TaxTMI 
TaxTMI 
TaxTMI 
2014 (9) TMI 1272
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.... the letter dated May 30, 2014 terminating two Supply and Service Agreements: TPTL/Tower-A1/01 and TPTL/Tower-A2/01 dated February 22, 2010, modified by two Supplementary Agreement(s) dated May 10, 2010; finding a reflection by way of Amendment-1 dated July 05, 2010 to the agreement(s) dated February 22, 2010. Challenge in FAO (OS) No. 398/2014 is to an order dated September 03, 2014, dismissing a petition filed by the appellant under Section 9 of the Arbitration and Conciliation Act, 1996, praying that the notice dated May 30, 2014, terminating the two contracts be stayed and the respondent be directed to maintain status quo in respect of the works pending adjudication of the dispute regarding the termination of the contract before an Arbitral Tribunal, since the contract(s) between the parties had an arbitration clause. 2. On November 18, 2009 the letter of intent was issued to the appellant resulting in a binding agreement for the Tower Packages A1 and A2, and as per the terms of the offer, requiring the works to be completed by October 17, 2011 for the reason completion time was 23 months. 3. Undisputedly, time for completing the works was extended thrice-on November 11, 2011....
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....als/offer was issued by the respondent, on December 04, 2009, the appellant made an offer to the respondent in which it, inter alia, it wrote: "As discussed during the meeting held with your good self, we would like to confirm and assure that APIL is fully competent to undertake the above works and have all expertise for preparing the Forest & Civil Aviation Proposals and obtaining the necessary clearances from respective State and Central Government authorities. We have in-house teams of surveyors, experience transmission line engineers along with back-end teams of technical experts and our Liaison Professionals. We are prepared to offer our most competitive consultancy charges for providing above services as under:- (The rates are thereafter given in a schedule, which we are not noting being not relevant. The quoted rate is Rs. 19,74,67,799/- (Rupees Nineteen Crores Seventy Four Lacs Sixty Seven Thousand Seven Hundred Ninety Nine only). 6. As per Annexure-I to the proposal dated December 04, 2009, the scope of work concerning the proposals was detailed, and suffice it to state that the scope of work included preparing the necessary documents and liaisoning with the forest ....
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.... clause III, it was clearly indicated vide sub-clause (B)(d) 'balance 35% of the respective lump sum amount, on receipt of approvals.' 12. Clause IV in the Supplementary Agreement(s), pertaining to time schedule, was drawn up as under:- "Time Schedule (Appendix-4-Contract Agreement) The Contractor shall complete the services including the additional items of works/services within the Time for Completion given under the Contract unless an extension of time is authorized by the Employer keeping in view the additional scope of services, if any. The Contractor shall be responsible for getting the statutory clearances including Right of Way (ROW) and way leave clearances required for completion of the Facilities within stipulated Time of Completion." 13. Before continuing with the factual narration, it would be appropriate if we note the relevant legal provisions which necessitated the issue of clearances and permissions for execution of the works to be kept in mind by the parties and commercial terms thereof finding a reflection in the agreement(s) dated may 10, 2010, between the parties. 14. The Indian Telegraph Act, 1885, as amended by Act No. 8 of 2004, with effect ....
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....lity of the provisions of the Indian Telegraph Act, 1885 to The Electricity Act, 2003, and thus we find Section 164 in The Electricity Act, 2003, which reads as under:- "Exercise of powers of Telegraph Authority in certain cases.- The Appropriate Government may, by order in writing, for the placing of electric lines or electrical plant for the transmission of electricity or for the purpose of telephonic or telegraphic communications necessary for the proper co-ordination of works, confer upon any public officer, licensee or any other person engaged in the business of supplying electricity under this Act, subject to such conditions and restrictions, if any, as the Appropriate Government may think fit to impose and to the provisions of the Indian Telegraph Act, 1885, any of the powers which the telegraph authority possess under that Act with respect to the placing of telegraph lines and posts for the purposes of a telegraphs established or maintained, by the government or to be so established for maintained." 16. Since the respondent Teesta Valley Power Transmission Limited' had obtained a license from the appropriate authority under Section 14 of The Electricity Act, 2003, ....
