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2009 DIGILAW 48 (ORI)

LARSEN AND TOUBRO LTD. v. STATE BANK OF INDIA

2009-01-19

A.S.NAIDU

body2009
JUDGMENT : A.S. Naidu, J. - The dispute in this Civil Revision relates to invocation of the bank guarantee furnished by the Petitioner to Opposite Party No. 2- National High Way Authority of India Ltd. 2. In response to an advertisement issued, Petitioner submitted his offer for execution of work of widening of 4-6 laning including strengthening the existing 2-lane carriageway of N.H.-60 from Km.0.000 to Km 53.410 i.e., between Balasore to Laxmannath. After opening of the bids and scrutiny thereof, the offer of the Petitioner was accepted and the work was awarded to it after execution of an agreement on 23.3.2001. The total cost of the work was Rs. 257,93,13,243/-. In course of execution of the work, it appears certain dissention cropped up and a dispute was raised by the Petitioner. In consonance with the terms of the agreement, the dispute was referred to the Dispute Review Board. It is averred that in the interest of timely completion of the project, the parties decided, as a matter of policy, to allow the. Petitioner-contractor to retain excess payment mistakenly said to have been released till achievement of 50% progress in the work. In consonance with the said decision, the Opposite Party No. 2- National High Way Authority of India Ltd. issued a circular on 26.6.2003 directing various units, which were implementing the work and were handling the contract, to obtain an undertaking from respective contractors, who had received such excess payment to the effect that the amount so paid may be recovered by the Opposite Party No. 2- National High Way Authority of India Ltd. along with interest in case either final decision goes against the contractor or gross cumulative progress payments under the respective contracts reach a level of 75% of the contract price whichever is earlier. Pursuant to the said policy decision, the Project Implementation Units were enjoined to obtain bank guarantee from the contractors to cover the said amount. In consonance with the agreement and in furtherance of the admission of liability, the Petitioner-contractor furnished bank guarantee in the prescribed format on 22.3.2004 initially for an amount of Rs. 8,00,00,000 which was subsequently amended and reduced to Rs. 6,75,78,994. The time of the said bank guarantee, it appears, was extended by the Petitioner-contractor from time to time as per the instruction of the Opposite Party No. 2- National High Way Authority of India Ltd. 3. 8,00,00,000 which was subsequently amended and reduced to Rs. 6,75,78,994. The time of the said bank guarantee, it appears, was extended by the Petitioner-contractor from time to time as per the instruction of the Opposite Party No. 2- National High Way Authority of India Ltd. 3. In the meanwhile the contractors achieved progress of 75% and in accordance with the undertaking given by the Petitioner, by letter dated 15.6.2006 the Project Director of the Opposite Party No. 2 intimated the Engineer that an amount of Rs. 75,00,000/- has already been recovered from the month of May, 2005 and further a sum of Rs. 75,00,000/- was proposed to be recovered. 4. The Petitioner-contractor being aggrieved by such decision approached this Court in W.P.(C) No. 8040 of 2005. During pendency of the said Writ Petition, the Petitioner-contractor made a prayer that as various disputes under the contract have cropped up, the same should be referred to the Arbitral Tribunal and the Petitioner should be permitted to move the Arbitral Tribunal under-Section 17 of the Arbitration and Conciliation Act, 1996, (hereinafter to be referred to as "the Act", in short). The Writ Petition was disposed of granting such liberty with a further direction to the Opposite Party No. 2- National High Way Authority of India Ltd. not to take any coercive step in the meanwhile. The Petitioner-contractor moved an application u/s 17 of the Act before the Arbitral Tribunal seeking various reliefs. One of the reliefs being to restrain the Opposite Party No. 2- National High Way Authority of India Ltd. from encashing the bank guarantee. The Arbitral Tribunal consisting of a Presiding Arbitrator and two Arbitrators, one of whom is a retired High Court Judge, heard the Learned Counsel for the parties and by Order Dated 9th and 10th October, 2006 directed as follows: Regarding CH-7, application filed by the Claimant u/s 17 of the Act, 1996 for interim relief, Respondents filed their reply vide RH-7, opposing the prayer and cited case laws vide RH-8,9 & 10 in support of their contentions. After going through the written submissions and hearing both parties at length, the AT allowed the prayer (i) & (ii) of the Claimant and rejected (iii), as under (i) No further recovery is to be effected on this account from the running bills submitted by the claimants. After going through the written submissions and hearing both parties at length, the AT allowed the prayer (i) & (ii) of the Claimant and rejected (iii), as under (i) No further recovery is to be effected on this account from the running bills submitted by the claimants. (ii) The Claimant will keep the bank guarantee in question alive till the AT publishes its award and the Respondents shall not encash the said BG, till the publication of the award. (iii) The AT finds no merit in it and the same is rejected. 5. Being aggrieved by the direction issued to the Opposite Party No. 2, who was one of the Respondents before the Tribunal not to encash the Bank guarantee till publication of the award, the Opposite Party No. 2- National High Way Authority of India Ltd. filed an appeal u/s 37(2)(b) of the Act before the Learned District Judge, Balasore. The said appeal was registered as ARBA No. 76 of 2008. The Learned District Judge after hearing the Learned Counsel for the parties, by Judgment dated 7.1.2009 allowed the appeal and set aside the order passed by the Arbitral Tribunal restraining the Opposite Party No. 2- National High Way Authority of India Ltd. from encashing the Bank guarantee. The said order, as stated above, is assailed in this Civil Revision. 