Apeco Infrastructure India Pvt Ltd . vs Bharat Heavy Electricals Limited (BHEL) & Anr

C. Hari Shankar, J

IA No.10916/2020 (for exemption)

Exemption allowed, subject to all just exceptions.

The application stands disposed of.

O.M.P.(I) (COMM.) 378/2020

This petition under, Section 9 of the Arbitration & Conciliation Act, 1996 (hereinafter referred to as “The Arbitration Act, 1996â€) seeks certain

pre-arbitral interim reliefs. The prayer clause, in the petition, reads as under:-

“a. Restrain the Respondents from taking any step towards encashment of bank Guarantee bearing No. 4574OBG19004415 dated 28.02.2019 for

an amount of Rs.7,06,526/- issued by the Respondent No. 2; and

b. Direct the Respondent No. 1 to provide security to the extent of Rs. 2.8 Crores before this Hon’ble Court in order to secure the amount in

dispute; and

c. Pass any other order(s) as this Hon'ble Court deems fit.â€​

Though there is no prayer, for ad interim relief, and no separate application, for ad interim relief pending disposal of this petition has been preferred,

I have heard Ms. Amrita Panda, learned counsel for the petitioner on her prayer for grant of ad interim relief in terms of prayers (a) and (b) in the

petition.

Insofar as prayer (a) in the petition for restraining the respondents from taking any steps towards encashment of bank guarantee no.

4574OBG19004415 dated 28th February, 2019 for an amount of Rs. 7,06,526/- is concerned, no case, for grant of any such injunction can be said to

be made out.

The law, on the issue of grant of interim relief by way of stay of invocation of bank guarantees, is now well settled. This Court has had occasion to

examine the law and distil the principles that have emerged in that regard, in a recent decision in CRSC Research & Design Institute Group Company

Ltd. v. Dedicated Freight Corridor Corporation of India LtdM ANU/DE/1803/2020. Paras 22 to 31 of the said decision may be reproduced for ready

reference thus:-

“Power to stay invocation of a Bank Guarantee

On the issue of the power of the court to stay invocation of bank guarantees, the learned Solicitor General has placed reliance on Himadri

Chemicals v, Coal Tar Refining Co., (2007) 8 SCC 110, Vinitec Electronics v. HCL infosystems Ltd. (2008) 1 SCC 544 ,N.H.A.I. v. Ganga

Enterprises (2003) 7 SCC 410 and State of Maharashtra v. National Construction Co. (1996) 1 SCC 735. Additionally, the learned Solicitor General

has submitted that Itek Corpn. v. First National Bank of Boston 566 Fed Supp 1210 (1983), in fact, advanced the case of the respondent, rather than

that of the petitioner.

Himadri Chemicals is an important judgement, in this canon. Para 14 of the report, in the said case, enumerates the following six principles,

governing the grant of injunction against the invocation of unconditional bank guarantees:

“(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional Bank Guarantee or Letter of

Credit is given or accepted, the Beneficiary is entitled to realize such a Bank Guarantee or Letter of Credit in terms thereof irrespective of any

pending disputes relating to the terms of the contract.

(ii) The Bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.

(iii) The Courts should be slow in granting an order of injunction to restrain the realization of a Bank Guarantee or Letter of Credit.

(iv) Since a Bank Guarantee or Letter of Credit is an independent and a separate contract and is absolute in nature, the existence of any dispute

between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of Bank Guarantee or Letter of Credit.

(v) Fraud of an egregious nature which would vitiate the very foundation of such a Bank Guarantee or Letter of Credit and the beneficiary seeks to

take advantage of the situation.

(vi) Allowing encashment of an unconditional Bank Guarantee or Letter of Credit would result in irretrievable harm or injustice to one of the parties

concerned.â€​

The learned Solicitor General also placed reliance on Vinitec Electronics which, in turn, took note of the earlier decisions in U.P. State Sugar

Corporation v. Sumac International (1997) 1 SCC 568 , B.S.E.S. Ltd. v. Fenner India Ltd., (2006) 2 SCC 72,8 Himadri Chemicals and Mahatma

Gandhi Sahakara Sakkare Karkhane v. National Heavy Engineering Coop. Ltd. (2007) 6 SCC 47 0a,nd proceeded to hold thus (in paras 11, 12 and 14

of the report):

“11. The law relating to invocation of bank guarantees is by now well settled by a catena of decisions of this Court. The bank guarantees which

provided that they are payable by the guarantor on demand is considered to be an unconditional bank guarantee. When in the course of commercial

dealings, unconditional guarantees have been given or accepted the beneficiary is entitled to realise such a bank guarantee in terms thereof

irrespective of any pending disputes. In U.P. State Sugar Corpn. v. Sumac International Ltd., (1997) 1 SCC 56 8this Court observed that: (SCC p.