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.... On May 14, 2014, the respondent invoked the four performance guarantees and the two bank guarantees issued at the instance of the appellant, when withheld payments were released in full to it, and the two bank guarantees for advance payment. The latter two, not in full value of the guarantees, but as per serial No. 1 and 2 of the tabular statement hereinabove. 19. Appellant immediately rushed to this Court and filed OMP No. 557/2014 under Section 9 of the Arbitration and Conciliation Act, 1996 praying that the State Bank of India be restrained from making any payment to the respondent under the bank guarantees. A reference was made in the pleadings to a bank guarantee No. 2102413BG0001287 in sum of Rs. 5.8 crores issued by the State Bank of Hyderabad, but for what purpose has not been brought out. The reply filed by the respondent is centered around the eight bank guarantees issued by the State Bank of India. The impugned decision dated September 03, 2014 has discussed the issue concerning the eight bank guarantees issued by State Bank of India. No arguments were advanced even before us concerning the bank guarantee issued by the State Bank of Hyderabad. What happened to the guar....
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....ent or alternatively said facts creating a special equity in favour of the appellant. 21. The respondent opposed the petition pleading that the eight guarantees were unconditional and it was within its right to invoke the same. It was pleaded that it had received the amount under the eight bank guarantees and had presented the banker's cheque for encashment to its banker: Bank of Baroda. It was denied that the respondent was in breach of any obligation. 22. On May 16, 2014 the learned Single Judge stayed encashment under the guarantees noting that a cure notice was issued in terms of clause 36.2.2 of the general conditions of the contract on May 09, 2014 and the guarantees were invoked on May 14, 2014. The learned Single Judge also noted that time for completion of the contract had been extended till October, 2014. The learned Single Judge noted that a caveat had been lodged by the respondent by one Mr. Aman Garg, Advocate. The learned Single Judge noted that he had taken up the matter for hearing at 10:00 AM on a mention being made and the Court Master had telephonically informed Mr. Aman Garg that the matter would be taken up immediately. The learned Single Judge had noted ....
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....paid along with accrued interest to the respondent. 28. Needless to state the learned Single Judge has held that there were no special equities. The learned Single Judge has, in paragraphs 28 to 30, very briefly discussed whether prima-facie the respondent was in breach. The learned Single Judge has held that these issues had to be decided by the Arbitral Tribunal. The learned Single Judge has noted a few decisions holding that pending adjudication of disputes before an Arbitrator it is permissible for a beneficiary to encash the bank guarantees. The learned Single Judge has noted the well-recognized legal position that the bank guarantees issued by bank are an independent contract between the bank and the beneficiary and issues concerning invocation of bank guarantee have to be determined on the language of the bank guarantees. 29. On May 30, 2014, the respondent proceeded to terminate the agreements with the appellant. This resulted in the appellant filing OMP No. 651/2014, a petition invoking Section 9 of the Arbitration and Conciliation Act, 1996, praying that pending resolution of the disputes before the Arbitral Tribunal (yet to be constituted), the notice of termination da....
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....s concerning the project to TATA Projects Ltd. To put it pithily, OMP No. 651/2014 was premised on: (i) reasonableness in action expected from an instrumentality of the State; (ii) time for completion of the works being extended without levy of liquidated damages thrice, and time for completion of the works being extended to October 31, 2014; (iii) cure notice being given on May 09, 2014 requiring fourteen days' time to the appellant to remedy the breaches if any and proximity of the time when contract was terminated with the expiry of the said fourteen days period i.e. May 23, 2014 and May 30, 2014, being indicative of malice and gross unreasonableness in the action: the argument being that if by May 23, 2014 the appellant, in compliance with the cure notice, would take remedial action, it was impossible that by May 30, 2014 it would be able to complete the works; and (iv) delay was occasioned principally due to non-availability of ROW and permissions under the Forests Act concerning forest land and consent from owners of private land as also from the local authorities, all of which were the obligations of the respondent. (The underlying emphasis in the pleadings would be that....
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....f the opening arguments on issues concerning the Right of Way and clearances commenced from a letter dated June 20, 2012, written by the respondent with reference to a committee constituted to resolve the issues concerning settlement of compensation to land owners, gram panchayats and the Right of Way. The arguments commenced, and naturally they were attractive to the Court, that the Supplementary Agreement had put in, as noted hereinabove in paragraph 11 above, in Clause IV pertaining to Time Schedule, the words 'the contractor shall be responsible for getting the statutory clearances including Right of Way (ROW) and way leave clearances required for completion of the Facilities within stipulated Time of Completion'. The letter dated June 20, 2012, written by the respondent to the appellant refers to Section 164 of the Electricity Act, 2003 and brings out that all powers for Right of Way for the transmission line has been vested in it. The letter thereafter refers to pending issues of compensation to be paid to land owners for tower location in the State of Sikkim, West Bengal and Bihar. It then refers to a meeting held on June 07, 2012 wherein it was decided that a commit....
