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2015 DIGILAW 1051 (BOM)

S. Satyanarayana v. West Quay Multiport Pvt. Ltd.

2015-04-21

S.C.GUPTE

body2015
JUDGMENT:- S.C. GUPTE, J. 1. The arbitration petition, filed under Section 9 of the Arbitration and Conciliation Act, 1996, seeks an interim injunction against enforcement of bank guarantees. The disputes between the parties arise out of two contracts, one for supply of materials and the other for supply of labour for construction of compound wall at stack yard of a birth in the Port of Visakhapatnam. The two bank guarantees, which are sought to be invoked by Respondent No.1, and invocation of which is sought to be restrained herein, are performance bank guarantees furnished under these contracts. 2. The contracts required each of the bank guarantees to be for an amount of 10% of the contract value and valid for a period of 12 months, guaranteeing due performance of the contract. The contracts, which are in identical terms in material respects, inter alia provided for (i) completion period and certificate to be issued on completion of work, (ii) defects liability period of 18 months from such certified completion date, and (iii) a final completion certificate at the end of successful completion of the defects liability period. The contracts further provided for enforcement of the performance guarantees inter alia for the Petitioner's failure to perform obligations in accordance with the contracts and upon the occurrence of specified events including failure to remedy the defects. The guarantees were to be enforceable without any requirement to place any demand on the Petitioner for any amount and notwithstanding any dispute between the parties in respect of the alleged default. 3. The Petitioner submitted the suit bank guarantees in pursuance of the contracts through Respondent No.2 bank, unconditionally and irrevocably guaranteeing to pay to Respondent No.1 the amounts not exceeding the sums mentioned therein "against any loss or damage caused to or suffered or would be caused to or suffered by the client by reason of any breach by the contractor of any of the terms and conditions contained in the 'LOA'.” The bank undertook to pay the amounts without demur "merely on a demand from the client stating that the amount claimed is due by way of loss or damage" by such reason. 4. 4. It is the Petitioner's case that around July 2014, the Petitioner satisfactorily completed the work, such completion being acknowledged by Respondent No.1 in an experience certificate; that there had been no complaint about the performance either in terms of time of completion or quality; that yet on 7 April 2015 Respondent No.1 addressed two separate letters alleging breach on the part of the Petitioner of the terms of the respective LOAs and loss caused to the former thereby; and that on the same day, i.e. 7 April 2015, the Petitioner received an intimation from Respondent No.2 bank about invocation of the bank guarantees by Respondent No.1. It is the case of the Petitioner that the invocation is not only wrongful but fraudulent, causes irretrievable injustice to the Petitioner, and is liable to be interfered with by this Court pending the arbitration reference, since these disputes are covered under the arbitration agreement between the parties. It is submitted by the Petitioner that the invocation is nothing but a counter blast to the proceeding filed by the Petitioner against Respondent No.1 seeking injunctive reliefs in respect of another contract between the parties, where the Petitioner has exposed the dishonesty of Respondent No.1 in a statement made by the latter before this Court. 5. The law concerning invocation of, and payment under, a bank guarantee is now well settled and hardly admits of any ambiguity or doubt. A bank guarantee is an independent contract between the bank and the beneficiary thereof. Irrespective of any dispute between the beneficiary and the party at whose instance the bank guarantee is furnished, the bank is obliged to honour the guarantee, if such guarantee is unconditional and irrevocable. As long as the invocation is in accordance with the terms of the bank guarantee, the bank must pay. In other words, the obligation is to pay according to the tenor of the guarantee, on demand, without proof or condition. The only two exceptions are fraud and special equities which imply an irretrievable injury or injustice. The fraud itself must be of an egregious nature so as to vitiate the entire underlying transaction. Even irretrievable injury or injustice would imply some executional circumstance which would make it impossible for the guarantor to reimburse himself if he were to ultimately succeed, there being good prima facie case of such success. 6. The fraud itself must be of an egregious nature so as to vitiate the entire underlying transaction. Even irretrievable injury or injustice would imply some executional circumstance which would make it impossible for the guarantor to reimburse himself if he were to ultimately succeed, there being good prima facie case of such success. 