AI Drafter 
TaxTMI 
TaxTMI 
2014 (9) TMI 1272
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....ng to restrain the respondent from invoking 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....
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....were entered into, but after notice inviting proposals/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....
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....y, * Central or State Judicial or Non Judicial Stamp duties, legal fees or cases related to TPTL. 11. Pertaining to the terms of payment, under 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 commercia....
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....ther than to enact similar provisions pertaining to laying of electricity transmission lines, while enacting 'The Electricity Act, 2003', a provision was made for the applicability 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 esta....
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....y Form 3,67,24,953/- 3,67,24,953/- 7. 0910311BG0001115 SBI BG for release of Balance payment 3,65,00,000/- 3,65,00,000/- 8. 0910311BG0000841 SBI BG for release of Balance payment 2,90,00,000/- 2,90,00,000/- TOTAL Rs. 62,75,85,144 Rs. 47,90,73,153/- 18. 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 ....
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....contract; and (ii) that having extended the time for completion of the works by October, 2014 and having given a cured notice on May 09, 2014, the duration of the cure period within which appellant could take remedial action, invocation of the bank guarantees on May 14, 2014 was mala-fide and hence fraudulent 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 lo....
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....bank guarantees No. 0910310BG0000163 and 0910310BG0000165 has been directed to be returned to the State Bank of India with interest accrued on the deposit of Rs. 47,90,73,153/- received in this Court pursuant to the orders passed by the Division Bench in FAO (OS) No. 250/2014. The remaining amount has been directed to be 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 resp....
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....so highlighting that extensive arguments were advanced in appeal before us making a reference to the conduct of the parties gleaned through the correspondence exchanged between the parties. We may additionally note that in the pleadings there is no reference to any facts nor have any pleas being urged concerning award of some works 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 comple....
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.... contended that under the contract the obligation to obtain the Right of Way and various permissions, sanctions and consents from land owners, be it private land owners, government owning the land or local authorities owning the land, was that of the respondent; but had to argue completely differently in rejoinder submissions. The fulcrum of 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, 2....
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....reement(s) executed on May 10, 2010, the obligation to obtain clearances from the Forest Authorities and authorizations to enter upon private land and resolved issues of compensation to land owners as also to obtain permissions and sanctions from the local authorities, was that of the appellant. The respondent denied its character of that being 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 actio....
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...., while discussing said four issues of law, albeit based on facts, discussed whether there was reasonableness in the action of the respondent to terminate the contract. The decisions noted by the learned Single Judge on said issue concern the defending party being an instrumentality of the State. No opinion has been expressed by the learned Single 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 w....
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.... well as cutting of trees in consultation with and consent of the Revenue and Forest Authorities of respective district/States'. 45. The note under Clause II clarified that compensations had to be paid by the respondent. Under Clause IV, while listing the time schedule within which the necessary approvals had to be obtained, a note was recorded that the 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 bon....
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....found in Section 16, which is to make a reference to the District Magistrate to permit entry upon a land pending adjudication of dispute qua compensation to be referred to the District Judge. The word power would be misnomer, and the correct word should be 'right'. A right is conferred upon the Central Government (a person to whom a license has been issued also 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 responden....
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...., from the hydro power stations on Teesta River up to Rangpoo had the necessary clearance under the Indian Forest Act, 1927 by September 07, 2011. Thus, the appellant was in a position to commence erection of towers in forest land in the State of Sikkim by September 07, 2011 and prior thereto, in the State of Sikkim was in a position to erect towers on non-forest land, but subject 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.....
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....est. Field work status in North, East and South Sikkim was noted. Meetings were thereafter held at regular intervals on June 29, 2011, which were minuted, July 30, 2011, August 30, 2011, November 02, 2011, December 02, 2011 and December 27, 2011. 60. The minutes of the meetings would evidence that the respondent kept on expressing its concern at the slow pace of work, and we need to simply 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....