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....ng an instrumentality of the State. Concededly the respondent is a company. 26% shares being held by Power Grid Corporation of India Ltd., a wholly owned company by the Central Government. The remaining 74% share are held by Teesta Urja Ltd. 26% shares of which company i.e. Teesta Urja Ltd. are held by the Government of Sikkim and the remainder by private individuals. Thus, it was pleaded that the respondent would not qualify to be an instrumentality of the State. Even taking into account that 26% share holding in Teesta Urja Ltd., which in turn held 74% shares of the respondent, was held by the Government of Sikkim and 26% shares of the respondent were held by a Government owned company, it would not qualify as an instrumentality of the State because the majority controlling shares of the respondent were still in private hands. Thus, its actions could not be tested on principles of reasonableness and fairness-a requirement of public law, concerning actions by a State and its instrumentalities. The respondent pleaded breach of obligations by the appellant. The respondent pleaded that under Section 9 of the Arbitration and Conciliation Act 1996 the Court would not stay a letter of t....
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....Judge regarding respondent's character as a State or an instrumentality of the State. The learned Single Judge has, during the discussion, in paragraph 54, held that a very high degree of prima facie case is required to be shown in order to obtain relief of stay of termination of a supply-cum-works contract. In the same paragraph the learned Single Judge has held that the 'reasoning accorded by the petitioner by informing the faults of the respondents are not the ones which are ex-facie apparent on the face of it.... therefore, prima facie, the reasons for termination as given by the respondents cannot altogether be brushed aside by calling it frivolous in nature.' A finding which has invited the attack by the appellant-on the one hand the learned Single Judge has opined that the vexed questions of facts at which the parties were at variance would advisedly be got settled before the Arbitral Tribunal and thus the learned Single Judge was not delving into the same, but on the other hand a finding has been returned against the appellant that prima facie it had not made good its submissions that the reasons for termination given by the respondent were not justified. 41. H....
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....he appellant shall be responsible for obtaining the statutory clearances including Right of Way and way leave clearances. 46. Thus, appellant's argument that 'the insidiously added paragraph beneath the time schedule clause' could not shift the liability on the appellant to obtain the necessary clearances, approvals and sanctions holds no water. 47. As noted in paragraph 5 above, after the letter of intent was issued, but before the contract was signed on February 22, 2010, the appellant had vide its letter dated December 04, 2009, relevant part whereof has been noted in paragraph 5 above, expressed its desire to not only prepare necessary documents but even obtained necessary clearances from the State and Central Government Authorities. It is apparent that in harmony with the tender documents, the contract bonds were signed on February 22, 2010, but side by side the parties were discussing shifting of the obligation of the respondent under Clause 6 of the contract to the appellant, and upon further negotiations, it being agreed that the appellant would take over said responsibility, the Supplementary Agreement(s) dated May 10, 2010 were executed, followed by formally....
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....having same right) to make a request to the District Magistrate to pass an order permitting it to take possession of land or have a Right of Way through land, requiring issue of compensation to be paid to be decided by the District Judge. To put it differently, ministerial acts required to be performed by firstly entering into negotiations with the owners of lands and upon failure to settle a rate, require a reference to be made to the District Judge can be performed by any person authorized by the licensee; of course, the person concerned acts for and on behalf of the licensee. 52. As we shall note the correspondence between the parties, it would become clear that the appellant rightly understood the legal position to be as aforesaid, evidenced by the fact that the appellant was, with the consent of the respondent, negotiating with owners of private land to discuss the compensation payable for Right of Way and/or site where towers had to be erected. The appellant was preparing the necessary documents required to be submitted to the various authorities and after obtaining signatures of the authorized officer of the respondent, was submitting the same and was taking follow up actio....
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....t to the consent of the land owners, which obviously subsume an agreement to pay the necessary compensation and in failure of such an agreement after obtaining necessary permissions from the District Magistrates. The adjudication of compensation payable by the District Judge would not have impeded the execution of the works. Likewise, in the State of West Bengal, the works could have been executed on non forest land. Post May 28, 2013 this hindrance qua forest land ceased to exist. There appears to be no forest land adversely affected by the power supply line in the State of Bihar. 57. Undisputedly the transmission line had a length of 36 km between the hydro power plant on Teesta river in the State of Sikkim till Rangpoo, 70 km between Rangpoo and Panighatta and 104 km between Panighatta and Kishanganj. Further, it is undisputed position that the number of towers to be erected in the Sikkim segment was 278 and in the West Bengal and Bihar segment 291. The stringing was 106 km in the State of Sikkim and West Bengal and 104 km in the remainder. The further undisputed position is that when the contracts were terminated on May 30, 2014 only 86 towers were erected out of 278 in the fi....
