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M/s Rakesh Mohan v. Hindustan Steelworks Construction Ltd. & Another - WRIT - C No. 23602 of 2004  RD-AH 305 (12 July 2004)
Civil Misc. Writ Petition No. 23602 of 2004
M/s Rakesh Mohan Vs. Hindustan Steelworks Construction Limited
Hon'ble Tarun Chatterjee, C.J.
Hon'ble Dilip Gupta, J.
This petition has been filed for a direction to restrain the respondents from forwarding the bank guarantee dated 5.9.2003 for being invoked.
Hindustan Steelworks Construction Limited (hereinafter referred to as the ''HSCL') was awarded a contract by the New Okhla Industrial Development Authority (hereinafter referred to as the ''NOIDA') for construction 1152 LIG flats and related pocket development works in Sector-93, NOIDA for an amount of Rs. 4103.28 lacs and for this purpose a written agreement dated 16.8.2003 was executed between the NOIDA and HSCL. Under Clause (8) of the aforesaid agreement which relates to Deposit Advance 10% of the contract value could be paid to the HSCL as advance.
The HSCL awarded a sub-contract in favour of the petitioner, which is a proprietorship firm for construction of 656 LIG houses in Sector-93, NOIDA and for execution of the external development for a total value of Rs. 2337.49 Crores and an agreement dated 28.8.2003 was also entered between the petitioner and HSCL. Clause (4) of the said agreement provides that the petitioner shall submit a bank guarantee equivalent to 10% of the awarded value to NOIDA towards withdrawal of Mobilization Advance. Clause (9) provides that all terms and conditions agreed between the NOIDA and HSCL shall be binding upon the petitioner. Clause (19) of the agreement which relates to settlement of disputes between the petitioner and HSCL is as follows:-
"Both M/s RM & HSCL shall make efforts to settle the disputed/differences amicably. In case of any dispute/difference arises between M/s RM & HSCL in connection with the work, Dy. Chief Executive Officer, NOIDA and Deputy General Manager, HSCL/New Delhi shall settle the dispute with mutual consent. If dispute/difference are not resolved, the decision of the Chief Executive Officer/NOIDA and CMD/HSCL shall be final and binding on both M/s RM & HSCL."
In accordance with the agreement dated 16.8.2003 between NOIDA and HSCL and the subsequent agreement dated 28.8.2003 between the HSCL and the petitioner, the petitioner submitted a bank guarantee dated 5.9.2003. The bank guarantee was issued by ING Vyasya Bank Ltd. in favour of NOIDA in respect of the construction of 656 LIG flats and related pocket development works in Sector-9, NOIDA, district Gautambudh Nagar and provided that the Bank, as instructed by the contractor, agrees unconditionally and irrevocably to guarantee as primary and not as surety merely, the payment to NOIDA on demand without whatsoever right of objections on its part an amount not exceeding to Rs. 2.34 Crores. It was further made clear by the Bank that they were liable to pay the guaranteed amount or any part thereof only if the NOIDA serves upon it a written claim or a demand on or before 4.9.2005.
The NOIDA issued an office order dated 23.8.2003 relating to various contracts awarded by it including the one awarded to HSCL regarding construction of 1152 LIG flats in Sector-93. The work in respect of the said contract in favour of HSCL was directed to be stopped immediately and the amount given to HSCL towards Mobilization Advance was ordered to be realised from it. Accordingly a communication dated 23.10.2003 was sent by the NOIDA to HSCL intimating it of the decision taken by the NOIDA on 20.10.2003 and it was also directed to refund the amount given to it towards Deposit Advance/Mobilization Advance.
The HSCL challenged the order dated 20.10.2003 and the communication dated 23.10.2003 by means of a writ petition in this Court, being Writ Petition No. 53242 of 2003. In the said petition the HSCL also annexed a copy of the letter dated 28.8.2003 sent by NOIDA to HSCL confirming having received the bank guarantee from the petitioner (M/s Rakesh Mohan) and also mentioning that the bank guarantee shall be released after recovering all the dues. This petition was dismissed on 3.12.2003 with the following observations:-
"The relief arising out of a contract is to be taken in the forum provided in the agreement entered into between the parties or in Civil Court.
Copies of the agreements have been filed by the writ petitioner as Annexure Nos. 1 and 2 to the writ application. Clause-11 of the agreements do provide that in the event the dispute between the parties is not settled by mutual discussion, the decision taken by the Mukhya Karyapalak Adhikari, NOIDA and the Chairman-cum-Managing Director, M/s. Hindustan Steel Works Constructions Ltd. shall be final. If so advised, the writ petitioner may take recourse to Clause-11 of the Agreements or may institute a suit for damages and compensation."