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....n the range of Rs. 8000-Rs. 10000 per tower location. However, in few locations of these area compensation amount is in the range of Rs. 10000-Rs. 40000. In the Tea Estates of West Bengal Plain, there are 17 tower locations where ROW issues are to be settled with the owners of the Tea Estates which is pending for last two years. Similarly, ROW issues for 94 tower locations In non-forest area of West Bengal Hills (Darjeeling 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 si....
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.... to be urged as if the respondent was informing the appellant that it was actively pursuing issues of compensation. With respect to the constitution of the committee it was sought to be projected as if the respondent was constituting a committee so that the appellant, having a member on the committee, would be kept aware of the status of the Right of Way. But, in view of the documents read by the respondent, during arguments in rejoinder the learned senior counsel for the respondent laid great emphasis on a letter 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 ....
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....tral Government, the first on September 07, 2011 and the second on January 07, 2013, grant the necessary sanctions. There are no conditions attached to the sanction(s). The condition antecedent are being treated by the appellant as a condition precedent. 67. The condition antecedents regarding felling/pollarding/pruning of trees requiring permission of the State Forest Department, compensatory forestization etc. are relatable to the Forest Conservation Act, 1980, and do not in any manner hinder the clearances under the Indian Forest Act. 68. Another twist was given to the argument by referring to a Government 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 electr....
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....4 4) Minutes of Meeting held on 27th March 2014. Dear Sir, With reference to the above referred correspondences and discussion held on the subject, we note your concern that the project needs to be completed by January 2015 in order to wheel the power of Teesta-III HEP but we are extremely sorry to inform you that you are not able to appreciate the serious concern raised by us on account of ROW issues, Forest clearances, compensation payment and pending payment issues leading to delay in completion of work These issues have been brought to your notice from time to time and also reiterated during recent discussions but you have failed to understand 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 requ....
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....pondence would show that as a matter of fact the appellant had expressed its inability to complete the work in South Sikkim and Darjeeling and this is the reason why the respondent had invited limited offers from experience parties in February, 2014 for unfinished works in the Darjeeling and South Sikkim segment, which works alone have been awarded to TATA Projects Limited on May 30, 2014. 75. In this connection we would terminate our discussion by noting that the contract, vide clause 36 empowered the respondent to withdraw certain works as per the contract without any financial liability and even terminate the contract. 76. We have already noted in paragraph 57 above that a major portion of the work remained unexecuted by May 30, 2014. 77. The 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 ....
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....eling and South Sikkim and the same being given to some other contractor which was followed the respondent's letter on May 24, 2014. The appellant responded on May 28, 2014. The letter of termination has referred to the termination being forthwith and we only highlight that clause 36.2.1 empowers the respondent to terminate the contract forthwith. The seven days time referred to in the letter of termination is the requirement of clause 36.2.3 of the contract which requires the contractor to hand over the site with all documents to the respondent by a notified date. The respondent was thus complying with the requirement of clause 36.2.3 when it gave seven days time to the appellant to vacate the unfinished sites. 82. It is trite that determinable/terminable 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....
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....ications, been brought within the extending horizon of judicial review over State action in this country. A corresponding horizon as to which authorities would constitute a State has taken place. The distinction between judicial, quasi-judicial, administrative or executive State action has been obliterated. 86. In the field of contract as well, there has been an extension of law on this subject. Since a State enters into a contract in exercise of its executive power, it has been held that State action in matters pertaining to contract cannot be taken out from the purview of judicial review. 87. However, this evolution of law has to be understood and applied with a rule of caution. 88. Business requires total freedom to decide and take action in the best interest of 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....
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....n, whether it be in the field of contract, or any other field was subject to Article 14 of the Constitution (refer para 10). It was noted (refer para 11) that the eviction of the appellant was only in pursuance of a policy of the Port Trust. Relying upon the judgment in International Airport Authority's case (supra) it was held that 'Government policy would be invalid as lacking in public interest, unreasonable or contrary to the protest standards', if it violates the mandate of Article 14 pertaining to arbitrariness and unreasonableness and any action taken pursuant thereto would be invalid. 95. Thus, it is to be noted that what was considered was a policy decision, which was applied thereafter to a contract and not a decision arising out of the contract. 96. Judgment of the Supreme Court reported 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 ....