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....imply highlight that by December 27, 2011, evidenced by a letter written by the respondent to the appellant, of the 278 towers to be erected in Segment A1 only 9 were erected and as regards tower foundation the same was complete only in 55. 61. The minutes of the meetings would show that the representatives of the appellant were agreeing that the Right of Way clearances and consents to be obtained from owners of private land and in the alternative to apply to the District Magistrates was their obligation. 62. Thus, prima facie, conduct of the appellant from the inception of the contract evinces it understanding its obligations under the Supplementary Agreement(s), contrary to what the appellant now contends before us. 63. It was only on April 03, 2012 that the appellant appears to have, for the first time, tried to half heartedly take the stand that its obligations under the Supplementary Agreement(s) dated May 10, 2010 was limited to preparing cases under the Forest Act, obtaining ROW and proposals for obtaining mandatory clearances. The appellant unilaterally sought to terminate the Supplementary Agreement(s). The respondent immediately responded on April 16, 2012 refuting the....
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....ling District) are also for last two years. The issues was deliberated in the meeting taken by Director (Projects), POWERGRID on 7.6.2012 wherein it has been decided that a committee comprising of members from TPTL and DCIL-AIPL JV shall be constituted to facilitate settlement of ROW issues. In view of above, it is proposed to constitute a committee comprising of the following three members from TPTL and DCIL-AIPL JV to facilitate settlement of ROW issues: (i) Mr. A.K. Tyagi, General Manager, TPTL (ii) Mr. Goutam Sen, General Manager, DCIL-AIPL JV alternative Mr. T. Subramanyam, Sr. DGM, DCIL-AIPL JV. (iii) Mr. D. Ravi Prasad, Sr. Manager, TPTL/Mr. Prashant Singh Manager, TPTL. The committee shall carry out site visits and perform the following activities: (i) Locations in Sikkim: To assess compensation amount for damage of crops for transportation of tower materials, hardware, insulators, T & P etc. for approach to the tower locations in foundation & erection as well as line corridor for stringing, not assessed by the District Collectors and vetting of the same by the Gram Panchayats. (ii) Locations in Bihar and Naxalbari area of West Bengal Plain: To assess compensa....
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....er dated May 21, 2012 written by the appellant to the respondent in which it wrote as under:- "Dear Sir, Kindly refer to our above cited letters/referred mails inviting your attention to the grim situation, we are being made to face due to non-payment of compensation payments by TPTI. While the erection gangs lost working time, we continue to incur idle charges of erection gangs and Watch & ward expenses at several other locations where tower material is shifted in advance as per program. As may be seen from the enclosed details, there are 218 cases of compensation payments pending with TPTI for locations in Bihar (A2 package). * 61 cases submitted on 2nd April, * 97 cases submitted on 24th April, * 43 cases submitted on 2nd May, * 16 cases submitted on 9th May, 12. This delay in payment of compensation is holding up tower erection work at 12 locations (278/1, 278A/8, 281, 282/1, 285, 294B, 294D/2, 294D/4, 294F, 294E/2 and 295B). We will be submitting our claim for the idle labour as well as Watch & Ward of tower material wherever it is shifted but erection has been stopped by landowners on account of non-payment of compensation. Similarly in Bengal (A2 package) t....
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....ment of India order dated March 21, 2011 as per which the Government of India had instructed that unless approvals under the Indian Forest Act are obtained no work should commence even in non-forest land because if ultimately approval under the Indian Forest Act is not granted, the entire money spent on a project would be wasted. 69. The argument overlooks that on January 07, 2013, the Government of India had modified its aforesaid recommendatory directive for linear projects involving use of forest land. Linear projects would be such as roads, canals, pipelines and electricity transmission lines. The relaxation was that work could commence in non-forest land if it was technically feasible to execute the project along and alternate alignment if approval under The Indian Forest Act was not granted. It was not the case of the appellant that it was not possible to complete the supply line along and alternate alignment if approval under The Indian Forest Act was refused. The position would therefore be that at least for the stretch in the State of Sikkim there being a forest clearance as early as September 07, 2011, there could be no excuse for the work not to proceed at full pace alo....
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.... the gravity of the situations. It is evident that reasons of delay is beyond our control and not attributable to us hence offloading of portion of work is unwarranted and not acceptable to us. Therefore we would prefer and request you to take over the complete work on as is where is basis' at no risk and cost to us. However, in view of your continuous insistence for offloading of services work of Darjeeling and part of South Sikkim from our scope and completion of balance portion of work by us, we would request you for acceptance of the following conditions to enable us to continue with the work: * Offloading of part work as proposed by you shall be done at no risk and cost to us * All works related to statutory clearances such as Right of Way, Forest clearances and way leave clearance etc including preparation of proposals for the same for entire line (both the packages) under supplementary agreement shall be excluded from our scope. * Rates for the items of the balance work in our scope shall be revised in line with the rates which shall be finalized by you for service contract of the offloaded Darjeeling and part of South Sikkim portion. * Revised time extension sha....