In the present petition initially NOIDA was not impleaded as a respondent. However, under the orders of the Court, it was impleaded as respondent No.3. On 28.6.2004 this Court directed that the petition should be placed on 6.7.2004 along with the records of Writ Petition No. 53242 of 2003.
We have heard Sri Ravi Kant, learned Senior counsel for the petitioner, assisted by Sri M.K. Gupta and Sri Anurag Khanna, learned counsel appearing for the respondent No.3, NOIDA and have perused the records of the writ petition and the records of Writ Petition No. 53242 of 2003.
Learned Senior counsel for the petitioner placed reliance upon the communication dated 23.4.2004 sent by the HSCL to NOIDA in reply to the communication dated 6.4.2004 sent by NOIDA to HSCL and submitted that the cancellation of the contract by NOIDA amounted to breach of contract and since some preliminary works had already been completed, there was no justification on the part of NOIDA to ask for refund of the mobilization amount from the HSCL. He further submitted that since the contract itself was cancelled by NOIDA, the bank guarantee furnished by the petitioner under the agreement lost significance and in fact stood cancelled and repudiated the moment NOIDA decided to cancel the contract. He, therefore, contended that in such circumstances, the HSCL should be restrained from forwarding the bank guarantee to NOIDA for being invoked.
Sri Anurag Khanna, learned counsel appearing for NOIDA, however, submitted that the earlier writ petition which had been filed by HSCL against the order of cancellation and against the letter dated 23.10.2003 asking the HSCL for refund of the Mobilization Advance had already been dismissed by this Court on 3.12.2003. He further submitted that in the facts and circumstances of the case NOIDA was justified in asking for refund of the advance given by it to the HSCL and in case of any default on the part of HSCL, the bank guarantee was liable to be invoked.
The main contract was between NOIDA and HSCL and the writ petition filed by HSCL against the cancellation of the contract and against the decision of NOIDA in asking for refund of the Mobilization Advance had already been dismissed on 3.12.2003. The petitioner is merely a sub-contractor engaged by HSCL and in terms of the agreement between the HSCL and the petitioner he had submitted a bank guarantee. Pursuant to the cancellation of the contract by NOIDA, the HSCL was required to pay the advance amount given to it under the agreement and in case such amount was not paid back by HSCL, then the bank guarantee could be invoked. Any dispute between HSCL and the petitioner is liable to be resolved in the manner provided for in clause (19) of the agreement dated 28.8.2003 between HSCL and the petitioner.
The main issue which is to be determined by this Court is whether the only relief claimed for by the petitioner in this writ petition to restrain the respondents from invoking the bank guarantee can be granted by us. We make it clear that we propose to examine this issue without going into the question whether the present writ petition would be maintainable against HSCL because no foundation has been laid in the writ petition to establish that it is an instrumentality or agency of the Government of India. Only bald statement has been made that it was a Government of India undertaking under the provisions of the Companies Act, 1956 and, therefore, it is ''State' within the meaning of Article 12 of the Constitution of India.
The case set up by the petitioner in the writ application is that the bank guarantee is still with HSCL which is now intending to forward it to NOIDA for it being invoked and, therefore, a direction should be issued to restrain it. This submission of the learned Senior counsel for the petitioner that the bank guarantee is still with HSCL does not appear to be correct in view of the letter dated 28.8.2003 sent by NOIDA to HSCL, a copy of which has been annexed as Annexure ''6' in Writ Petition No. 53242 of 2003 since a bare perusal of the said letter indicates that NOIDA had confirmed having received the bank guarantee in respect of the aforesaid contract. It is, therefore, clear that the bank guarantee is with NOIDA and, infact, even the agreement dated 28.8.2003 required the petitioner to submit the bank guarantee to NOIDA.
For resolving the dispute we must first examine the meaning and scope of a ''Bank Guarantee' and the respective rights created thereunder. The issuance of a guarantee in common parlance is what a guarantor creates to discharge the liability when the principal debtor fails in his duty and the guarantee is in the nature of a collateral agreement to answer for the debt. It is well settled that the Bank guarantee is an autonomous contract and imposes an absolute obligation on the Bank to fulfil the terms and the payment under the Bank guarantee becomes due on the happening of the contingency on the occurrence of which the guarantee becomes enforceable.