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....propriate to state that in cases where the instrumentality of the state enters the contractual field, it should be governed by the incidence of the contract." 98. Certain observations of the Supreme Court in the decision reported as AIR 1991 SC 537 Srilekha Vidyarthi Vs. State of UP, in our opinion are relevant and need to be noted. Case related to the termination of the appointment of District Government Advocates, which was in the nature of a contractual appointment terminable at will on either side; not being appointment to a post under the Government. Pursuant to a policy decision taken by the State of Uttar Pradesh, circular was issued, pursuant thereto the services of the existing Government Counsel were dispensed with. Direct writ petition under Article 32 of the Constitution of India was filed as also the appeals arising out of judgment 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 c....
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.... Store, Srilekha Vidyarthi and Dwarka Dass Marfatia (referred above) and a few other decisions. It was held:- "Where the breach of contract involves breach of statutory obligation when the order complained of was made in exercise of statutory power by a statutory authority, though cause of action arises out of or pertains to contract, brings within the sphere of public law because the power exercised is apart from contract. The freedom of the Government to enter into business with anybody it likes is subject to the condition of reasonableness and fair play as well as public interest. After entering into a contract, in cancelling the contract which is subject to terms of the statutory provisions, as in the present case, it cannot be said that the matters falls purely in a contractual field." 103. The aforesaid decisions of the Supreme Court when analysed, clearly 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 ....
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....ailure of justice where the action is administrative in nature. Just as principles of natural justice ensure fair decision where the function is quasi-judicial, the doctrine of fairness is evolved to ensure fair action where the function is administrative. But it can certainly not be invoked to amend, alter or vary the express terms of the contract between the parties............... We are, Therefore, of the opinion that in case of contracts freely entered into with the State, like the present ones, there is no room for invoking the doctrine of fairness and reasonableness against one party to the contract (State), for the purpose of altering or adding to the terms and conditions of the contract, merely because it happens to be the State. In such cases, the mutual rights and liabilities of the parties are governed by the terms of the contract (which may be statutory in some cases) and the laws relating 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....
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....rty is manifest. Hardly a fact is in dispute. From the given facts no conclusion other than the one projected by the agreed party is possible. The view taken by the offender is demonstrably unreasonable, and unreasonableness being of the Wednesbury's kind, in such cases, irrespective of the character of the respondent and irrespective of whether the dispute arises out of a contract, it may be possible to grant by way of an interim measure the stay of the determination/termination of a contract. But the genre of such cases would be rare. 108. The forensic battle fought at the bar on the subject of the encashment of the bank guarantees centered on: what is the sweep of the expression special equity the span whereof entitles the guarantor to avoid payment under the guarantee. 109. 'Fraud', 'irretrievable injury' and 'special equity' are expressions found in a catena of judicial 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 (....
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.... the goods or whether the goods conformed to the requirements of the contract. Any dispute between the buyer and the seller must be settled between themselves. 115. The reason of the aforenoted opinion is obvious. The letter of credit is a contract. The bank promises to pay the 'beneficiary'-traditionally a seller of goods-on demand if the beneficiary presents whatever documents may be required by the letter. They are normally the only two parties involved in the contract. The bank which issues a letter of credit acts as a principal, not as agent for its customer, and engages its own credit. The letter of credit thus evidences an irrevocable obligation to honour the draft presented by the beneficiary upon compliance with the terms of the credit. The Supreme Court noted that whether it is a traditional letter of credit or a new device like performance bond or performance guarantee, the obligation of the guarantor (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 63....