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....he argument that having extended the time till October 31, 2014, the respondent could not have terminated the contract on May 30, 2014, appears to be attractive at first blush, but as the flushing is over, one realizes that the argument is no more than a puffing. The correspondence between the parties would evince that the envisaged progress when extension was granted on July 04, 2013 for the works to be completed by October 31, 2014 was not achieved even up to 40% of the stage by which the works were to be completed. The appellant was lagging far behind evidenced by the fact that as per the extension, by January 2014, in Tower Package A1 as against 67 more foundations to be laid only 13 were laid and as against 79 more towers to be erected only 46 were erected. Similarly, for Tower Package A2 as against 32 foundations more to be laid till January 04, 2014 only 2 were laid and as against 29 more towers to be erected during this period, none were erected. On the laying of cables (stringing), as against 23 kilometers to be laid only 4 kilometers were laid in Tower Package A1 and for Tower Package A2 as against 46 kilometers only 12 kilometers were laid. If a contractor lags behind by....
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....e contracts would not be interdicted by interim orders especially when the same relate to supply and execution of works because damages for breach would be an adequate remedy. On the facts of the instant case, the offers made by the appellant to off-load the remaining works in full and alternatively the unfinished works in South Sikkim and Darjeeling district would further justify no interim relief being granted with respect to the termination of the contracts. 83. Thus, on facts the conclusion arrived at by the learned Single Judge in declining to confirm the ex-parte ad-interim order of status quo and dismiss the petition filed by the appellant under Section 9 of the Arbitration and Conciliation Act, 1996 concerning the letter dated May 30, 2014 cannot be faulted with. 84. As we have prima facie found that the respondent is not an instrumentality of the State, there would be no question of the respondent being subjected to the rigorous of Article 14 of the Constitution of India. The respondent would be as free as any other individual and would have the same freedom as anyone else would have in matters of contract. But for the reason we find a few decisions by learned Single Jud....
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.... business. Profit, is the aim of every business and, therefore, when a State conducts business it must have all the freedom to do so. If shackled by the strict principles of judicial control over administrative action, it may become impossible for a State to conduct business, as business needs to be conducted. 89. We may ignore the judgments dealing with the limitations on the power of the State at the time of entering into contract, for they would constitute a different category of cases. 90. Disputes involving breach of alleged obligations by the State or its agent can be classified into three groups:- (i) Where grievance relates to alleged breach of promise on part of the State where claimant has acted to his prejudice on basis of assurance or promise on the part of the State, but the agreement is short of a contract within the meaning of Article 299 of the Constitution; (ii) Where the State after entering into a contract, acts in exercise of statutory power and the claimant alleges a breach on the part of the State; and (iii) Where the rights are purely contractual and claimant alleges breach by the State of a term of the contract. 91. The present case before us has to....
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....ported as AIR 1990 SC 1031 Mahavir Auto Vs. Indian Oil Corporation & Ors. also needs a clarification because it is often cited by counsel for the parties as if at a post agreement stage, a dispute pertaining to a contract and especially when the same is determined is actionable under a public law remedy. Issue related to a post contract dispute (as was the situation in Dwarka Dass Marfatia's case). The following observations of the Supreme Court are relevant:- "16) Mr. Salve submitted that in private law field there was no scope for applying the doctrine of arbitrariness or mala fides. The validity of the action of the parties have to be tested, it was urged on behalf of the respondent on the basis of "right" and not "power". A plea of arbitrariness/mala fides as being so gross cannot shift a matter falling in private law field to public law field. According to Mr. Salve to permit the same would result in anomalous situation that whenever State is involved it would always be public law field, this would mean all redress against the State would fall in the Writ Jurisdiction and not in suits before Civil Courts. "17) We are of the opinion that in all such cases whether public....
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....dgment of the Allahabad High court dismissing the writ petition were heard together and decided. What is relevant to be noted is the question framed by the Supreme Court for being answered. In para 4 the questions was posed as under:- "Broadly, two questions arise for decision by us in this bunch of matters. These are: Is the impugned circular amenable to judicial review?; and if so, is it liable to be quashed as vocative of Article 14 of the Constitution of India, being arbitrary? 99. Answering the question it was observed:- "It can no longer be doubted at this point of time that Article 14 of the Constitution of India applies also to matters of governmental policy and if the policy or any action of the Government, even in contractual matters, fails to satisfy the test of reasonableness, it would be unconstitutional.(See Ramana Dayaram Shetty vs. The International Airport Authority of India (1979) 3 SCR 1014 and Kasturi Lal Lakshmi Reddy Vs. State of Jammu and Kashmir [1980] 3 SCR 1338. In Col. A.S. Sangwan Vs. Union of India, AIR 1981 SC 1545, while the discretion to change the policy in exercise of the executive power, when not trammeled by the statute or rule, was held to ....
