prima
facie nature of the respective claim of the litigating
parties relatable to the main dispute. The dispute
between the parties to the underlying contract has to be
decided at the civil forum i.e. a civil suit if there exists
no arbitration clause in the contract or before the
arbitral tribunal if there exists an arbitration clause in
the contract. Pendency of arbitration proceedings is no
consideration while deciding on the issue of grant of
an interim injunction. That certain amounts have been
recovered under running bills and have to be adjusted
for is of no concern in matters relating to invocation of
bank guarantee. That there are serious disputes on
questions as to who committed the breach of the
contract are no circumstances justifying granting an
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injunction pertaining to a bank guarantee. Plea of lack
of good faith and/or enforcing the guarantee with an
oblique purpose or that the bank guarantee is being
invoked as a bargaining chip, a deterrent or in an
abusive manner are all irrelevant and hence have to be
ignored. There are only two well recognized
exceptions to the rule against permitting payment
under a bank guarantee. The same are:-
A. A fraud of egregious nature;
B. Encashment of the bank guarantee would
result in irretrievable harm or injustice of an
irreversible kind to one of the parties.
147. There is no separate third exception of a special
equity justifying grant of an injunction to restrain the
beneficiary from receiving under an unconditional
bank guarantee and if there exists any third exception
of a special equity the same has to be of a kind akin to
irretrievable injustice or putting a party in an
irretrievable situation.
148. Contractual disputes cannot be projected by
attempting to urge that the beneficiary under the bank
guarantee is in default. Issues of fraud require
pleadings to bring out a case of a fraud of an egregious
nature and we do not find any brought out in the
pleadings. The irretrievable injury or irretrievable
injustice or special equity would mean a situation
where the party at whose behest the bank guarantee is
issued is rendered remediless….”
15. In BSES Ltd. v. Fenner India Ltd.: (2006) 2 SCC
728 the Supreme Court had observed as under:
“10. 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
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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
Corpn. v. Sumac International Ltd., (1997) 1 SCC
568 this Court, correctly declared that the law was
‘settled’.”
16. In Hindustan Steel Works Construction Ltd. v.
Tarapore & Co. and Anr.: AIR 1996 SC 2268, the Supreme
Court had held as under:
“We are, therefore, of the opinion that the correct
position of law is that commitment of banks must be
honoured free from interference by the courts and it is
only in exceptional cases, that is to say, in case of
fraud or in a case where irretrievable injustice would
be done if bank guarantee is allowed to be encashed,
the court should interfere. In this case fraud has not
been pleaded and the relief for injunction was sought
by the contractor/Respondent 1 on the ground that
special equities or the special circumstances of the
case required it. The special circumstances and/or
special equities which have been pleaded in this case
are that there is a serious dispute on the question as to
who has committed breach of the contract, that the
contractor has a counterclaim against the appellant,
that the disputes between the parties have been
referred to the arbitrators and that no amount can be
said to be due and payable by the contractor to the
appellant till the arbitrators declare their award. In
our opinion, these factors are not sufficient to make
this case an exceptional case justifying interference by
restraining the appellant from enforcing the bank
guarantees. The High Court was, therefore, not right in
restraining the appellant from enforcing the bank
guarantees.”
17. It is well settled that a bank guarantee can be
interdicted only in exceptional circumstances. Mere
contractual disputes cannot be asserted to give rise to special
equities. The expression ‘special equities’ is not nebulous. It
means peculiar or special circumstances which result in
irretrievable injustice. These special equities or special
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circumstances must be pleaded.
18. Bank guarantees cannot be interdicted on account of
disputes between the parties and therefore, any allegation that
the respondent has been reluctant to join the proceedings for
an amicable resolution of the disputes in terms of the Contract
is not per se a ground for interdicting an unconditional bank
guarantee.
19. In Hindustan Construction Co. Ltd. v. National
Hydro Electric Power Corporation Ltd. ( supra ), the division
bench of this Court had held that a bank guarantee cannot be
interdicted on account of contractual disputes. The relevant
extract of the said decision is set out below:-
“9. The law relating to grant of injunctions to
restrain the invocation/encashment of unconditional
BGs is well settled. BGs are distinct agreements
between the banks and its customers and are
independent of the main contract between the
customer and the beneficiary and therefore, disputes
between the latter two will have no bearing on the
obligation of the bank giving such a guarantee to
honour its invocation by the beneficiary in terms of
the bank guarantee, more so when it is unconditional.
The courts are slow to restrain the realization of a BG,
but have, however, carved out two exceptions to the
rule, one being fraud and the other being special
equities in the form of irretrievable harm or injustice
being caused if encashment is allowed. [See: UP State
Sugar Corporation v. Sumac International Ltd.
(1997) 1 SCC 568; Standard Chartered Bank v.