574, para 12)

“12. The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional

bank guarantee is given or accepted, the beneficiary is entitled to realise such a bank guarantee in terms thereof irrespective of any pending disputes.

The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving

such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realisation of such a

bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation

of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The

second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to

one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer

at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as

would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are

not necessarily connected, though both may coexist in some cases.â€​

It is equally well settled in law that bank guarantee is an independent contract between bank and the beneficiary thereof. The bank is always

obliged to honour its guarantee as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and the party at whose

instance the bank has given the guarantee is immaterial and of no consequence. In BSES Ltd. v. Fenner India Ltd. [(2006) 2 SCC 728 ]this Court

held: (SCC pp. 733-34, para 10)

“10. There are, however, two exceptions to this rule. The first is when there is a clear fraud of which the bank has notice and a fraud of the

beneficiary from which it seeks to benefit. The fraud must be of an egregious nature as to vitiate the entire underlying transaction. The second

exception to the general rule of non-intervention is when there are ‘special equities’ in favour of injunction, such as when ‘irretrievable

injury’ or ‘irretrievable injustice’ would occur if such an injunction were not granted. The general rule and its exceptions has been reiterated

in so many judgments of this Court, that in U.P. State Sugar Corpn. v. Sumac International Ltd., (1997) 1 SCC 56 8this Court, correctly declared that

the law was ‘settled’.â€​

*****

In Mahatma Gandhi Sahakra Sakkare Karkhane v. National Heavy Engg. Coop. Ltd., (2007) 6 SCC 470 this Court observed: (SCC p. 471b-d)

“If the bank guarantee furnished is an unconditional and irrevocable one, it is not open to the bank to raise any objection whatsoever to pay the

amounts under the guarantee. The person in whose favour the guarantee is furnished by the bank cannot be prevented by way of an injunction from

enforcing the guarantee on the pretext that the condition for enforcing the bank guarantee in terms of the agreement entered into between the parties

has not been fulfilled. Such a course is impermissible. The seller cannot raise the dispute of whatsoever nature and prevent the purchaser from

enforcing the bank guarantee by way of injunction except on the ground of fraud and irretrievable injury.

What is relevant are the terms incorporated in the guarantee executed by the bank. On careful analysis of the terms and conditions of the guarantee in

the present case, it is found that the guarantee is an unconditional one. The respondent, therefore, cannot be allowed to raise any dispute and prevent

the appellant from encashing the bank guarantee. The mere fact that the bank guarantee refers to the principal agreement without referring to any

specific clause in the preamble of the deed of guarantee does not make the guarantee furnished by the bank to be a conditional one.â€​

(Paras 22 and 28)â€​

(Underscoring supplied; italics in original)

The following principles clearly emerge from the decision in Vinitec Electronics:

(i) Bank guarantees, which are payable on demand by the guarantor, are unconditional bank guarantees.

(ii) Unconditional bank guarantees entitled the guarantor to realisation thereof, irrespective of any pending disputes. In fact, disputes between the

guarantor, and the parties, at whose instance the bank has given the guarantee, are immaterial and of no consequence. Enforcement of the guarantee

cannot be injuncted on the pretext that the condition for enforcing the bank guarantee, in terms of the agreement between the parties, has not been

fulfilled. What is relevant are the terms incorporated in the guarantee (and not those in the agreement between the parties). The mere fact that the

bank guarantee refers to the principal agreement, without referring to any specific clause, does not make the bank guarantee conditional.

(iii) Courts should, therefore, be slow in injuncting realisation of unconditional bank guarantees.

(iv) The only exceptions, to this general rule, are where there exist/exists

(a) fraud of an egregious nature, or

(b) irretrievable injustice resulting to the parties, at whose instance the bank gave the guarantee, were the injunction not granted, or

(c) special equities, of which the possibility of irretrievable injustice is itself one.

(v) “Irretrievable injusticeâ€, for this purpose, has to be of such an exceptional nature as would override the terms of the guarantee and the

adverse effect of the grant of such injunction on commercial dealings in the country.

