HON. ANIL KUMAR SHARMA, J.
(By Hon. Anil Kumar Sharma, J) Challenge in this appeal is to the order dated 12.7.2012 passed by the District Judge, Allahabad in Arbitration Case no. 216 of 2012 whereby the application of the appellant u/s 9 of The Arbitration and Conciliation Act, 1996 (to be referred as the 'Act' hereinafter) for restraining the respondents from giving effect to or withholding any sum payable to the appellant under any other contract and staying the operation and implementation of the impugned circular dated 10.6.2011 during the pendency of the arbitral disputes and till such time the award is made by the arbitrator and enforcing any other bank guarantee or recovering any amount of other contracts and for allied reliefs has been rejected.
The appellant company was awarded a contract for earth work in embankment and cutting including provision of blanketing bet CH-84700M to 114100M, construction of RCC Box type minor bridge and other ancillary work in connection with laying down of Agra Etawah new BG Rail Line by the respondents. The total value of the contract was Rs. 14,62,46,742/- to be executed withing the period 14.3.2005 to 13.3.2007. However, on the request of appellant, the period of completion of work was extended twice, firstly from 14.3.2007 to 31.12.2007 and then up to 30.9.2008 without penalty and with PVC (price variation clause) benefit. It was made clear to the appellant by the respondents that they will not be entitled to make any claim what so ever against the Railways by virtue of the extensions being granted nor shall the Railways would entertain or consider any such claim if it is made by the appellant.
The appellant alleged that the work under the contract could not be completed within the extended time as site was not available on account of agitation of farmers and non-supply of specifications or drawing of most of the small bridges by the respondents, who illegally terminated the contract vide letter dated 30.4.2009. The respondents, it was alleged, have given another contract for completing the work under the contract to M/s Hannu Infrastructure Pvt. Ltd., Kasganj on 10.6.2011 for Rs. 11 crores and without notice or providing opportunity of hearing to the appellant and have foisted the liability of their own negligence upon the appellant amounting to Rs. 5,58,16,036/- by way of damages representing risk and cost. It was further alleged that the respondents on 10.6.2011 in this regard issued letters to all General Managers of Railways to withhold the dues of the appellant available with them. The respondents also sent a letter to Indian Mercantile Co-operative Bank Ltd. for encashment of bank guarantee no. 12/2006 dated 4.8.2006 for Rs. 1,32,78,820/-, which was given by the appellant in connection with other contract pertaining to Northern Railway. The appellant has further claimed that they have suffered losses due to non-performance of contractual obligations by the respondents amounting to Rs. 7 crores and as such they have opted for arbitration which have commenced. The respondents have denied the allegations of the appellants and have blamed them for non-performance of the contract alleging that even during the extended period, no action had been taken against the appellant as per the terms of General Conditions of Contract (to be referred as 'GCC' hereinafter). According to them the work under the contract was of national and public interest, so the left over work of appellant had to be completed by inviting fresh tenders with notice to the appellant. Subsequently the risk and cost contract was awarded to M/s Hannu Infrastructure Pvt. Ltd., Kasganj following the rules and due procedure with after notice to the appellant and the tender was also uploaded on the website.
It was further contended that after the contract was assigned to the new agency on calculation of difference of risk and cost amounting to Rs. 5,58,16,036/- after notice to the appellant which is to be recovered. This action was taken by the respondents as per the provisions of Clause-62 of General Conditions of Contract for breach of contract and abandonment of the contract work by the appellant. Under Clause no. 62, the amount can be recovered from any money of appellant which is payable to them under any other contract and, therefore, letter was issued to the Indian Mercantile Bank Ltd for enashment of bank guarantee no. 12/2006 dated 4.8.2006 with extended validity up to 13.7.2012 for Rs. 1,32,78,820/- in favour of President of India through FA & CAO/Construction/Northern Railway, Kashmere Gate, Delhi. The respondents have further alleged that since the arbitral tribunal has been constituted by the competent authority on 13.3.2012 the appellant is not entitled to any relief. The learned District Judge after hearing the parties counsel has rejected the application of the appellant u/s 9 of the Act for interim relief restraining the respondents from recovering the amount aforesaid by invoking the bank guarantee dated 4.8.2006. Aggrieved the appellants have come up in appeal.