The guarantee has been defined in Halsbury's Laws of England Vol. 20, Fourth Edn. Page 49 para 101 as "A guarantee is an accessory contract whereby the promisor undertakes to be answerable to the promisee for the debt, default or miscarriage of another person whose primary liability to the promise must exist or be contemplated."
In the banking system it is understood that Bank guarantee has a dual aspect. In the case of a Bank guarantee the banker is the promisor. It is a contract between the Bank and the beneficiary of the guarantee and it is also a security given to the beneficiary by a third party. It is a well-known business transaction in the world of commerce and it has become the backbone of the banking system. Its enforceability depends upon the terms under which the guarantor has bound himself. He cannot be made liable for more than what he has undertaken. Therefore the Bank guarantee, as already noticed, is in the nature of a special contract depending upon the happening of a specific event and when once it is discharged the guarantee comes to an end. It has to be borne in mind that the obligations arising under the Bank guarantee are independent of the obligations arising out of the specific contract between the parties.
In order to examine the terms under which the petitioner had bound himself, we consider it appropriate to reproduce the relevant portions of the Bank Guarantee:-
"In accordance with the provision of the conditions of the Memorandum of Understanding dated 16/08/2003 between the New Okhla Industrial Development Authority and Hindustan Steelworks Construction Limited. Clause 8 ("Deposit Advance") of the abovementioned Contract. Hindustan Steelworks Construction Limited, P-34A, Gariahat Road (South) Kolkata-700031 (hereinafter called "the Contractor") shall deposit with the New Okhla Industrial Development Authority (hereinafter called " the NOIDA" a bank guarantee to guarantee his proper and faithfully performance under the said clause of the Memorandum of understanding in an amount of Rs. 2.34 Crores (Rs. Two Crores Thirty Four lacs only.)
As per Execution Agreement between HSCL & Rakesh Mohan Dt. 28/08/2003 for External Development Works & Construction of 656 No. LIG House in Sector-93, NOIDA for a total value of Rs. 2337.49 Lacs. M/s Rakesh Mohan has agreed to submit the BG of amount 2.34 Crores on behalf of HSCL.
We the ING Vysya Bank Ltd., 30-31, Navyug Market, Ghaziabad as instructed by the Contractor, agree unconditionally and irrevocably to guarantee as primary and not as Surety merely, the payment to "the NOIDA" on his first demand, with 15 days prior claim to the Contractor, without whatsoever right of objection on our part, in the amount not exceeding Rs. 2.34 Crores. (Rs. Two Crores Thirty Four Lacs only), such amount to be reduced periodically by the amounts recovered by you from the proceeds of the contracts.
We further agree that no change or addition to or other modification of the terms of the Contract or of Works to be performed thereunder or of any of the Contract documents which may be made between "the NOIDA" and the Contractor, shall in any way release us from any liability under this guarantee and we hereby waive notice of any such change, addition or modification."
Thus a bare perusal of the bank guarantee clearly indicates that the Bank had agreed unconditionally and irrevocably to guarantee as primary and not as surety merely, the payment to NOIDA without any right of objections on its part the amount not exceeding to Rs. 2.34 Crores. It further indicates that the petitioner had agreed to submit the bank guarantee for an amount of Rs. 2.34 Crores on behalf of HSCL in terms of the agreement. The question, therefore, is whether such an unconditional and irrevocable guarantee can be resisted.
The Supreme Court in the case of U.P. State Sugar Corporation Vs. Sumac International Ltd. reported in (1997) 1 SCC 568 examined this matter in detail. In this case the Corporation entered into a contract with the respondent Company for setting up a complete sugar plant. The respondent was required to furnish bank guarantees for due delivery and for the advance price to be paid by the appellant to the respondent. The guarantees were irrevocable in nature, payable by the guarantor to the appellant on demand without demur. The appellant terminated the contract and invoked the bank guarantees. The respondent thereupon filed a petition under Section 20 of the Arbitration Act for appointment of an arbitrator since the agreement between the parties provided for arbitration. The respondent also filed two applications for interim relief under Section 41(b) of the Arbitration Act seeking interim stay against encashment of the bank guarantees. The Civil Judge dismissed the applications but in Revision, the High Court allowed the same and granted an injunction restraining the appellant from enforcing the bank guarantees.
The Supreme Court while allowing the appeal held that when in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The Courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The existence of any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees. The Courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may coexist in some cases.
As regards the exceptional ground of fraud, the Court relied upon the observations of Sir John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank, (1984) 1 All ER 351 which had been approved in an earlier decision of the Supreme Court and are as follows:-
"The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear both as to the fact of fraud and as to the bank's knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank's credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it charged."