The Court, in Vinitec Electronics proceeded, thereafter, to examine whether the bank guarantee, forming the subject matter of the controversy

before it, was conditional or unconditional, and the discussion, in the judgement, on this aspect, is instructive. Paras 17, 18 and 19 of the report deserve,

in this context, to be reproduced in extenso:

“17. The relevant clause in the bank guarantee dated 10-8-2001 furnished by the appellant is to the following effect:

“Whereas M/s Vinitec Electronics Pvt. Ltd., H-33, Bali Nagar, New Delhi (hereinafter called ‘the supplier’) supplied their Vinitec online

UPS systems of various capacities pursuant to their agreement dated 10th May, 2000 and PO No. 4500011730 dated 30 -5-2000 (hereinafter called

‘the Company’) for the final purchaser President of India through the Director, National Crime Records Bureau, Ministry of Home Affairs,

Government of India, New Delhi (hereinafter called ‘the purchaser’).

Whereas in terms of Clause 15 of the agreement for receiving the entire balance payments of Rs 49,99,335 from the company, the supplier has agreed

to provide a performance bank guarantee equivalent to Rs 16,81,238.50 as 10% of the value of the contract to be kept valid till the warranty period

during which time the supplier is required to perform their warranty obligations to the purchaser; and

Whereas pursuant to the application made by the supplier, we, Oriental Bank of Commerce, Kirti Nagar, New Delhi (hereinafter called ‘the

Bank’) have accordingly agreed to give the supplier a bank guarantee for the aforesaid purpose.

Therefore, we, the Bank, hereby affirm that we are guarantors and responsible on behalf of the supplier up to a total of Rs 16,81,238.50 (Rupees

sixteen lakhs eighty-one thousand two hundred thirty-eight and paise fifty only) and we undertake to pay any sum or sums within the limit of Rs

16,81,238.50 (Rupees sixteen lakhs eighty-one thousand two hundred thirty-eight and paise fifty only) as aforesaid upon receipt of written demand

from the purchaser and Company within the validity of this bank guarantee establishing the supplier to be in default for the performance of their

warranty obligations under the contract.

We, the Bank, affirm that our liability under this guarantee is limited to the total amount of Rs 16,81,238.50 (Rupees sixteen lakhs eighty-one thousand

two hundred thirty-eight and paise fifty only) and it shall remain in full force up to and including 31st August, 2003 and shall be extended from time to

time for such further period(s) as desired by the purchaser, Company and supplier on whose behalf this guarantee has been given.â€​

Thereafter by a letter dated 20-8-2001, the bank guarantee was amended and Para 4 of the bank guarantee dated 10-8-2001 was substituted and

the same reads as under:

“Therefore, we, the Bank, hereby affirm that we are guarantors and responsible on behalf of the supplier up to a total of Rs 16,81,238.50 (Rupees

sixteen lakhs eighty-one thousand two hundred thirty-eight and paise fifty only) and we undertake to pay any sum or sums within the limit of Rs

16,81,238.50 (Rupees sixteen lakhs eighty-one thousand two hundred thirty-eight and paise fifty only) as aforesaid upon receipt of written demand

from the Company within the validity of this bank guarantee.â€​

In the unamended bank guarantee the Bank affirmed that they are guarantors and responsible on behalf of the supplier up to a total of Rs

16,81,238.50 (Rupees sixteen lakhs eighty-one thousand two hundred thirty-eight and paise fifty only) and had undertaken to pay any sum or sums

within that limit upon receipt of written demand from the purchaser within the validity of bank guarantee provided it is established that the supplier be

in default for the performance of their warranty obligations under the contract. This makes it abundantly clear that what was furnished was a

conditional bank guarantee and the bankers were liable to pay the amounts only upon establishing the fact that the supplier was in default for the

performance of their warranty obligations under the contract. But by the subsequent letter dated 20-8-2001, the relevant clause in bank guarantee was

amended whereunder the Bank stood as guarantor and responsible on behalf of the supplier up to a total of Rs 16,81,238.50 (Rupees sixteen lakhs

eighty-one thousand two hundred thirty-eight and paise fifty only) and had undertaken to pay any sum or sums within that limit “upon receipt of

written demand from the Company within the validity of this bank guaranteeâ€. This amended clause makes it abundantly clear that the Bank had

undertaken to pay amounts up to a total of Rs 16,81,238.50. The condition that the amounts shall be paid only upon establishing the supplier to be in

default for the performance of their warranty obligation under the contract has been specifically deleted. In our considered opinion, the bank guarantee

as amended replacing Para 4 of the original bank guarantee makes the bank guarantee furnished as unconditional one. The bankers are bound to

honour and pay the amounts at once upon receipt of written demand from the respondent.â€​