It has been argued by the learned counsel for the appellant that due to unwarranted and illegal actions of the respondents, the appellant had to file an application u/s 9 of the Act in the Court and vide order dated 4.1.2012 they were restrained from giving effect to or withholding any sum payable to the appellant under any other contract and the operation and implementation of the impugned circular dated 10.6.20111 was also stayed till the appointment of arbitrator or constitution of Arbitral Tribunal as the case may be; that respondents committing fraud are causing irretrievable injury to the appellant and are bent upon the invoke the expired and non-existent bank guarantee dated 4.8.2006 issued by Indian Mercantile Bank Ltd for Rs. 1,32.78,820/- which was given for other contract pertaining to northern railway. Per contra learned counsel for the respondents has contended that the appellant has defaulted at various stages and finally could not complete the work under the contract even by the extended time and have after due notice to the appellant the contract was terminated. It is stated that in these circumstances the respondents had to invite open tender for uncompleted work within the knowledge of the appellant and had to incur substantial amount of money. It was further submitted that the respondents can recover the amount due to the appellant from any money then due or which at any time thereafter may become due to the Contractor by the Railway under this or any other contract or otherwise.
We have heard arguments of Sri Zafar M. Nayier, Sr. Advocate for the appellant and Sri S. K. Misra, Advocate special counsel for the Railways at length and perused the record.
The pleadings of the parties clearly show that the appellant left the contract incomplete and the parties have blamed each other for non-performance of their obligations taking refuge under the terms of the contract and interpreting its provisions as suited to them. Appellant allegedly is company who is dealing with Railways from before and very well knew about various provisions of the GCC. The Arbitral Tribunal has been constituted by the respondents and it has taken cognizance of the case. In such circumstances all disputed questions relating to the contract and money due claimed by the parties against each other are to be decided by the said tribunal.
The moot question for determination before us is whether the respondents can encash the bank guarantee no. 12/2006 dated 4.8.2006 for Rs. 1,32,78,820/- given by the Indian Mercantile Co-operative Bank Ltd, which was given for other contract pertaining to northern railway. In this regard circular dated 10.6.2011 is referred to which reads as under:
In connection with above, it is informed that the contract for the work of Earthwork in embankment and cutting including provision of mechanically crushed blended material blanketing layer and const. Of RCC Box type minor bridge and other ancillary work bet ch 84700 to 114100m in connection with AGC-ETW New BG rail line was awarded to the above named firm, vide Acceptance L.No. 78/W/WA/CE/C/C/AG/A-E/EW-III of 14.3.2005. The contractor has failed to complete the work. Therefore, the contract has been terminated at his Risk and cost vide this office letter No. Ey.CE/C/AGC/P/Cont./A-E/EW-III dated 03.6.09 and Risk and cost tender has been awarded to M/s Hanu Infrastructure (P) Ltd., Surya Factory, Soron Road, Kasgang, Distt. Kanshi Ram Nagar (UP). The tentative Risk and cost amount works out to Rs. 5,58,16,036.33. The further liquidated damage, if any shall be calculated and avised in due course of time.
You are therefore, requested to please withhold the dues of above named contractor available with your office, if any, under intimation to this office please.
Dy.Chief Engineer (Const) N.C.Rly, Agra Cantt.
