Bharat Heavy Electricals Limited vs Ethiopian Electric Power Corp & Ors

Yogesh Khanna, J

The plaintiff has filed this suit for declaration and permanent injunction seeking following reliefs:

(a) permanent injunction against the defendants for restraining it's servants, employees, officials, agents or any person acting through or under it from

invoking/ encashing or receiving any moneys thereunder or getting an extension of the Bank Guarantee bearing C/G No:0999606PF000057 for

€794,190.37 above in any manner whatsoever;

(b) Pass a decree of permanent injunction restraining defendant No.2 and defendant No.3 or its officers or servants from encashing/ extending the

bank guarantee bearing C/G No:0999606PF000057 for €794,190.37 issued by it on behalf of the plaintiff in favour of defendant No.l above or paying

any money under or pursuant to the said guarantee to the defendant No.l or any of it's agents, employees, officials or assigns; and

(c) A decree of permanent injunction restraining defendant No. 2 or its officers or servants from encashing/ extending the bank guarantee bearing

C/G No:0999606PF000057 for € 794,190.37 issued on behalf of the plaintiff in favour of defendant No.l as stated in par 14 above or paying any

money under or pursuant to the said guarantee to the defendant No. 1 or any of it's agents, employees, officials or assigns; and Pass a decree of

declaration that the bank guarantee bearing C/G No: 0999606PF000057 for €794,190.37 issued by defendant No.2 vide defendant No.3 in favour of

defendant No.l on behalf of plaintiff as stated in para 14 above stand discharged wholly or partly and that the said bank guarantee cannot be

invoked/encashed by the defendants; and

(d) a decree of declaration that the Bank Guarantee bearing C/G No: 0999606PF000057 for Euro 794,190.37 issued by Defendant No.2 vide

Defendant No.3 in favour of Defendant No.l on behalf of Plaintiff as stated in para 14 above stand discharged wholly or partly and that the said Bank

Guarantee cannot be invoked/encashed by the Defendants; and

(e) pass a decree of mandatory injunction directing the defendant No. 1 to return the originals of the performance bank guarantee bearing C/G

No:0999606PF000057 for € 794,190,37 to the plaintiff.

The facts narrated by the plaintiff in its plaint are as under:Â

a) In the year 2005 the defendant No.l invited a tender vide tender No. CSD-1 Combolcha-Semera-Dichoto 230kV power transmission project for the

design, supply, erection and commissioning of substations and power transformers for installation at various sites in Ethiopia;

b) on 30.06.2006 the plaintiff and defendant No.l entered into an agreement for the design, supply, construction, erection and commissioning of

substations and power transformers at the Gombolcha-Semera-Dichoto 230 kV substations;

c) on 17.07.2006 plaintiff provided a performance bank guarantee to the defendant No.l of an amount of €794,190.37 equivalent to Rs.5,97,00,000

approximately. The said bank guarantee was issued by defendant No. 2 through defendant No.3. The performance bank guarantee provided by the

plaintiff, was a conditional bank guarantee having specific terms and conditions. Defendant No.3 confirmed the performance bank guarantee issued by

defendant No.2;

d) in the year 2006 during the execution of the contract, there were delays and disruptions created by defendant No.l that caused the project to be

delayed. The defendant No.l was also responsible for delayed approval of engineering drawings, frequent changes and revisions in drawings/ layouts,

non-grant of approval of works, delayed payment to plaintiff etc. which had a cascading effect on the execution of the project. The defendant No.l,

further by neglecting its obligations as the employer, had thereby created several hurdles in the commissioning of the various systems;

e) in the year 2010 despite continuous mishandling of the project by the defendant no. 1, the plaintiff successfully completed the Semera substation and

that after the successful commissioning of the Semera substation, the same went into commercial operation and since then the Semera substation is

operating smoothly;

f) the defendant No.l unilaterally and arbitrarily invoked the bank guarantee bearing C/G No:0999606PF000057 for €794,190.37 on false, fraudulent,

frivolous and illegal grounds. The fraud is of such an egregious nature which goes to the root of the whole transaction. Further the invocation of the

said bank guarantee shall have the effect of causing irretrievable loss and injury to the plaintiff. Hence, the present suit.