(Emphasis supplied)

These paras illustrate, lucidly, the distinction between a conditional bank guarantee and an unconditional bank guarantee. The judgement in Vinitec

Electronics makes it abundantly clear that the first aspect, to be taken into consideration, is the bank guarantee itself, and the terms thereof. If the

bank guarantee is conditional, then, if the conditions have not been fulfilled, injunction, against encashment and invocation, may unquestionably follow.

If, however, the bank guarantee is unconditional, then injunction can be granted only if egregious fraud, irretrievable injustice, or special equities, exist,

and not otherwise.

The issue was revisited, by the Supreme Court, in its more recent decision in Standard Chartered Bank v. Heavy Engineering Corporation Ltd,

2019 SCC OnLine SC 1638. The terms of the bank guarantees, in that case, contemplated their invocation “against any loss or damage caused to

or suffered by the Corporation by reason or any breach or failure by the said supplier, in due performance of the aforesaid contractâ€. The specifics

of the controversy between the parties need not detain us. Suffice it to state that the Supreme Court held the bank guarantees to be

“unconditional†and “specific in natureâ€. Thereafter, the Supreme Court, relying on its earlier decisions Ansal Engineering Projects Ltd v.

Tehri Hydro Development Corporation Ltd (1996) 5 SCC 450, Hindustan Construction Co. Ltd v. State of Bihar (1999) 8 SCC 43,6 State Bank of

India v. Mula Sahakari Sakhar Karkhana Ltd (2006) 6 SCC 29,3 Himadri Chemicals (2007) 8 SCC 110 and Gujarat Maritime Board v. Larsen &

Toubro Infrastructure Development Projects Ltd(2016) 10 SCC 46, reiterated the principles already set out hereinabove, and emphasised, additionally,

that fraud or special equities had, to support the prayer for stay of invocation of bank guarantees, to be “pleaded and prima facie established by

strong evidence as a triable issueâ€​.

The above legal position stands reiterated in Yograj Infras. Ltd. V. Ssangyong Eng. & Construction Co. Ltd 2012 (2) SCALE 5 8and Adani Agri

Fresh Ltd v. Mahaboob Sharif (2016) 14 SCC 517.

Thus far, the position in law appears to be crystal clear.

Some scope for debate, however, arises, on the concept of “special equitiesâ€. The decisions of the Supreme Court â€" perhaps, advisedly â€

do not delineate, in precise contours, the ambit of the expression. Significantly, Fenner India Ltd. (2006) 2 SCC 728 regards “irretrievable

injustice†as a specie of the “special equities†genus, whereas Standard Chartered Bank v. Heavy Engineering Corporation Ltd, 2019 SCC

OnLine SC 1638 ,treat “special equities†and “irretrievable injustice†as distinct circumstances, either of which would justify injuncting the

invocation of a bank guarantee. “Irretrievable injusticeâ€, to reiterate, has to be of such a magnitude as would override the twin considerations of

the express terms of the guarantee and the adverse effect, from the grant of injunction, on commercial dealings in the country. “Special equitiesâ€,

too, must, therefore, be so “special†so as to prevail over these two considerations, otherwise paramount while examining a prayer for injunction

against invocation of a bank guarantee. While, therefore, examining whether “special equities†exist, so as to justify the grant of a prayer for

injuncting invocation of a bank guarantee, the Court has to tread warily, and cannot confer, on the expression “special equitiesâ€, so elastic a

construction, as would snap the rule. â€​

(Emphasis as in original)

The bank guarantee, numbered 4574OBG19004415, dated 28th February, 2019, of which stay is sought in the present petition, has been executed

between the Kotak Mahindra Bank and the respondent-Bharat Heavy Electricals Limited (BHEL). The covenants of the bank guarantee are clear

and unequivocal. Clause 2, which deals with the liability of the respondent no.2 (hereinafter referred to as the “Bankâ€) on bank guarantee on

demand, reads as under:

“2. The Guarantor hereby undertakes to pay the amounts due and payable under this guarantee without any demur, merely on demand from the

