CONTINENTAL CONSTRUCTION LIMITED v. STATE — 1995 DIGILAW 480 (GUJ)

R. A. MEHTA, J. ( 1 ) AHMEDABAD Baroda Express Highway was to be constructed and six contracts Nos. 5 to 10 for works of about Rs. 77 crores were entrusted to the appellant-petitioner. The works were to start in May/june 1987 and the stipulated dates of completion were January/february 1992 (57 months ). The dates of completion were revised and the revised date was 31st December 1994. During this period, notices were issued from time to time under Clause 46 and on 19th August 1994, notices were issued under Clause 47 of the contract agreements. Ultimately, on 28th December 1994, by interim notices, the contractor was ordered to be expelled from the contract site. The contracts expired on 31st December 1994. As a result of this, the Government entered the site and sought to encash the bank guarantee by making demand to the bank. It is stated that the bank guarantee in respect of these six contracts are for about Rs. 15. 11 crores. ( 2 ) THE appellant filed a writ petition under Art. 226 of the Constitution for challenging the above notices and enforcement of the bank guarantees. By judgment dated 10-10-1995, the learned single Judge held that the appellant was trying to enforce the contract and claim rights under the contract and was not entitled to any constitutional right and, therefore, the petition was not maintainable. The learned single Judge also held that the petition involved disputed questions of fact. At the same time, the learned single Judge also held that the Government cannot be restrained from entering the site and trying to recover the construction plants and machineries. ( 3 ) AFTER contending that the petition was maintainable under Art. 226 of the constitution, the learned Counsel for the appellant has raised three contentions on merits : (A) that the impugned notices dated 28th December 1994 under Clause 63 are illegal and not in terms of Clause 63 in as much as : (i) there is no certificate of the Engineer as required under Clause 63; (ii) the notices are not by the employer. (b) that the demands for encashment of bank guarantees were contrary to the terms of the bank guarantees. (b) that the demands for encashment of bank guarantees were contrary to the terms of the bank guarantees. There is no debt determined, adjudicated and payable by the contractor to the principal debtor and, therefore, the bank guarantees cannot be enforced and the bank cannot be asked to make payment in terms of the demand made by the Government. (c) the Government has no right to enter the site more particularly the private sites of the contractor where the labour colonies, workers household kits and stocks of machineries are there. ( 4 ) WE have heard the learned Counsel for the appellant at great length. Though the record is bulky, stake is large and a Senior Advocate has argued at length, the points are short and answers are clear. Hence the matter was heard on merits assuming that the petition was maintainable. In view of the fact that even on merits, we are dismissing the appeal, we have deemed it fit not to examine the contentions and findings regarding maintainability or otherwise of the petition under Art. 226. ( 5 ) THE first contention complains of non-compliance with the requirements of clause 63 of the contract. There is no dispute about the fact that though there were six separate contracts in respect of separate portions of the same Expressway the terms and conditions were identical. Clause 63 (Page 35 of the L. P. A. paperbook) is under the heading "remedies and Powers" and its sub-heading is "default of contractor" and the relevant part thereof provides that :"63. (1 ). . . . . . . . . . . . . . . . . . if the Engineer shall certify in writing to the Employer that in his opinion the Contractor :- (a ). . . . . . . . . . . . . . . . . . (b ). . . . . . . . . . . . . . . . . . (c ). . . . . . . . . . . . . . . . . . (d) despite previous warnings by the Engineer, in writing, is not executing the works in accordance with the Contract, or is persistently or flagrantly neglecting to carry out his obligations under the Contract, or (e ). . . . . . . . . . . . . . . . . . . . . . . . . (d) despite previous warnings by the Engineer, in writing, is not executing the works in accordance with the Contract, or is persistently or flagrantly neglecting to carry out his obligations under the Contract, or (e ). . . . . . . . . . . . . . . . . . then the Employer may, after giving fourteen days notice in writing to the Contractor, enter upon the site and the Works and expel the Contractor therefrom without thereby voiding the Contract, or releasing the Contractor from any of his obligations or liabilities under the Contract, or affecting the rights and powers conferred on the employer or the Engineer by the Contract and may himself complete the Works or may employ any other contractor to complete the Works. "the following definitions are relevant in respect of the first contention :- (A) "employer" means the Governor of the State of Gujarat or his successor. (c) "engineer" means the Chief Engineer of the R. and B. Department of Gujarat state or such other officer as may be appointed by the Employer to act as an Engineer for the purpose of this contract. ( 6 ) AS regards the appellants contention that the impugned notices are illegal