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....ly bring out the distinction that where action is taken pure and simple under a contract, the principles of justness, fairness, arbitrariness, reasonableness etc. flowing out of Article 14 of the Constitution of India cannot be attracted. Where, however, the foundation of the action lies in an administrative or an executive policy decision taken and then applied to the contract, the merits of the administrative or executive decision taken are subject to judicial review. In each of the cases, aforesaid, before the Supreme Court it was noted that either the police decision taken suffers from the vice of arbitrariness or the administrative decision taken was found to be so suffering. In each and every decision the Supreme Court was at pains to clarify that their observations would not apply purely to a field of contract pure and simple. 104. The decision of the Supreme Court reported as 1994 (4) SCC 104 Assistant Excise Commissioner Vs. Issac Peter & Ors. is another decision to which we may refer to. All the aspects of arbitrariness, reasonableness, promissory estoppel , estoppel by conduct and legitimate expectation in the field of contract, where Government was a party were c....
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....elating to contracts. It must be remembered that these contracts are entered into pursuant to public auction, floating of tenders or by negotiation. There is no compulsion on anyone to enter into these contracts. It is voluntary on both sides. There can be no question of the State power being involved in such contracts. It bears repetition to say that the State does not guarantee profit to the licenses in such contract. There is no warranty against incurring losses. It is a business for the licensees. Whether they make profit or incur loss is no concern of the State. In law, it is entitled to its money under the contract. It is not as if the licensees are going to pay more to the State in case they make substantial profits. We reiterate that what we have said hereinabove is in the context of contracts entered into between the State and its citizens pursuant to public auction, floating of tenders or by negotiation. It is not necessary to say more than this for the purpose of these cases." 105. Even the decision reported as (2004) 3 SCC 553 ABL International Ltd. & Anr. Vs. Export Credit Guarantee Corporation of India Ltd. & Ors. granted public law remedy relief to a claim under a c....
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....cial opinions penned by Learned and Hon'ble Judges and notwithstanding a plethora of case law on the subject, the debate goes on. 110. Where the guarantee is limited (on it's terms) we have no problem, for the enforcement of the guarantee has to be within the conditions (limitations) contained in the guarantee. But where a guarantee is couched in a language which makes it unconditional and the guarantor binds himself to give money to the beneficiary on demand, without demur or protest; and the guarantor is not even permitted to probe into the dispute between the parties, an area of fertile litigation has grown because most common law jurisdictions recognize primacy to justice as an integral part of law enforcement. 111. Though opinions on bank guarantees span half a century, we plunge mid-stream and commence our discussion with the celebrated decision of the Supreme Court reported as 1987 (2) SCALE 1149 U.P. Coop. Federation Ltd. Vs. Singh Consultants & Engrs. (P) Ltd. The decision has noted the prior landmark decisions on the subject and throws considerable light on what would be 'special circumstances' or 'special equity' justifying issuance of an injunc....
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....arantor (usually a bank) is the same. 116. One exception to the rule of absolute independence of a bank guarantee was thereafter noted. It was traced to the opinion of Shientag J. in a case in U.S.A. reported as Sztejn Vs. J. Henry Schroder Banking Corpn. 31 NYS 2d 631. 117. The year was 1941. Injunctions against payments under letters of credit were not issued by courts. Mr. Sztejn had wanted to buy quality bristles from Indian and struck a deal for a quantity with an Indian seller. Payment was secured to the seller by means of a letter of credit which provided that upon receipt of appropriate documents the bank would pay for the shipment. Somehow Mr. Sztejn discovered that the shipment made was crates of worthless rubbish. He went to the bank with a request not to pay and received a response that being a letter of credit it was an independent undertaking of the bank and hence it must pay. Mr. Sztejn went to Court. He sought an injunction against the issuing bank to restrain it from paying under the letter of credit. He made, prima facie, good his allegations that as against the contracted goods i.e. bristles, worthless material and was shipped. Noting a fraud in the transaction....