Copy forwarded and necessary action to :-
1.DRM/NCR/Agra, Jhansi & ALD
2.FA & CAO(C) NCR, ALD
3.Dy.CE/C/NCR/JHS,GWL,CNB & ALD DyCE(C), AGC"
Learned senior counsel for the appellant has placed reliance on the case of Hindustan Construction Co. Ltd. Vs. State of Bihar and others 2000 ACJ 358, wherein the Apex Court has held that bank guarantee constitutes a separate, distinct and independent contract and any term in main contract cannot be imported to construe bank guarantee. In this report the Hon'ble Court after interpreting the terms of bank guarantee found that it was not unconditional or unequivocal in terms so that the defendants could be said to have an unfettered right to invoke that guarantee and demand immediate payment thereof from the Bank. In the instant case it is not disputed that bank guarantee no. 12/2006 dated 4.8.2006 was given by Indian Mercantile Co-operative Bank Ltd. in favour of President of India through the FA & CAO (Const.), Norther Railway, Kashmere Gate, Delhi as 'performance guarantee bond' regarding contract assigned to the appellant by the respondents for 'construction of new station building (G+2) circulating area, various service buildings, construction of platform shelters, with RCC column and beam, under ground and overhead water storage tanks, water supply pipe line network and other misc. works in connection with the development of new passenger terminal at Anand Vihar (East Delhi)'. The bank guarantee was valid up to 3.8.2007, but was renewed from time to time and now its validity was extended up to 13th July, 2012.
Before we proceed further it would useful to have a brief look on law relating to injunction with regard to encashment of bank guarantee in commercial transactions. In Himadri Chemicals Industries Ltd. v. Coal Tar Refining Company AIR 2007 SC 2798, the Hon'ble Supreme Court has observed as under : -
The following principles should be noted in the matter of injunction to restrain the encashment of a Bank Guarantee or a Letter of Credit :-
(i)While dealing with an application for injunction in the course of commercial dealings, and when an unconditional Bank Guarantee or Letter of Credit is given or accepted, the Beneficiary is entitled to realize such a Bank Guarantee 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.
(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.
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 a ground for issuing an order of injunction to restrain enforcement of Bank Guarantees or Letters of Credit. (Para 14) There are two exceptions when Courts can grant an order of injunction in favour of an aggrieved party in the matter of encashment of a Bank Guarantee or a Letter of Credit. The two exceptions are :
(1) 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.
(2)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. (Paras 14, 15) On a query made by the Court, counsel for the appellant accepted that Clause-62 of GCC which is indisputably applicable to the contract in question. It provides for determination of contract owing to default of contractor, of which Clause-62(1) provides, If the contractor should (vi) abandon the contract or (vii) persistently disregard the instructions of the Engineer, or contravene any provision of the contract. It further provides as under:
"Then and in any of the said cases, the Engineer on behalf of the Railway may serve the contractor with a notice (Proforma at Annexure III) in writing to that reflect and if the contractor does not within seven days after the delivery to him of such notice proceed to make good his default in so far as the same is capable of being made good and carry on the work or comply with such directions as aforesaid to the entire satisfaction of the Engineer, the Railway shall be entitled after giving 48 hours notice (Proforma at Annexure IV) in writing under the hand of the Engineer to resind the contract as a whole or in part or parts (as may be specified in such notice) and after the expiry of 48 hours notice, a final termination notice (Proforma as Annexure V), whould be issued and adopt either or both of the following courses:-
(x)to carry out the whole or part of the work from which the Contractor has been removed by the employment of the required labour and materials, the costs of which shall include lead, lift, freight, supervision, and all incidental charges.
(y) to measure up the whole or part of work from which the Contractor has been removed and to get it completed by another Contractor, the manner and method in which such work is completed shall be in the entire discretion of the Engineer whose decision shall be final:
and in both the cases (x) and (y) mentioned above, the Railway shall be entitled (i) to forfeit the whole or such portion of the security deposit as it may consider fit, and (ii) to recover from the Contractor the cost of carrying out the work in excess of the sum which would have been payable according to the certificate of the Engineer to the Contractor if the works had been carried out by the Contractor under the terms of the contract, such certificate being final and binding upon the Contractor, Provided, however, that such recovery shall be made only when the cost incurred in excess is more than the security deposit proposed to be forfeited and shall be limited to the amount which the cost incurred in excess exceeds the security deposit proposed to be forfeited. The amounts thus to be forfeited or recovered may be deducted from any moneys then due or which at any time thereafter may become due to the Contractor by the Railway under this or any other contract or otherwise. (emphasis laid) Provided always that in any case in which any of powers conferred upon the Railway by sub-clause (1) of Clause 62 hereof shall have become exercisable and the same shall not be exercised, the non-exercise thereof shall not constitute a waiver of any of the conditions thereof and such powers shall notwithstanding be exercisable in the event of any future case of default by the Contractor for which his liability for past and future shall remain unaffected."