and not in terms of Clause 63 inasmuch as there is no certificate of the Engineer, the appellants argument is that certificate was required to be issued by the Chief engineer and not Superintending Engineer, because "engineer" by definition Clause (c) has to be the Chief Engineer of the R and B Department of Gujarat State. This argument deserves to be rejected for the simple reason that the definition of "engineer" provides that "such other officer as may be appointed by the Employer to act as an Engineer for the purposes of this contract" also falls within the definition of "engineer". Mr. Shelat, learned Additional Advocate-General has invited our attention to the Government Resolution dated 1st June, 1990 (Annexure "u" to the reply-affidavit pages 532-535 of the Spl. C. A. paperbook) which specifically provides that Superintending Engineer, Expressway (Road) Circle, Ahmedabad is designated as the Engineer for contracts 5 to 10. By letter dated 14th June, 1990 (Annexure "v" to the reply-affidavit - page 535 of the Spl. C. A. paperbook) which specifically provides that Superintending Engineer, Expressway (Road) Circle, Ahmedabad is designated as the Engineer for contracts 5 to 10. By letter dated 14th June, 1990 (Annexure "v" to the reply-affidavit - page 535 of the Spl. C. A. paperbook), the appellants-petitioners attention was specifically invited to the above Government resolution dated 1st June, 1990 appointing the above Superintending Engineer as "engineer" for contracts 5 to 10. It is, therefore, absolutely clear that the superintending Engineer is as much an "engineer" for the purposes of contracts 5 to 10 as the Chief Engineer is. ( 7 ) THE learned Counsel for the appellant submitted that in the present case, the notice contemplated by Clause 63 is required to be given by the "employer" and the "employer" means the Governor of Gujarat but in the present case, the action was taken not by the Governor of Gujarat, but by the Chief Engineer and joint Secretary of the Government of Gujarat. Annexure 2 to this Letters Patent appeal (at Page 56) is the letter dated 28-12-1994 of the Government of Gujarat to the Supreintending Engineer. It is signed by the Chief Engineer and Joint secretary, R. and B. Department. It recites that the progress of the work is very poor and after due consideration and as per the directives given by the Ministry of Surface transport, New Delhi, it has been decided to invoke Clause 63 of the contract in all the six contracts and to proceed ahead for carrying out the remaining works through other agencies and the Superintending Engineer was directed to issue notice under Clause 63 to the appellant-contractor under intimation to the Government. The bank guarantee was also directed to be encashed by sending a special messenger with detailed letter of demand of guarantee money on the concerned bank, under intimation to the Government. This action has been taken by the Government through its appropriate officer, namely, the Joint Secretary of R. and B. Department. It may also be noticed that the contracts have also been entered into on behalf of the governor by the Chief Engineer and Joint Secretary of the R. and B. Department. This action has been taken by the Government through its appropriate officer, namely, the Joint Secretary of R. and B. Department. It may also be noticed that the contracts have also been entered into on behalf of the governor by the Chief Engineer and Joint Secretary of the R. and B. Department. All Government conrtacts are entered in the name of the President of India or the governor of the State; that is the constitutional requirement under Art. 299 of the constitution of India which provides that all contracts made in the exercise of the executive power of the Union or a State shall be expressed to be made by the president, or by the Governor of the State, as the case may be. Sub-Article (2) provides that neither the President nor the Governor shall be personally liable in respect of any contract. Article 300 provides that the Government of a State may sue or be sued by the name of the State. In the case of State of Uttar Pradesh v. Pradhan Singh Kshetra Samiti, 1995 (2) SCC 305 , the Supreme Court has held that while exercising executive powers of the State, the "governor" means the State government. In this case, the letter dated 28-12-1994 issued by the Joint Secretary to the Superintending Engineer is by the Government and therefore, it is the letter of the Employer. ( 8 ) PURSUANT to the aforesaid letter of the Joint Secretary, R. and B. Department to the Superintending Engineer, the Superintending Engineer addressed a letter dated 28-12-1994 (page 58 of the L. P. A. paperbook) to the appellant-original petitioner. This letter is signed on behalf of the Governor of Gujarat by the "engineer". ( 8 ) PURSUANT to the aforesaid letter of the Joint Secretary, R. and B. Department to the Superintending Engineer, the Superintending Engineer addressed a letter dated 28-12-1994 (page 58 of the L. P. A. paperbook) to the appellant-original petitioner. This letter is signed on behalf of the Governor of Gujarat by the "engineer". It recites various letters and notices issued to the contractor under Clause 46 of the contract (the details of which are mentioned in the statement attached to the said letter) and similarly it refers to the letter dated 13th