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....ote that the exception of fraud has been codified in Sections 5-114 of the Uniform Commercial Code. 120. With respect to the question: Can an injunction be issued upon a plea that the beneficiary is in breach of the contract? Law on the subject was thereafter noted by the Supreme Court with reference to a decision of the Court of Appeal in England reported as (1985) 2 Q.B.D. 127 Hamzon Melas & Sons Vs. British Imex Industries Ltd., wherein it was held the principle was that commercial trading must go on the solemn guarantee either by the letter of credit or by bank guarantee or irrespective of any dispute between the contracting parties whether or not the goods were upon contract. 121. With reference to the decision of the House of Lords in UCM (Investment)'s case (supra) viz-a-viz a plea of fraud in invoking the guarantee and the opposite party being in breach of its obligations under the contract, the Supreme Court summarised the legal position as under:- "The whole commercial purpose for which the system of confirmed irrevocable documentary credits had been developed in international trade was to give the seller of goods an assured right to be paid before he parted with ....
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....e bank guarantee, nevertheless they had a most important interest in it. If the Midland Bank Ltd., paid under this guarantee, they would claim against the Lebanese bank who in turn would claim against the shippers. The shippers would certainly be debited with the account. On being so debited, they would have to sue the shipowners for breach of their promise express or implied, to release the goods. Lord Denning, M.R., further posed the question were the shippers to be forced to take that course? Or can they short-circuit the dispute by suing the shipowners at once for an injunction? He further observed at page 497 of the Report that this was a special case in which injunction should be granted. Lord Denning, M.R. went on to observe that there was a prima facie ground for saying that on telex messages which passed (and indeed, on the first three lines of the guarantee) the shipowners promised that, if the bank guarantee was given, they would release the goods. He further observed that the only lien they had in mind at that time was the lien for demurrage. But would anyone suppose that the goods would be held for another lien? It can well be argued that the guarantee was given on the....
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....he injunction. The plaintiff appealed to the court of appeal. Lord Denning M.R. held that the justice was right in discharging the injunction and reiterated that the bank must honour its commitment. 127. Therefore, in para 24 of its decision the Supreme Court clarified that it appears that special equities (circumstances) mentioned therein i.e. in Elian's case (supra) may be a situation where the injunction was sought for to prevent injustice which was irretrievable in the words of Lord Denning M.R. In para 28 of the decision it was categorically opined: "It is not the decision that there should be a prima facie case. In order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise the very purpose of bank guarantees would be negatived and the fabric of trading operation will get jeopardised." 128. The ratio of law in U.P. Cooperative Federation Ltd.'s case (supra), would thus be that the bank must pay under an unconditional ....
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....tire underlying transaction while irretrievable injustice had to be of a kind arising in a situation found in 566 Fed Supp 1210 Itek Corpn Vs. First National Bank of Boston. Finding none, the injunction granted by the High Court was vacated. 132. We thus need to note the decision in Itek Corporation's case (supra). The facts were that in April of 1977, Itek entered into a contract with the Imperial Government of Iran to manufacture certain high-technology optical equipment. The contract price was $22,500,000. By the terms of this contract, the Imperial Government was required to make an advance payment to Itek of $4,500,000. Itek, in turn, was obliged to provide security for this advance in the form of four bank guarantees, each in the amount of $1,125,000, issued by Bank Melli and naming the Imperial Ministry of War as beneficiary. Itek was further required to furnish a bank guarantee in the amount of $2,250,000, issued by Bank Melli in favour of the Imperial Ministry of War as security for the good performance of its contractual obligations. As a condition to issuing the guarantees, Bank Melli required Itek to supply standby letters of credit in its favour, issued by an Amer....
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.... with officials of the Ministry of National Defense to discuss the occurrence of force majeure and the status of the contract obligations. At this meeting, Itek's representatives also presented the Iranian participants with copes of unpaid invoices that had accumulated since February 1979, and a summary of the account under the contract. On November 03, 1979, the United States Embassy in Teheran, Iran was forcibly taken over and 52 American citizen were taken hostage. In response to the crisis, President Carter on November 14, 1979 declared a national emergency and, by Executive Order No. 12170, 'blocked' all Iranian assets subject to the jurisdiction of the United States. Shortly thereafter, the Treasury Department promulgated regulations to implement the Presidential directive that all assets be blocked. These regulations prohibited the transfer of any property subject to the jurisdiction of the United States in which Iran had any interest whatever, except as authorized by license or regulation. The regulations specifically authorized payment by United States banks on letters of credit issued in favour of an Iranian entity, provided the payments were made into blocked....