Company intimating that the amount claimed is due by way of loss or damage caused to or suffered or would be caused or suffered by the contractor

of any terms contained in the said order/contract. Any such demand made on the guarantor shall be conclusive as regards the amount due and payable

by the Guarantor irrespective of the fact whether the Contractor/contractor admits or denies. â€​

(Emphasis supplied)

A reading of the extract of clause 2 of the bank guarantee reveals that the bank is required to pay the amounts due and payable under the

guarantee without demur merely on the demand from the BHEL intimating that the amount claimed is due by way of loss or damage caused to or

suffered or would be caused or suffered by the contractor of any terms contained in the contract. The clause further ordains that any such demand

made on the petitioner would be conclusive as regards the amount to be paid, irrespective of whether the petitioner admits or denies its liability.

In view of the expressed terms of the bank guarantee, and the law laid down by various decisions on the issue, this Court cannot restrain the

invocation of the bank guarantee. The bank guarantee constitutes an independent contract between the bank and the beneficiary of the bank

guarantee. The right of BHEL to invoke the bank guarantee has not been made conditional on performance, or non-performance, of the contract

between the petitioner and BHEL. All that is required is a demand from BHEL, to the bank, to the effect that there has been loss or damage caused

to or suffered by it, owing to an act of the petitioner. If such a demand is made, that demand would be conclusive against the petitioner, and the bank

guarantee would be invocable, irrespective of whether the petitioner admits or denies the allegation of non-performance or breach of the contract.

In such circumstances, the law does not empower this Court, ceased with the application of stay of the bank guarantee, to peer behind the bank

guarantee and enter into the dispute whether there has, or has not, been breach of the contract. In fact, the position in law is that the guarantor cannot

even plead that the stage for invocation of the bank guarantee, as contemplated in the contract, has not arisen.

If, however, the bank guarantee was to stipulate that the liability of the bank under the guarantee is made conditional to non-performance of the

contract by the contractor, then it may be possible for the contractor to seek a stay of the invocation of the bank guarantee on the ground that there

has been no non-performance. That is, however, different from a case such as the present, in which the contractor cannot dispute the allegation of

non-performance/breach of the contract, if a demand, by BHEL, alleging loss to have occurred on that ground to it, is made.

In somewhat better circumstances, this Court had in CRSC Research & Design1, refused to stay the invocation of the bank guarantees in that

case.

Ms. Amrita Panda, while fairly acknowledging this position, seeks to plead that the present case involved “special equitiesâ€​.

Regarding special equities, she points out, in this regard that the petitioner is an MSME and that, therefore, though the amount of the bank

guarantee is not large, given the scale of the petitioner enterprise, it would result in irretrievable injury to the petitioner.

As para 31 of the report of CRSC Research & Design1 reveals, “Special Equities†can be pleaded as a ground to stay invocation of bank

guarantee only if they are truly “Special Equitiesâ€, to the extent which would essentially require the establishment of “equitable injustice†,

which is so irretrievable as to override the considerations of the expressed terms of the guarantee and the adverse effect on public interest, of grant of

injunction on commercial dealings in the country.

I am unable to convince myself that, in the present case, special equities of such a magnitude, exist, as would justify stay of invocation of the bank

guarantee. The amount of bank guarantee is, at a plain glance, not large and is merely Rs. 7,06,526/-. Even if the bank guarantee were to be invoked,

and the petitioner were to succeed in arbitration, at a later and more appropriate stage, a direction to BHEL to liquidate the amount covered by the

bank guarantee could always be passed at that stage. This factor, coupled with the fact that the bank guarantee is only for Rs. 7,06,526/-, compels me

to hold that no case of “special equitiesâ€​ exists, as would justify injuncting the invocation of the bank guarantee.

As a result, prayer (a) in the petition cannot be granted and is, accordingly rejected.

Issue notice, therefore, limited to prayer (b), returnable on 3rd February, 2021. Notice is accepted by Mr. Atul Shanker Mathur, learned counsel

for respondent no.1 and Mr. Gurmeet Binda, learned counsel on behalf of respondent no.2. Counter affidavit, if any, be filed within four weeks with

advance copy to learned counsel for the petitioner who may file rejoinder thereto, if any, within two weeks thereof.

Before the next date of hearing, the petitioner is directed to place on record the general conditions of the contract, containing the arbitration clause.