Heavy Engineering Corporation Ltd. 2019 SCC
OnLine SC 1638 ].
10. Fraud, calling for the intervention of the court,
has to be of an egregious nature. There must be fraud
established and mere allegations will not suffice.
Fraud in connection with a BG should vitiate its very
foundation. It is when the beneficiary seeks to benefit
thereby, that the courts will restrain encashment.
Fraud must be that of the beneficiary and none else.
Injunction can be granted also where the bank itself is
proved to have knowledge that the demand for
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payment of the BG is fraudulent. [SEE : U.P. Coop.
Federation Ltd. v. Singh Consultants and Engineers
(P) Ltd. (1988) 1 SCC 174; Svenska Handelsbanken
v. Indian Charge Chrome (1994) 1 SCC 502 ].
*
21. The law relating to encashment of BGs under
the second exception has attained wider dimensions
over a period of time. The courts were initially very
circumspect and required existence of fraud before it
prevented encashment of unconditional BGs. Then it
looked into the question of who was in breach of the
contract to determine the relief to be granted under
special equities. Through various judicial
pronouncements the scope of what constitutes special
equities was expanded to include cases of irretrievable
injury, extraordinary special equities including the
impossibility of the guarantor being reimbursed at a
later stage if found entitled to the money and the
invocation of the BG being not in terms of the BG
itself. In the absence of any straight-jacket formula,
the courts are required to examine each case to find
out whether it falls within these heads.”
20. In UP State Sugar Corporation v. Sumac
International Ltd.: 1997 (1) SCC 568 the Supreme Court
authoritatively held that:
“..the existence of any dispute between the parties to
the contract is not a ground for issuing an injunction to
restrain enforcement of bank guarantees”
21. The order dated 31.12.2020 passed by this Court in
O.M.P. (I) (COMM) 442/2020 captioned ISGEC Heavy
Engineering Ltd. v. Indian Oil Corporation Ltd. & Anr , is
an ad-interim order and is not an authority for the proposition
that in all cases where the beneficiary of a bank guarantee is
reluctant to amicably resolve the disputes, the bank guarantee
in its favour is liable to be injuncted.
22. In the present case, this Court finds no valid grounds
for interdicting the invocation of the Bank Guarantee. The
petitioner’s prayer in this regard is, accordingly, rejected.”
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(Italics and underscoring supplied)
28. At the very outset of the proceedings, I had drawn the attention
of Mr. Panda to the above decision and questioned him regarding the
justification for re-approaching this Court with the very same prayer,
which has earlier been rejected by a coordinate Bench of this Court.
His response was that the said order had been passed prior to the
closure of the contract by the respondent and that, therefore, special
equities now existed, justifying stay of invocation of the bank
guarantee, which may not have existed at that point of time.
29. The passages from the judgment of this Court in OMP (I)
(Comm) 158/2021, reproduced hereinabove, clearly indicate that the
closure of the contract by the respondent cannot alter the legal
position, as expressed by this Court in the said decision. In clear and
categorical terms, this Court has held, in the said decision, inter alia ,
that a bank guarantee can be interdicted only in exceptional
circumstances and that mere contractual disputes cannot be asserted to
give rise to special equities. To make the matter clearer, in the very
next paragraph, it is reiterated that the bank guarantees cannot be
interdicted on account of disputes between the parties.
30. All submissions advanced by Mr. Panda only, at best, relate to
make out a dispute between the petitioner and the respondents. These
cannot be pleaded all over again, to seek, afresh interdiction against
invocation of a bank guarantee amounting, in fact, to a second bite at
the cherry.
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31. As such, the prayer for stay of invocation of the Bank
Guarantee provided by the petitioner is, in my view, is completely
misconceived.
Re. prayer for furnishing of security
32. Mr. Panda also drew my attention to prayer (b) in these
petitions, which seeks an ad interim order securing the alleged dues of
the respondent to the petitioner. An interim protection, by way of a
direction to provide security covering the amount in dispute in
arbitration, cannot be granted in a routine fashion. There are
12
precedents galore , to the effect that an order directing payment of
security, whether under Section 9 or Section 17 of the 1996 Act, can
be passed only if circumstances analogous to those which govern
Order XXXVIII Rule 5 of the Code of Civil Procedure, 1908 (CPC)
are pleaded and, prima facie , shown to exist. Though the language of
Order XXXVIII Rule 5 cannot be bodily incorporated either into
Section 9 or Section 17, the position in law, as it exists today, requires
that an applicant seeking interim protection by way of security under
Section 9 (1)(ii)(b), is required to show, apart from the existence of a
prima facie case, balance of convenience and irreparable loss, that (i)
the financial position of the opposite party is so precarious as would,
possibly, frustrate the implementation of any arbitral award rendered
12
Goel Associates v Jivan Binma Rashtriya Avas Samati Ltd. 2004 SCC OnLine Del 874; CV
Rao v. Strategic Port Investments KPC Ltd. (2015) 218 DLT 200 (DB); Ajay Singh & Ors. v.