August 1994 invoking Clause 47 of the contract for stepping up the progress of the work and after giving some details, it is pointed out that though the completion time was of 57 months expiring in January/february 1992 and it was extended for almost three years till December 1994, the actual progress achieved was hardly 58%; the contractor had failed to complete the work in time-bound manner in accordance with the conditions though the Department had fulfilled all the obligations under the contract and even granted additional mobilisation of advances and further mobilisation of advances. The contractor had defaulted and the performance and work in progress was very poor and the contractor was neither willing nor ready to complete the work within the stipulated time-limit upto 31st December 1994. Under the circumstances, the government of Gujarat had to serve notices invoking Clause 47 and it was decided to take action under Clause 63 of the contract and, therefore, the appellant-contractor was informed that on expiry of fourteen days, the Department would enter the site and take further necessary action for getting the work completed as per the contract. It is, thus, abundantly clear that the Employer and the Engineer have acted in accordance with law and there is no infirmity in any of these actions. ( 9 ) IT will now be more convenient to take up the third contention of the appellant at this stage. Clause 63 not only empowers the Employer to enter upon the site and the Works and to expel the contractor therefrom but it also empowers the Employer to complete the Works himself or through any other contractor. ( 9 ) IT will now be more convenient to take up the third contention of the appellant at this stage. Clause 63 not only empowers the Employer to enter upon the site and the Works and to expel the contractor therefrom but it also empowers the Employer to complete the Works himself or through any other contractor. The remaining part of Clause 63, therefore, provides that :-"the Employer or such other contractor may use for such completion so much of the constructional plant, temporary works and materials, which have been deemed to be reserved exclusively for the execution of the Works, under the provisions of the contract, as he or they may think proper, and the Employer may, at any time, sell any of the said constructional plant, temporary works and unused material and apply the proceeds of sale in or towards the satisfaction of any sums due or which may become due to him from the contractor under the contract. "clause 63 (proviso) also provides that nothing shall prevent the Employer from retaining on the site for the due completion of the Works any item of Constructional plant, Temporary Works and materials after the happening of any event which gives right to the Engineer to exclude the contractor from the site and proceed with the completion of the work. (h) "constructional Plant" means all appliances or things of whatever nature required in or about the execution or maintenance of the Works but does not include materials or other things intended to form or forming part of the Permanent Works. (i) "temporary Works" means all Temporary Works of every kind required in or about the execution or maintenance of Works. (j) "permanent Works" means the Permanent works to be executed and maintained in accordance with the Contract. (m) "site" means land and other places on which the Permanent Works or temporary Works designed by the Engineer are to be executed or any other land or places required by the Employer. ( 10 ) THE contention that in exercise of the power under Clause 63, the Employer has no right to enter the private lands and labour colonies, etc. may have some substance. However, the Employer is not disturbing any of these. The question is of taking possession of the Construction Plant and Machineries reserved for the construction purpose. ( 10 ) THE contention that in exercise of the power under Clause 63, the Employer has no right to enter the private lands and labour colonies, etc. may have some substance. However, the Employer is not disturbing any of these. The question is of taking possession of the Construction Plant and Machineries reserved for the construction purpose. These are the Construction Plants reserved for the construction of contract works. As per the agreement, the Employer is entitled to enter and also use Construction Plants and machineries for getting the remaining work done. It is to be noted that the Government has advanced huge sums of money for acquiring these machineries for these contract works which run into about Rs. 10 crores. It is inconceivable as to how the Government can be expected to get the remaining works completed, if there is an injunction to restrain Government or new contractors from entering the sites or from taking possession of the Construction Plants which include machineries as well. ( 11 ) AS far as the second contention regarding the encashment of bank guarantees is concerned, the question is well settled and there is such a catena of judgments of the Supreme Court that it may not be necessary to restate all over again the law so well settled. The bank guarantees in the present case are in absolute terms and the bank has undertaken in absolute terms to pay the money on demand. The relevant part of the bank guarantee reads as follows :-"now, THEREFORE, we hereby affirm that we are the guarantor and responsible to you, on behalf of the Contractor, upto a total of Rs. 31,50,000. 