6. Mr. Jagannath Das, Learned Senior Counsel for the Petitioner-contractor submitted that the hearing before the Arbitral Tribunal has been completed and the matter is posted for delivery of orders and the same may be pronounced any day. It is further submitted that in consonance with the direction given by the Arbitral Tribunal the bank guarantee has been validated on January, 2009 for a period of six months. Thus, there is.absolutely no urgency for encashing the said Bank guarantee and there is no reason as to why the Opposite Party No. 2- National High Way Authority of India Ltd. cannot wait till the award is passed by the Arbitral Tribunal. It is further submitted that the Petitioner-firm is not an endangered person and it has enough asset from which recovery of any award passed by the Arbitral Tribunal can be made. Thus, it would not be just and proper to encash the bank guarantee when the matter is posted for delivery of the award. It is further submitted that the Petitioner-firm is not an endangered person and it has enough asset from which recovery of any award passed by the Arbitral Tribunal can be made. Thus, it would not be just and proper to encash the bank guarantee when the matter is posted for delivery of the award. The third ground on which the order of the Learned District Judge is challenged is that though the bank guarantee is a conditional one, the Learned District Judge lost sight of the said fact. 7. The aforesaid submissions are strongly countenanced by Mr. Ashok Mohanty, Learned Senior Counsel appearing for Opposite Party No. 2. According to Mr. Mohanty, the Learned District Judge has correctly appreciated the facts and law with regard to invocation of bank guarantee and the decision does not suffer from any infirmity or illegality. In support of such submission, Mr. Mohanty relied upon the decision of the Supreme Court in the case of Vinitec Electronics Private Limited Vs. HCL Infosystems Limited. In the said case the Supreme, Court while dealing with the law relating to invocation of bank guarantee observed that the bank guarantee which provided that an amount secured is payable by the guarantor on demand is to be treated to be an unconditional bank guarantee. In course of commercial dealings, unconditional guarantees have been given or accepted and the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. 8. In the case of AIR 1997 1644 (SC), the Supreme Court has further held that when in course of commercial dealings, an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realise such bank guarantee in terms thereof irrespective of any pending dispute and that the bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer if not the very purpose of giving such bank guarantee would be defeated. The Supreme Court further observed that while dealing such matters, the Court should be slow in granting injunction to restrain realization of such bank guarantee. The Courts have carved out only two exceptions. A fraud in connection with such bank guarantee, would vitiate the very foundation. Hence, if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained- from doing so. The Courts have carved out only two exceptions. A fraud in connection with such bank guarantee, would vitiate the very foundation. Hence, if there is such a fraud of which the beneficiary seeks to take 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. The Supreme Court further went to add that since in most cases payment of money under such a bank guarantee would adversely affect the Bank and its customers at whose instance the guarantee is given, harm or injustice contemplated under this head must be of such 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. 9. In the case of BSES Ltd. (Now Reliance Energy Ltd.) Vs. Fenner India Ltd. and Another it is observed as follows: There are, however, two exceptions to this rule. The first is when there is a clear fraud of which the bank has notice and the fraud of the beneficiary from which it seeks to benefit. The fraud must be of an egregious nature as to vitiate the entire underlying transaction.The second exception to the general rule of non-intervention is when there are 'special equities' in favour of injunction, such as when 'irretrievable injury' or 'irretrievable injustice' would occur if such an injunction were not granted. 10. In the case of Himadri Chemicals Industries Ltd. Vs. Coal Tar Refining Company while summerising the principles for grant or refusal to grant of injunction to restrain the enforcement of a bank guarantee or letter of credit, the Supreme Court observed as follows: (i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional of injunction, such as when 'irretrievable injury' or 'irretrievable injustice' or letter of credit is given or accepted, the beneficiary is entitled to realize such a of injunction, such as when 'irretrievable injury' or'irretrievable injustice' 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. (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 realization 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 to 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. Thus, it is no more res integra that if the bank guarantee furnished is unconditional and irretrievable one, the person in whose favour guarantee is furnished by the Bank cannot be prevented by way of any injunction for enforcing the guarantee on the pretext that the condition for enforcing the bank guarantee in terms of the agreement entered into between the parties has not been fulfilled. Perusal of the terms of the bank guarantee in the case in hand clearly reveals that the same was an unconditional one. 11. In the aforesaid background, the conclusion is irresistible that the Learned District Judge has not committed any illegality or irregularity and the conclusions arrived at are just and proper and in consonance with law. But then, this Court finds that the Arbitral Tribunal has already concluded the hearing and the matter is posted for pronouncement of the award. The recovery of the amount secured by bank guarantee would be dependent upon the award passed. Section 17 of the Act empowers the Arbitral Tribunal to pass interim protection. Under such eventualities, this Court feels that a balance has to be drawn between the rights and liabilities of the contesting parties. The recovery of the amount secured by bank guarantee would be dependent upon the award passed. Section 17 of the Act empowers the Arbitral Tribunal to pass interim protection. Under such eventualities, this Court feels that a balance has to be drawn between the rights and liabilities of the contesting parties. Therefore, this Court while confirming the order passed by the Learned District Judge, set aside the order restraining the Opposite Party No. 2- National High Way Authority of India Ltd from encashing the bank guarantee and directs that in the event the bank guarantee is encashed, the said amount shall be kept in deposit in the name of Opposite Party No. 2--National High Way Authority of India Ltd. in fixed deposit in the State Bank of India, Opposite Party No. 1 for a period of three months or till pronouncement of the award, whichever is earlier. Utilization of the said amount, it is needless be said, would be subject to the result of the award to be passed. 12. With the aforesaid observation and direction, the Civil Revision is disposed of.