Irretrievable injury, which is the second exception to the rule against granting of injunctions when unconditional bank guarantees are sought to be realised, must be of the kind which was the subject-matter of the decision in the case of Itek Corpn. Vs. First National Bank of Boston, 566 Fed Supp 1210 Case. To avail of this exception, therefore, exceptional circumstances which make it impossible for the guarantor to reimburse himself if he ultimately succeeds, will have to be decisively established. A mere apprehension that the other party will not be able to pay, is not enough.
Reference may be made to another decision of the Supreme Court in which HSCL itself was the appellant, namely, Hindustan Steelworks Construction Ltd. Tarapore & Co. reported in (1996) 5 SCC 34. In this case a works contract was awarded by the appellant HSCL to the respondent contractor. A bank gave a number of guarantees in favour of HSCL at the instance of the respondent. Those bank guarantees were towards mobilisation of advances, security deposit, securing the working funds provided by HSCL to the respondent and due performance of the contract. By furnishing the bank guarantee to secure the working funds the bank undertook to pay HSCL on demand any amount payable by the contractor without any demur and protest, without any reference to the contractor and such demand by HSCL had to be regarded as conclusive and binding on the bank notwithstanding any difference between the HSCL and the contractor. A dispute arose between the parties which was referred to arbitrators. During the pendency of the dispute before the arbitrators, but the HSCL rescinded the contract and demanded encashment of the bank guarantees by the bank. The contractor filed petitions under Section 41(b) read with Schedule II of the Arbitration Act in Court seeking injunction restraining HSCL from encashing the bank guarantees. The Court finding that bank guarantees were unconditional refused to grant the injunction and dismissed the petitions. But the High Court in Revision, after taking note that fraud was not pleaded went on to examine whether there were special equities or special circumstances justifying granting of an injunction. It held that no irretrievable injustice would be caused to HSCL as it could recover damages from the bank and the contractor in case it succeeded in the case and that the interest of HSCL could be safeguarded by directing the contractor to go on extending the bank guarantees till the matter was settled by the arbitrators. The High Court therefore allowed the revision petitions and by an order of injunction restrained HSCL from enforcing the bank guarantees.
Before the Supreme Court in appeal by Special Leave by HSCL it was submitted that in the matter of encashment of a bank guarantee interference by Courts is permissible only when fraud is pleaded and prima facie established and it is further shown that irretrievable injustice would otherwise be caused. Allowing the appeals the Supreme Court held that a bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the primary contract between the person at whose instance the bank guarantee is given and the beneficiary. In case of an unconditional bank guarantee the nature of obligation of the bank is absolute and not dependent upon any dispute or proceeding between the party at whose instance the bank guarantee is given and the beneficiary. 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. Fraud had not been pleaded and the relief for injunction was sought by the respondent contractor on the ground that special equities or the special circumstances of the case required it. The special circumstances and/or special equities which had been pleaded in this case were that there was a serious dispute on the question as to who had committed breach of the contract; that the contractor had a counter-claim against the appellant; that the disputes between the parties had been referred to the arbitrators and that no amount could be said to be due and payable by the contractor to the appellant till the arbitrators declare their award. The Supreme Court held that these factors were not sufficient to make out an exceptional case justifying interference by restraining the appellant from enforcing the bank guarantees and, therefore, the High Court was not right in restraining the appellant from enforcing the bank guarantees.
In the present case the bank had agreed unconditionally and irrevocably to guarantee the payment to NOIDA without right of objections on its part the amount not exceeding to Rs. 2.34 Crores. We, therefore, do not find any substance in the arguments advanced by the learned Senior counsel for the petitioner that since there was a breach of contract of NOIDA and some preliminary works had already been completed, there was no justification for NOIDA to ask for refund of the mobilization amount from the HSCL and, accordingly, the bank guarantee submitted to the NOIDA could not be invoked. As stated above, in view of the fact that the nature of the bank guarantee was unconditional and irrevocable, the existence of any dispute between the parties to the contract cannot be a ground for restraining the invocation of the bank guarantee. The arguments advanced by the learned Senior counsel for the petitioner tend to over look this aspect of the matter.
The petitioner has not alleged that any fraud had been played and nor are we satisfied that any irretrievable harm or injustice to the petitioner will be caused. Thus in view of the principles laid down in the aforesaid decisions of the Supreme Court, we are unable to grant relief to the petitioner that the respondents should be restrained from invoking the bank guarantee.
The writ petition is, therefore, liable to be dismissed and is, accordingly, dismissed. There shall be no order as to costs.
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