6. On this law and in the face of these facts, there is hardly any case for grant of any injunction against the invocation of the two bank guarantees here. But learned Counsel for the Petitioner submits that this case admits of an exception, since the invocation here can be subsumed within the idea of fraud. It is submitted that when the invocation is ex-facie bad and it can be demonstrated that the ostensible purpose of invocation is different from the real purpose, the latter purpose being outside the contract and alien to it, the invocation can be termed as unconscionable and lacking in bonafides. If the Court considers such invocation as shocking to its judicial conscience, it must step in and forbid the invocation. In other words, what is suggested is that a fraud must be viewed from a broader perspective; it must include a fraud of the beneficiary in invoking the guarantee; and an ex facie wrongful invocation actuated by an extraneous purpose should be viewed as nothing but fraudulent on the part of the beneficiary. Learned Counsel relies upon the decision of a learned Single Judge of Delhi High Court in Hindustan Construction Co. Ltd. Vs. Satluj, Jal Vidyut Nigam Ltd. (2006 (1) CTLJ 239 (Del), and a Division Bench of that Court in SatlujJal Vidyut Nigam Ltd. Vs. Jai Prakash Hyundai Corsortium (AIR 2006 Delhi 239), in support of his submissions. Learned Counsel also relies upon the decision of a learned Single Judge of our Court in Daiichi Karkaria Pvt. Ltd. Vs. Oil & Natural Gas Commission Bombay (1991 (93) BOM LR 183). 7. In Daiichi Karkaria the learned Judge of our Court (Dhanuka J.), whilst analyzing the law of bank guarantees, observed that 'fraud' was not a static term; it had a broader meaning in equity than at law; and an intention to defraud or to misrepresent was not a necessary element. The learned Judge quoted in this behalf observations of an American judgment (in Dynamics Corporation of America Vs. The learned Judge quoted in this behalf observations of an American judgment (in Dynamics Corporation of America Vs. The Citizens and Southern National Bank (356) Fed Supp 991), which were as under: "Fraud, indeed, in the sense of a court of equity properly includes all acts, omissions and concealments which involve a breach of legal or equitable duty, trust, or confidence, justly reposed, and are injurious to another, or by which an undue and unconscientious advantage is taken of another." The learned Judge, also in this behalf, quoted a Division Bench of our Court in State Trading Corporation of India Ltd. Vs. Indian Cotton Mills Federation, which noted as follows: "One of the exceptions is where it is alleged and prima facie established that the bank guarantee is sought to be operated for collateral purposes and that the party invoking the same is not acting bona fide." The learned Judge observed that in a given case, the conduct of the beneficiary of the bank guarantee may be fraudulent in invoking the bank guarantee even though the bank guarantee itself may not be totally void or voidable. 8. Much water has flown since Dhanuka J. delivered the judgment in Daiichi Karkaria. The wider proposition formulated in that judgment, and noted above, is no longer good law. The Supreme Court in U.P. State Sugar Corporation Vs. Sumac International Ltd.6 firmly reiterated the ( AIR 1997 SC 1644 ) principles of law concerning the nature and extent of inquiry to be made by Courts insofar as the two exceptions, namely, fraud and irretrievable injustice, are concerned. The Supreme Court made it clear that to bring the case within the exception of 'fraud' the fraud must be of an egregious nature such that the very foundation of a bank guarantee or letter of credit is thereby vitiated. Such a fraud would necessarily imply a knowledge on the part of the bank that any demand for payment under the bank guarantee or letter of credit would clearly be fraudulent. And the evidence as to the fact of fraud and the bank's knowledge thereof must be clear. An uncorroborated statement of the customer by itself normally would not be sufficient to meet such requirement. In BSES Ltd. Vs. And the evidence as to the fact of fraud and the bank's knowledge thereof must be clear. An uncorroborated statement of the customer by itself normally would not be sufficient to meet such requirement. In BSES Ltd. Vs. Fenner India Ltd. (2006) 2 Supreme Court Cases 728), the Supreme Court considered the rule and exceptions developed in England and some other foreign jurisdictions for restraining enforcement of a bank guarantee. The Queen's Bench decision in TTI Team Telecom Ltd. Vs. Hutchison 3G UK Ltd. (2003) 1 ALL ER (Comm) 914) was cited before the Court. That decision expressly recognized various situations such as 'misuse by the beneficiary of the guarantee by failing to act in accordance with the purpose for which it was given', 'a threatened call by the beneficiary for an unconscionable ulterior motive' and 'a lack of a honest or bonafide belief by the beneficiary that the circumstances, such as poor performance, against which a performance bond had been provided, actually exist', as bringing the case within the exception of 'breach of faith'. A Singapore case, SamwohAsphalt Premix Pte. Ltd. Vs. Sum Cheong Piling Pte. Ltd. (2002) 1 SLR 1), was also cited before the Supreme Court, which recognized 'calling a performance guarantee for an oblique purpose' or 'using it as a bargaining chip as a deterrent or in an abusive manner' as affording grounds to issue an injunction. The Supreme Court expressly rejected these wider propositions of law recognized in these foreign judgments. The Supreme Court observed thus: "14. We are afraid that in the face of the law succinctly laid down in U.P. Coop. Federation and reiterated in numerous judgments of this Court referred to earlier, we are unable to accept the wide proposition of law laid down in the foreign judgments cited by Mr. Sorabjee. Whatever may be the law, as to the encashment of bank guarantees in other jurisdictions, when