00 (Rs. Thirty-One lacs Fifty Thousand only) and we undertake to pay you upon your first written demand and without caveat or argument, any sum or sums within the limit of rs. 31,50,000/- (Rs. Thirty-One Lacs Fifty Thousand only) as aforesaid without your needing to prove or to show ground or reasons for your demand for the sums specified therein. We hereby waive the necessity of your demanding the said debt from the contractor before presenting us with the demand. " ( 12 ) THIS bank guarantee is so clear, categorical, unconditional and unqualified that it is like a promissory note or a cheque payable on demand which a banker is bound to honour when presented. We hereby waive the necessity of your demanding the said debt from the contractor before presenting us with the demand. " ( 12 ) THIS bank guarantee is so clear, categorical, unconditional and unqualified that it is like a promissory note or a cheque payable on demand which a banker is bound to honour when presented. It is an unconditional guarantee and the banker is responsible to the Government upto a sum of Rs. 31,50,000. 00 and the bank undertakes to pay to the Government on its first written demand and without any argument, a sum within the limit as aforesaid without even requiring the Government to show, much less prove, any ground or reasons for the demand of the sums specified therein. ( 13 ) THE learned Counsel for the appellant has submitted that there has to be a "debt" determined and adjudicated before the banker can be called upon to honour the bank guarantee. There is no substance in this contention. The said word "debt" refers to the sum specified in the previous para which is the sum demanded on the bank guarantee. By giving this guarantee, the banker has placed at the disposal of the Government, the aforesaid sum and the State Government is entitled to call upon the banker to pay the said sum at any time without the Government needing to prove or show any ground or reason for the same. ( 14 ) IN this connection, the learned Counsel for the appellant has strongly relied on the judgment of the Supreme Court in the case of Union of India v. Raman iron Foundry, AIR 1974 SC 1265 . It was not a case of bank guarantee. It was a provision for recovery of the sums due and the claim of damages for the breach of contract was held to be not a claim for a sum presently due and payable and, therefore, the purchaser was not entitled to exercise the right conferred upon it under clause 18 to recover the amount of such claim by appropriating other sums due to the contractor. In that case, the Government had tried to appropriate dues lying with itself towards the claim for damages and Clause 18 provided for recovery of sums due and that clause had repeatedly used the words sum then due, become due and, therefore, the Supreme Court held that the claim for damages for breach of contract was not a sum which had become due and payable under Clause 18 and, therefore, it could not be appropriated from other sums which were payable to the contractor. This judgment cannot have any application to the cases of unconditional and absolute bank guarantee as in the present case. ( 15 ) THIS question was also considered by the Supreme Court in the case of m/s. Kamaluddin Ansari v. Union of India, AIR 1984 SC 29 and it appears to have impliedly overruled the decision in Raman Iron Foundry (supra) because after referring to the said judgment in Raman Iron Foundry (supra), a different view has been taken and it has been held that Clause 18 of the contract conferred ample power on the Union of India to withhold the amount and no injunction order could be passed restraining the Union of India from withholding the amount. The editor has, therefore, rightly noted that AIR 1974 SC 1265 is impliedly overruled. The learned single Judge has also held so. ( 16 ) THE learned Counsel for the appellant has also strongly relied on the Supreme court judgment in the case of United Commercial Bank v. Bank of India, AIR 1981 sc 1426 and submitted that the demand must be in accordance with the terms of the bank guarantee and conditions thereof and if the condition of bank guarantee is not satisfied, the banker is not bound to honour such demand. Mr. Vakil also relied on the principle laid down to that effect by the Delhi High Court in the case of M/s. Banwari Lal Radhe Mohan v. Punjab State Co-operative Supply and marketing Federation Ltd. , Chandigarh and Anr. , AIR 1982 Del 357 (Para 6) and also in the case of M/s. Synthetic Foams Ltd. v. Simplex Concrete Piles (India) Pvt. Ltd. , AIR 1988 Delhi 207 (Para 11 ). It is submitted that the bank guarantee used the words "the said debt". , AIR 1982 Del 357 (Para 6) and also in the case of M/s. Synthetic Foams Ltd. v. Simplex Concrete Piles (India) Pvt. Ltd. , AIR 1988 Delhi 207 (Para 11 ). It is submitted that the bank guarantee used the words "the said debt". We have already held that the said expression refers to the sum payable under the bank guarantee and it is required to be paid to the beneficiary on demand. There is no condition whatsoever and the obligation of the bank is absolute and unconditional. As between the Government and the Contractor, it may be a question of a "debt", but