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.... there does not appear among the English authorities any case in which this exception has been applied, it is well established in the American cases, of which the leading or 'landmark' case is Sztejn Vs. Henry Schroder Banking Corpn. This judgment of the New York Court of Appeals was referred to with approval by the English Court of Appeal Edward Owen Engineering Ltd. V. Barolays Bank International Ltd. though this was actually a case about a performance bond under which a bank assumes obligations to a buyer analogous to those assumed by a confirming bank to the seller under a documentary credit. The exception for fraud on the part of the beneficiary seeking to avail himself to the credit is a clear application to the maxim ex trupi cause non oriture or if plain English is to be preferred, 'fraud unravels all', the courts will not allow their process to be used by a dishonest person to carry out a fraud." 119. We may note 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 w....
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....London in favour of second defendant (first defendants' London agents) to secure release of cargo. There was a claim by Yugoslavians to distrain on goods, involving ship in further delay and master of Flora M, on lifting original lien, immediately exercised another lien in respect of extra delay (which was raised when Hungarian buyers put up 2000). Two years later, shipowners claimed arbitration with charterers to assess demurrage for which first lien was exercised and claimed to enforce guarantee. Plaintiff claimed declaration that guarantee was not valid and injunction to restrain shipowners or their agents from enforcing guarantee. First and the second defendants appealed against the injunction granted by Blain, J. It was held by the Court of Appeal that it was a special case in which the Court should grant an injunction to prevent what might by irretrievable injustice. Lord Denning, M.R., observed that although the shippers were not parties to the 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 woul....
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....mand, without any conditions or proof. The Libyan bank issued a letter of guarantee for GBP50,203 to the buyers. The contract between the plaintiffs and the buyers provided for payment of the price of the goods supplied by a confirmed letter of credit. The letter of credit opened by the buyers was not a confirmed letter of credit and did not, therefore, comply with contract. Because of that non-compliance the plaintiffs repudiated the contract. Although it was the buyers who appeared to be in default and not the plaintiffs, the buyers nevertheless claimed on the guarantee given by the Libyan bank who in turn claimed against the defendants on the guarantee they had given. The plaintiffs issued a writ against the defendants claiming an injunction to restrain them from paying any sum under the performance guarantee. A judge granted the plaintiffs an interim injunction in the terms of the injunction claimed by the writ but subsequently another judge discharged the 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....
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....nd that disputes in the performance of the contract does not give rise to a cause to seek an injunction from enforcing the guarantee. 131. In the decision reported as 1995 (4) SCC 515 N.T.P.C. Vs. Flowmore Pvt. Ltd. & Anr. the Supreme Court revisited the law on the subject. Two performance guarantees and three guarantees to secure the mobilization advance, all five being unconditional and payable on demand, were the centre of the dispute. The main contract having an arbitration clause, the dispute was pending adjudication before an Arbitral Tribunal. S.T.C. invoked the bank guarantees pending arbitration. Flowmore sought injunction urging two pleas. That main dispute was pending adjudication before the Arbitral Tribunal and hence status quo should be maintained. Secondly, invocation was fraudulent. Repelling both contentions it was held that pendency of arbitration proceedings was an irrelevant factor and that fraud had to be of an egregious nature so as to vitiate the entire 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 ....
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....ncident. An independent American company monitored the progress of the work performed by Itek and gave Itek consistently high praise for its efforts. By February 10, 1979, the value of Itek's performance amounted to $20,300,000; and payments to Itek totalled $11,100,000. In early 1979, Iran underwent a revolution. Ultimately, the head of the Imperial Government, Shah Riza Pahlevi, was driven into exile, and was succeeded in power by the religious leader Ayatollah Ruhollah Khomeini. The Islamic Republic of Iran was established, and the Imperial Ministry of War was replaced by the Ministry of National Defense. On April 30, 1979, the State Department cancelled the export license for the equipment to be manufactured by Itek under the contract. Two weeks later, on May 15, 1979, Itek notified the Iranian authorities of the occurrence of force majeure, and requested consultations in accordance with the terms of the contract. On August 20, 1979, representatives of Itek met in Iran 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....