the law in India is clear, settled and without any deviation whatsoever, there is no occasion to rely upon foreign case-law.” 9. In Hindustan Construction Co. Ltd. (supra), the Delhi High Court, after considering the facts of that case, held that the action of the respondent employer in insisting upon encashment of bank guarantees was bound to cause irretrievable injustice and injury to the applicants and that the applicants had a case of special equities in their favour. In Hindustan Construction Co. Ltd. (supra), the Delhi High Court, after considering the facts of that case, held that the action of the respondent employer in insisting upon encashment of bank guarantees was bound to cause irretrievable injustice and injury to the applicants and that the applicants had a case of special equities in their favour. The Court also balanced the equities on the peculiar facts of that case. The observations made in that case by the learned Single Judge merely restate the law on the subject. So also, in the case of SatlujJal Vidyut Nigam Ltd. (supra), the Division Bench of Delhi High Court agreed with the reasoning of the trial Court that (i) the bank guarantee in that case had outlived its purpose, (ii) there was no call for invocation till the time the contractor moved the trial Court, and (iii) the call made thereafter had been made in bad faith. The observations made by the Division Bench that the invocation being made for something which was alien to the agreement and lacking in bonafides, which appear to be in a broader sense, must be restricted to the peculiar facts of that case and cannot be said to be laying down any broader definition of 'fraud' or expanding the ambit of 'fraud' as laid down by the Supreme Court in bank guarantee cases. 10. Having regard to the law laid down by the Supreme Court, as noted above, it is no longer open to question the invocation of a bank guarantee on the ground that such invocation is for an extraneous purpose or lacks in bonafides. It is not possible to question the motive of the beneficiary behind invocation of the bank guarantee so as to find out whether such motive is ulterior or unconscionable. An ex facie bad invocation also cannot afford a ground for an injunction against enforcement of the guarantee. The exception of fraud can be invoked only in the case of a fraud which goes to the root of the guarantee and vitiates it, as explained above. 11. An ex facie bad invocation also cannot afford a ground for an injunction against enforcement of the guarantee. The exception of fraud can be invoked only in the case of a fraud which goes to the root of the guarantee and vitiates it, as explained above. 11. In the present case, the demand made on the bank to pay under the subject bank guarantees is in accordance with the terms of the bank guarantees, and the bank guarantees themselves being unconditional and irrevocable and without reference to any prior demand on the Petitioner, Respondent No.2 bank cannot be restrained from making any payment thereunder. It is the case of Respondent No.1 employer that cracks have developed in the wall and that these cracks are on account of deficiency in the quality of the work and material supplied by the Petitioner. Material has been placed on record by Respondent No.1 in support of the purported defects. It is not open to the Petitioner to question the invocation of the bank guarantees at this stage by claiming either that the alleged loss or damage caused or suffered or to be caused or suffered by the Respondent No.1 is not on account of any breach by the Petitioner of the terms and conditions in the LOA or that such invocation is wrongful on account of omission on the part of Respondent No.1 to call upon the Petitioner to remedy or make good the alleged defects. The Petitioner's contentions are on the footing that the contract work was successfully completed, such completion being certified in the certificate of Respondent No.1 and though there may be some cracks now seen, these are not due to any defective work, but because of a devastating earthquake in the area and at any rate, these defects can be cured under the contract; Respondent No.1 cannot straightaway invoke the bank guarantees without calling upon the Petitioner to remedy the defects. Respondent No.1, on the other hand, disputes the completion. According to it, the certificate referred to in this behalf by the Petitioner was not a completion certificate but merely an experience certificate given to the Petitioner as required by it for the purpose of some other contract; that the cracks are attributable to breach of contract on the part of the Petitioner and constitute a default event for invocation of the bank guarantees. These are all matters pertaining to the underlying contract, with which the guaranteeing bank is not in any way concerned. It is not permissible to the Petitioner to even allege that the demand is ex facie erroneous. Error in demand, even if such error be ex facie apparent on record, is no ground for an injunction. If the invocation is erroneous, the Petitioner can very well claim a refund of the amount paid under the bank guarantees and also a compensation for the loss occasioned thereby in the arbitration reference. The injustice suffered by the Petitioner on account of wrongful invocation of the bank guarantee, assuming that such invocation is wrongful, can thus be remedied and is not irretrievable. 12. For these reasons, there is no merit in the arbitration petition, and the same is dismissed. There shall be no order as to costs.