The respondents have stated that they have calculated the risk and cost after notice to the appellant and on the contrary the appellant has denied these allegations and had stated that exparte and illegal action had been taken by the respondents. Since the arbitration proceedings are pending it should not bother us any more as to who has committed default of the terms of contract or violated any of its terms and conditions or did not perform its obligations or as to who is liable to pay any amount or damages or its extent and to whom it is payable, because it would be in the domain of the arbitral tribunal, which is pending. However, in our considered opinion the above provisions (highlighted by us) provide unfettered powers to the respondents to deduct the amount which had been quantified under the provisions of GCC from any moneys then due or which at any time thereafter may become due to the appellants by the respondents under the instant or any other contract or otherwise.
It is noteworthy that not every perceived wrong can be exalted to the status of fraud. Irretrievable and unconditional bank guarantees are payable on demand without demur. In U.P. State Sugar Corporation Vs.Sumac International, 1997 (1) SCC 568, the Supreme Court held that the exceptions to the rule of payment under a bank guarantee would be if a fraud was committed to the notice of the bank which would vitiate the foundation of the bank guarantee or if the encashment of the bank guarantee would result in irretrievable injustice of the kind which would make it impossible for the person at whose instance the guarantee was furnished to reimburse itself.
It is also not disputed that the left out or incomplete work of the contract had to be given by the respondents to another agency after open tender and we were informed at the bar that the work had been completed by the other contractor, the plea taken by them for non-performance of the contract, is to be proved by them. None of the grounds canvassed by the appellant are worthy of consideration when payment under a bank guarantee is sought to be interdicted. Even if every grounds canvassed by the appellant in the petition is accepted, it would still not be good enough for the Court to grant the appellant an interim measure sought for the reason that even if the appellant makes out a prima facie case that the respondent has committed breach and that it is the appellant which is to get money from the respondent, even then the order that the appellant seeks cannot be made as Bank guarantees and letters of credit are the life-line of the commercial world and cannot be toyed with. Moreover in the instant case the invocation of bank guarantee is covered by the GCC quoted above which are admittedly the part of the instant contract.
We are not suggesting that there can be no injunction or interim measure against a bank guarantee, but the high case of irretrievable injury and irreparable damage that has to be made out is not met by the appellant. The appellant does not show as to why it should not wait till the arbitral reference to obtain refund of the money that the respondent may receive upon the encashment of the bank guarantee. It is very important to note that the remainder of the work had to be got done through other agency by accepting open tender and naturally the respondents had to to incur heavy expenditure thereon. There is no credible case made out that the respondent would be unable to make the payment should an award be made against it. There is also no case of special equity which has been made out. The appellant has merely cited a strong prima facie case as the bank guarantee which was given after the award of contract in question to the appellant for another contract is being invoked. The appellant has not been able to show that there was an element of fraud on the part of the respondent at the inception of the transaction that would entitle the appellant to an extraordinary order of the kind that has been sought.
Thus, in the instant case the provisions of GCC would entitle the respondents to realize their dues from the appellant from the bank guarantee in question which was in force at the time of invocation. In the facts and circumstances of present case, the case cited above on behalf of the appellant being distinguishable on facts does not help the appellant at all. The learned District Judge has not erred in rejecting the appellant's application u/s 9 of the Act as the appellant has failed to make out any case of fraud or irretrievable injustice.
For all the reasons stated above, we find that there is no merit in the instant appeal and it is hereby dismissed. However, in the facts and circumstances of the case, we would request the arbitral tribunal to conclude the proceedings expeditiously.
Order Date :- 23.7.2012 Imroz