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....: 1348 (D.Mass. 1981). Nothing has occurred to change my view that "if [FNBB] were to make payment on the letters as demanded, Itek's only recourse would be a lawsuit against the Iranian Government," 511 F.Supp. at 1349, or that on the present record, this cannot be viewed as an "adequate" remedy." 134. Thus, the irretrievable injustice or special equity noted in Itek's case was the impossibility of the party at whose instance the bank guarantee was issued being in a position to retrieve the money upon obtaining a decree in its favour. 135. In an action for injunction relating to fourteen bank guarantees of four kinds; (i) to secure Mobilization Advance; (ii) to secure the Security Amount; (iii) to secure the Funds Advanced by Hindustan Steelworks Construction Ltd.; and (iv) to secure Due Performance, the High Court granted an injunction qua the guarantees except the guarantees under head No.(iii) in favour of the contractor Tarapore & Co., holding that on facts special equity or special circumstances were shown justifying grant of an injunction. Reason given by the High Court was that till the arbitrator decided the dispute the claim under the bank guarantees (qua which ....
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....here is a stipulation in the bank guarantee that the bank should pay on demand without a demur and that the beneficiary shall be the sole judge not only on the question of breach of contract but also with respect to the amount of loss or damages, the obligation of the bank would remain the same and that obligation has to be discharged in the manner provided in the bank guarantee. In General Electric Technical Services Co. Inc. v. Punj Sons (P) Ltd. while dealing with a case of bank guarantee given for securing mobilisation advance it has been held that the right of a contractor to recover certain amounts under running bills would have not relevance to the liability of the bank under the guarantee given by it. In that case also the stipulations in the bank guarantee were that the bank had to pay on demand without a demur and that the beneficiary was to be the sole judge as regards the loss or damage caused to it. This Court held that notwithstanding the dispute between the contractor and the party giving the contract, the bank was under an obligation to discharge its liability as per the terms of the bank guarantee. Larsen and Toubro Limited v. Maharashtra State Electricity Board an....
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....nental Construction wherein the Supreme Court did not interfere with an injunction order passed by the High Court noting that the dispute was pending adjudication before the arbitrator. However in the decision reported as 2006 (2) SCC 728 BSES Ltd. Vs. Fenner India it was observed: "We are afraid that the short order in Continental Construction Ltd. appears to have been made on the narrow facts of that case and does not constitute a precedent binding us. Moreover, as mentioned earlier, a line of judgments of this Court have long settled the law relating to the invocation of bank guarantees." 140. In the decision reported as 1997 (6) SCC 450 Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engineering Work P. Ltd. it was held that special circumstance of irretrievable injury means a circumstance which makes it impossible for the guarantor to reimburse itself by way of restitution. 141. In the decision reported as 1997 (1) SCC 568 U.P. State Sugar Corporation Vs. Sumac International Ltd. the fact that the beneficiary was a sick company and that a scheme for its revival was pending consideration before BIFR under Sick Industrial Companies (Special Provisions) Act 1985 was held not t....
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....nder Section 17 after making an inquiry, if the Board is satisfied that a company has become a sick industrial company, the Board may then decide, by an order in writing, whether it is practicable for company to make its net worth exceed the accumulated loses within a reasonable time. If this is practicable, then the Board shall give such company the opportunity to make its net worth exceed the accumulated loses. Under Sub-Section (3) of Section 17 if the Board decides that this is not practicable within a reasonable time, it may adopt measures specified in Section 18 and provide for a scheme for appropriate measures in relation to that company. There can, therefore, be no presumption that the company will, in no circumstance, be able to discharge its obligations. x x x x x x x x x x x x x x x x Under Section 22 on which the respondent relies, where in respect of an industrial company, an inquiry under Section 16 is pending, or any scheme under Section 17 is under preparation or a sanctioned scheme is under implementation or when an appeal under Section 25 is pending, then no proceedings for the winding up of the industrial company or for execution, distress or the like against....
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....dia is clear, settled and without any deviation whatsoever, there is no occasion to rely upon foreign case-law." 145. The legal position which can be summarized would be that a bank guarantee is an independent contract between the bank and the beneficiary and disputes pertaining to bank guarantees have to be resolved de-hors the terms of the main contract between the parties or disputes relatable to the main contract between the parties. Where a bank guarantee is a conditional guarantee invocation thereof would have to be in strict conformity with the conditions on which the guarantee is issued. In such a case an injunction can be granted against payment under the bank guarantee if it is found that the condition upon which the guarantee was issued has not been complied with or met. But where the guarantee is unconditional and/or the bank has agreed to make payment without demur or protest, on the beneficiary invoking the bank guarantee the bank is obliged to honour the same for the reason like letters of credit, a bank guarantee if not honoured would cause irreparable damage to the trust in commerce and would deprive vital oxygen to the money supply and money flow in commerce and ....