Vide order dated 12.09.2017 the right of defendant no.l to file written statement was closed and the defendant no.3 till date has not filed any written

statement. The defendant no.2 viz. State bank of India (SBI) only has filed the written statement wherein they have stated (a) In pursuance of the

contract entered into between the plaintiff and defendant no.1, the plaintiff requested defendant no.2 to issue a bank guarantee in favour of defendant

no.1; (b) The defendant bank sent SWIFT message MT 760 to the foreign bank i.e. Commercial Bank of Ethiopia (defendant no. 3) for issuance of

bank guarantee favouring defendant no.1 for € 794,190.37 along with the counter guarantee of the defendant bank no.2;

(c) The defendant no.2 issued a counter guarantee for foreign guarantee No. 0999606PF000057 in favour of defendant no. 3 for further issuance of a

performance bank guarantee for € 794,190.37 in favour of defendant no.1. The defendant no.3 issued performance bond dated 17.07.2006 in favour

of defendant no.1 vide ref. no. 2006.FG.00007765; (d) The bank guarantee and the counter guarantee were extended from time to time at the request

of the plaintiff and is presently valid till 30.07.16. The defendant no.l i.e. beneficiary, invoked the bank guarantee with defendant no. 3 Commercial

Bank of Ethiopia which bank in turn sent to this defendant a message MT 799 on 10.3.16 for invocation and payment under the counter guarantee.

Now the issue is if the plaintiff is entitled to a decree of declaration/injunctions as prayed for. The counsels have argued after agreeing there is no

use of evidence being recorded.

It is trite law that fraud at the time of invocation is relevant factor.

The plaintiff completed all its obligations as stipulated under the contract and ensured the remaining works were carried out as per the requirements

of the defendant no.1. The fact that plaintiff completed all its obligations under the contract is evinced from the following (a) letter dated 20.07.2011

which show the Semera substation is running successfully and the plaintiff requested for issuance of taking over certificate; (b) letter from defendant

no.1 dated 17.12.2012 which shows that all works are completed apart from certain final testing at both Dichoto and Semera substation; (c) minutes of

meeting dated 01.08.2013

showing very small, insignificant and minor works pending for both the stations; (d) defendant no.1 has returned all the advance payment guarantees

of the plaintiff which itself shows that all major works of the contract have been completed.

Despite the completion of works and successful operation of the substations, defendant no.1 did not provide the taking over certificate to the

plaintiff and coerced the plaintiff into keeping the bank guarantee alive. Refusal on part of defendant no.1 to provide the taking over certificate to the

plaintiff is contrary to clause 4.29.3 of the contract which says:

“The Employer shall nor use any part of the works unless a Taking Over Certificate has been in respect thereof.

If nevertheless the Employer use any part of the Works, that part which is used shall be deemed to have been over at the date of such use. The

Engineer shall on request of the contractor issue a Taking Over Certificate accordingly.â€​

In view of the above contractual stipulation, the works under the contract are deemed to be taken over and hence the bank guarantee and counter

guarantee stand discharged as the same were valid only till issuance of the taking over certificate. The terms of the Bank Guarantee provides that

“this Guarantee is valid until the 30 days after the issuing of final acceptance certificate issued by the Engineer…â€. Accordingly the Bank

Guarantee stands discharged on its own terms and in terms of the Contract. It is trite to state that a Bank Guarantee which is discharged or expired

cannot be invoked.

The defendant has been commercially using the Semera substation since 2010 which itself shows that the works are deemed to be taken over and

once works are taken over and used commercially, the Bank guarantee gets discharged on its own terms.

Furthermore, it is submitted that the Bank Guarantee was fraudulently invoked by the defendant No.1 in as much as all works under the Contracts

were completed and only very minor portions of works which do not go to the root of either the functioning or the operation of the substations were

remaining. In such circumstances where all the works under the Contracts have been completed, the Courts have consistently held that invocation of

such guarantees would be fraudulent. Reliance in this regard is placed on the judgment in Gangotri Enterprises V. UOI (2016) 11 SCC 720, para 40

wherein the Supreme Court has held that “the work having been completed to the satisfaction of the respondents, they had no right to encash the

Bank Guaranteeâ€​.