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....celled and the letters of credit securing the advance payment had been cleared. 133. Itek sought an injunction restraining FNBB from making any payment on the letters of credit. Holding in favour of Itek it was held: "In commercial litigation, the question whether the plaintiff is likely to suffer irreparable injury may be cast in terms of whether the plaintiff has available a legal remedy adequate to compensate it for its injuries. Weinberger v. Romero-Barcelo, 456 U.S. 305, 312, 102 S.Ct. 1798, 1803, 72 L.Ed.2d 91 (1982). Though I accept that Itek's ultimate damages, absent an injunction, are susceptible to reasonable estimation, I do not find that this alone establishes an adequate remedy at law. As I stated in an earlier opinion in this matter, "the fact that its damages may be reasonably calculable will provide Itek with little consolation in the event those damages ultimately prove uncollectable." Itek Corporation v. First National Bank of Boston, 511 F.Supp.1341 : 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 Governmen....
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....endent and of a different nature. 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. The High Court thus failed to appreciate the real object and nature of a bank guarantee. The distinction which the High Court has drawn between a guarantee for due performance of a works contract and a guarantee given towards security deposit for that contract is also unwarranted. The said distinction appears to be the result of the same fallacy committed by the High Court of not appreciating the distinction between the primary contract between the parties and a bank guarantee and also the real object of a bank guarantee and the nature of bank's obligation thereunder. Whether the bank guarantee is towards security deposit or mobilisation advance or working funds or for due performance of the contract if the same is unconditional and if there 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 contrac....
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.... effect of vitiating the entire underlying transaction. A demand by the beneficiary under the bank guarantee may become fraudulent not because of any fraud committed by the beneficiary while executing the underlying contract but it may become so because of subsequent events or circumstances. We see no good reason why the courts should not restrain a person making such a fraudulent demand from enforcing a bank guarantee." 138. In the decision reported as 1996 (5) SCC 450 Ansal Engineering Projects Ltd. Vs. Tehri Hydro Development Corpn. the Supreme Court held that a serious dispute on the question as to who committed the breach of the contract and whether the amount is due and payable by the contractor till the arbitrator declares the award are not circumstances, much less exceptional, justifying granting an injunction to restrain the bank from paying under the guarantee. 139. A slightly discordant note was struck by the Supreme Court in the decision reported as 2002 (10) SCC 508 State of Haryana Vs. Continental 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 ....
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.... are allowed to be realised because the appellant is a sick industrial company in respect of which a reference is pending before the board for industrial and financial reconstruction under the Sick Industrial Companies (Special Provisions) Act, 1985. The respondent contends that even if it succeeds before the arbitrator it will not be able to realise his claim from the appellant. The mere fact that a reference under the Sick Industrial Companies (Special Provisions) Act, 1985 is pending before the Board, is, in our view, not sufficient to bring the case in the ambit of the "irretrievable injustice" exception. Under the scheme of the said Act the board is required to make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company. Under Section 16(4) where the board deems it fit to make an inquiry or to cause an inquiry to be made in this connection, it may appoint one or more persons to be special directors for safeguarding the financial and other interests of the company or in the public interest. Under Section 17 after making an inquiry, if the Board is satisfied that a company has become a sick industrial company, the Boar....
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....brought into aid to urge that if a bank guarantee was invoked for an oblique purpose or invocation lacked in good faith, exceptional circumstance existed justifying granting an injunction. Decision of the Court of Appeal in Singapore reported as (2002) 1 SLR 1 Samwoh Asphalt Premix Ptc. Ltd. Vs. Sum Cheong Piling Pte Ltd. was considered. 143. The Court of Appeal in Singapore held that where a bank guarantee was invoked as a 'bargaining chip' or as a 'deterrent' or in an 'abusive manner' it would amount to calling a guarantee for an oblique purpose, justifying the issuance of an injunction. 144. Refusing to go for the bite, in Femur India's case, the Supreme Court held: "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....