as between the Government and the banker, it is just a "sum". The Supreme Court after observing in para 41 of the judgment in the case of United Commercial Bank (supra) to the effect that the bank which gives the guarantee must honour that guarantee according to its terms, also stated that the machinery or irrevocable obligation assumed by the banks is the life-blood of commerce; the Courts are not concerned with the difficulties in enforcing of such claims and they must be free from interference by the Courts, otherwise, trust in international commerce could be irreparably damaged. These words were underlined, emphasized and approved by the Supreme Court. It is, thus, clear that there is no scope for restraining enforcement of the bank guarantee and the banks are bound to honour the guarantees and make payment as per the demand without any argument and without any delay. ( 17 ) IN the case of U. P. Co-operative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. , 1988 (1) SCC 174 , the Supreme Court has laid down that :"whether it is a traditional letter of credit or a new device like performance bond or performance guarantee, the obligation of banks appears to be the same. If the documentary credits are irrevocable and independent, the banks must pay when demand is made. Since the bank pledges its own credit involving its reputation, it has no defence except in the case of fraud. The banks obligation of course should not be extended to protect the unscrupulous seller, that is, the seller who is responsible for the fraud. But, the banker must be sure of his ground before declining to pay. Since the bank pledges its own credit involving its reputation, it has no defence except in the case of fraud. The banks obligation of course should not be extended to protect the unscrupulous seller, that is, the seller who is responsible for the fraud. But, the banker must be sure of his ground before declining to pay. 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. "in the instant case, the appellant has not alleged any fraud, hence, the question of considering the request for staying the enforcement of the bank guarantee cannot arise. Mr. Vakil did, however, contend that encashment of the bank guarantee would cause irreparable harm to the appellant. Mr. Vakil further submitted that in an exceptional case the Court can intercept a bank guarantee from being honoured and in support of the said submission relied on the observations made by the Madras high Court in the case of M/s. Arun Murugan Traders v. Rashtriya Chemicals and fertilizers Ltd. , Bombay and Anr. , AIR 1986 Madras 161 (Paras 7 to 9 ). The law as to on what grounds Courts can grant injunction against enforcement of a bank guarantee is succinctly laid down in a catena of recent decisions of the Apex Court. In this connection, it is necessary to bear in mind, the following observations of the Supreme Court in the case of Svenska Handelsbanken v. M/s. Indian Charge chrome and Ors. , AIR 1994 SC 626 :"again in this very judgment (U. P. Co-operative Federation Ltd.), Shetty, J. referred to the observations of Mukherji, J. that 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. "again, the ground of irretrievable injustice was pleaded in the case of National Thermal Power Corporation Ltd. v. M/s. Flowmore Private Ltd. , JT 1995 (5) SC 591. Mere irretrievable injustice without prima facie case of established fraud is of no consequence in restraining the encashment of bank guarantee. "again, the ground of irretrievable injustice was pleaded in the case of National Thermal Power Corporation Ltd. v. M/s. Flowmore Private Ltd. , JT 1995 (5) SC 591. The Supreme Court has thus explained the kind of irretrievable injustice or harm which would warrant stay against enforcement of bank guarantees :-"while irretrievable injustice should be of the kind arising in an irretrievable situation which was referred to in the U. S. case of Itek Corporation v. The First National Bank of Boston etc. (566 Fed. Supp. 1210 ). The irreparable harm should not be speculative. It should be genuine and immediate as well as irreversible - a kind of situation which existed in the case of Itek Corporation (supra) where, on account of the revolution in Iran, the American Government had cancelled all export contracts to Iran and had blocked all Iranian assets within the jurisdiction of the United States. Fifty-two Americans had been taken hostages in Iran. In this situation the Court felt that the plaintiff had no remedy at all and the harm to him would be irreparable. This kind of a situation is not a likely situation. "the irretrievability and irreversibility is, therefore, supposed to lie in such exceptional situation and therefore, injunction cannot be granted merely on the ground of hardships or difficulties which the contractor may suffer on account of loss of liquidity as such, resulting from encashment of bank guarantees. ( 18 ) IN view of the above, it is clear that the appellant has neither pleaded any case of fraud nor made out a case of irretrievable injustice as contemplated in the aforesaid decisions of the Apex Court. ( 19 ) NONE of the contentions raised have any merit. Hence, the appeal is dismissed with costs quantified at Rs. 10,000. 00. ( 20 ) THE request for grant of interim relief is rejected. The learned single Judge had also refused the same. .