Further it was a precondition for the invocation of the bank guarantee in the contract that the claim under the bank guarantee/performance

security shall not be claimed unless contractor/plaintiff is in the breach of the contract and fails to remedy the said breach within 42 days after

receiving written notice from the defendant no.1/employer, see Clause 4.10.3 of the Contract which is as under :

“4.10.3 Whether or not the Performance Security is stated by its terms to be payable on the demand of the Employer shall not make claim under

the Performance Security unless one of the following conditions is satisfied:

a. the Contractor is in breach of the Contract and fails to remedy the bread within 42 days after receiving written notice from the Employer requiring

him so to do. The notice shall state the intention to claim under the Performance Security, the mount claimed and the breach relied upon, or

b. the Employer and the Contractor have agreed in writing that the amount demanded is payable to the Employer, and the amount has not been paid

within 42 days thereafter, or

c. the Employer has obtained an award in arbitration under Clause 4.50 and the amount awarded has not been paid within 42 days after the award or

d. the Contractor has gone into liquidation or is bankrupt.

In every case the Employer shall, when making the claim, send a copy to the Contractor.

No such notice under Section 4.10.3 has ever been served to the plaintiff to remedy the breach of the contract, if any. Accordingly the bank

guarantee in question is liable to discharged and originals be returned to the plaintiff.

Further defendants No.1 to 3 are located in Ethiopia and since there is no established legal system in Ethiopia and there exist political turmoil, civil

war like situation in Ethiopia currently, it would be impossible for the plaintiff to recover the amounts under the bank guarantee, if it were allowed to be

encashed, (see para 38 of the plaint). Under the terms of the main contract, the venue of arbitration is in Ethiopia and the contract is subject to

Ethiopian law. Without an efficient legal system the plaintiff will be unable to recover any money from the defendant no.1. The plaintiff shall suffer

irreparable harm and injury in case the injunction as sought for is not granted as it shall be impossible for the plaintiff to recover its dues from

defendant no.1.

This Court in Bharat Heavy Electricals Limited vs. Public Electricity Corporation & Ors. in CS(COMM) 1507/2016 has granted permanent

injunction on the bank guarantees on similar facts and circumstances when the matter has proceeded without any opposition from the main contesting

party, the injunction was granted considering the crisis in Yemen.

Even during the execution of the works several communications were written by the plaintiff highlighting security and other related issues to the

Defendant No.1 which are as follows:

a. Plaintiff’s letter dated 4.04.2008 wherein plaintiff highlighted security issues at the Site (page 8 of the plaintiff additional docs)

b. Defendant No.1’s letter dated 4.04.2008 wherein D1 admitted and acknowledged the security issues at the site (page 7 of the plaintiff

additional docs)

c. News reports dated 6.04.2008 (page 10 of plaintiff additional docs)

All other relevant communication showing various hindrances caused to the Project on account of one issue or the other are filed as additional

documents by the plaintiff and plaintiff places reliance upon the same to show that it was always ready and willing to perform its obligations under the

Contract but the works were delayed on account of all such hindrances caused on account of force majeure situation or the hindrances caused by the

defendant No.1.

On the pleas aforesaid, duly supported by documents and taking judicial note of the crisis in Ethopia, the plaintiff has made out a case for grant of

permanent injunction restraining encashment by defendant no.2 of the counter guarantee furnished by the defendant no.2 at the instance of plaintiff

and of payment by the defendant no.3 thereunder, on the ground of special equities. Though the counter guarantee is unconditional and unequivocal

but the plaintiff has made out the case of payment being not due thereunder. If the plaintiff is correct in its plea and the monies under the Bank

Guarantee are released on the ground of defendant no.2 having agreed to pay notwithstanding any dispute raised by plaintiff, the plaintiff would be

placed in a irretrievable position, of being not able to recover back the monies owing to the crisis in Ethopia. The Courts can certainly interfere in

payment under the bank guarantee, even if unconditional and unequivocal, in such circumstances.

A decree is accordingly passed in favour of plaintiff and against the defendant no.2&3 in terms of prayer para (a) to (e) relating to permanent

injunction(s) and discharge/return of bank guarantee. Decree sheet be drawn.

The costs are allowed in favour of plaintiff.

In view of the above order, pending application also stands disposed of.