Kal Airways Private Limited (2018) 209 CompCas 154 (Delhi); State Bank of India v
Ericsson India Pvt. Ltd. (2018) 16 SCC 617; DLF Ltd. v Leighton India Contractors Pvt.
Ltd. (2021) 4 Arb LR 160
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in favour of such applicant and (ii) that the opposite party is likely to
dissipate its assets with a view to frustrate the arbitral award. Vague
allegations of financial difficulties are entirely insufficient to justify
passing of a protective order of security under Section 9 (1)(ii)(b).
33. It has to be remembered that Section 9 is not a substitute for
Section 17. Grant of relief under Section 9 requires, as its sine qua
non , an opinion, by the Court, that, were such relief not to be granted,
13
the arbitral proceedings may stand frustrated. Section 9 cannot be
used as an avenue to secure “ ad hoc protection”. Else, the Court would
be pre-empting the right of the arbitral tribunal to take a prima facie
view regarding the necessity of grant of interim protection to either of
the parties before it.
34. In this context, one is also required to be mindful of the note of
caution by a Division Bench of this Court in DLF Ltd. v Leighton
14
India Contractor Pvt. Ltd. , that findings, and even observations, of
the Court, exercising jurisdiction under Section 9, invariably impact,
to one extent or the other, the arbitral proceedings. The court should,
therefore, save in exceptional circumstances and where the interests of
justice pre-eminently so require, eschew the temptation to return any
such observations or findings.
35. Viewed in this backdrop, the averments in the petition do not
make out any case for a direction, to the respondents to furnish
13
Avantha Holdings v Vistra ITCL Limited MANU/DE/1548/2020: Indiabulls Housing
Finance Ltd. v Ambience Projects & Infrastructure Pvt. Ltd. MANU/DE/0557/2021
14
2021 SCC OnLine Del 3772
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security. All that is alleged is that Respondent 1 is in a fragile financial
condition. The only contention advanced by Mr. Panda, during
arguments, in this context, was that Respondent 1 is a subsidiary of,
and financially dependent on Doosan Heavy Industries & Construction
Company, Korea, (Doosan Korea) which, itself, is in dire financial
straits. Apropos the financial condition of Doosan Korea, the petition
alleges that, recently, it had to shut down several of its subsidiaries
and fire thousands of its employees which has, “had a rippling effect”,
on the Indian subsidiary, Respondent 1, owing to which Respondent 1
has not been able to pay its contractors. There is no reference to the
particulars of the financial condition of Doosan Korea, or of the
“rippling effect”, on Respondent 1. Though there is an averment that
Doosan Korea has had to shut down some of its subsidiaries,
Respondent 1, obviously, has not been shut down. There is no
reference to any Balance Sheet or other financial document of
Respondent 1, on the basis of which it can be said that Respondent 1 is
financially not in a position to meet the claims of the petitioner, in the
event of the petitioner succeeding in arbitration. Further, there is no
allegation of dissipation, by Respondent 1 of any of its assets, whether
with a view to frustrate the arbitral proceeding or for any other reason.
36. Factual assertions, which would satisfy, even prima facie, the
pre-requisites for grant of interim protective relief under Section 9
(1)(ii)(b) are, therefore, completely lacking in the present case.
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Digitally Signed
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Signing Date:20.11.2021
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2
Critical note sounded in CRSC Research and Design Institute Group
2
37. In CRSC Research and Design Institute Group , the Division
Bench of this Court has critically commented on parties approaching
this Court under Section 9 of the 1996 Act, seeking restraint against
invocation of bank guarantees, despite the extremely restricted
grounds on which such prayers could be sought. This Court has opined
that such attempts have to be quelled with a heavy hand and imposed,
in the said case, costs of ₹ 5 lakhs on the appellant in that case.
Unjustified attempts at approaching Courts at the pre-arbitral stage
under Section 9 of the 1996 Act, such as the present, apart from
burdening the docket of the Court, are also against the very ethos of
the 1996 Act.
38. I am therefore constrained, albeit reluctantly, to dismiss these
petitions with costs, in each case of ₹ 2.5 lakhs.
39. The costs would be deposited by the petitioner with the
Registrar General of this Court, by way of a crossed cheque favouring
the Delhi High Court Legal Services Centre (DHCLSC) within a
period of four weeks from today.
C.HARI SHANKAR, J
NOVEMBER 12, 2021
r.bararia
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Digitally Signed
By:SUNIL SINGH NEGI
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