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Judgment
The petitioner, a registered partnership firm engaged in the business of catering services, is before this Court seeking to call for the records leading
to the invocation of the bank guarantee of the petitioner and to quash the same and command the respondents to return the amount provided as bank
guarantee to the petitioner forthwith.
The Southern Railway floated a tender in the year 2014 for provision of Vegetarian Refreshment Room (VRR) at Ernakulam Junction Railway
Station. The petitioner was the successful bidder. A Master Agreement was entered into between the Southern Railway and the petitioner on
15.06.2016. The petitioner was to conduct the VRR from 05.05.2016 to 04.05.2021. An extent of 2250 sq. ft. area was provided to the petitioner, for a
licence fee of ₹1,31,40,000/-per annum. The licence fee was payable in advance for each year.
By way of a Tripartite Agreement, the Southern Railway assigned all its rights and liabilities as Licensor under the Master Agreement to the 1st
respondent-Indian Railway Catering and Tourism Corporation Limited, on 14.08.2017. On 10.08.2017, the 1st respondent issued Ext.P1 letter alleging
that the petitioner is occupying an additional area of 58.30 m² for running the VRR. The petitioner was directed to remit a sum of₹ 4,29,371/- as
proportionate licence fee for the additional area. The demand was disputed by the petitioner. However, the 1st respondent reiterated the demand on
11.10.2017. In this letter, the demand was enhanced to ₹48,57,874/-. The petitioner would contend that the petitioner paid the licence fee in full and
was entitled to run the VRR till 04.05.2019. On 06.12.2018, the petitioner informed the Southern Railway that after the expiry of the present licence
year, the petitioner would like to stop services at the VRR. The Southern Railway did not give any reply to the petitioner. On the other hand, the 1st
respondent as per Ext.P2 letter dated 15.12.2018 informed the petitioner that the licence fee payable has been increased by 3.26% with effect from
26.09.2018 and hence the petitioner is liable to pay ₹3,16,052/- as additional licence fee for the period up to 04.05.2019.
To the predicament of the petitioner, the 1st respondent issued Ext.P3 letter dated 04.02.2019 stating that the competent authority has decided to
close the VRR by 05.02.2019 and directing the petitioner to handover vacant possession of the site to the 1st respondent. The officials of the 1st
respondent illegally and forcibly sealed and took over the VRR on 05.02.2019. By Ext.P4 letter, the 1st respondent required the petitioner to clear the
dues.
The petitioner challenged the action in forcibly closing the VRR, filing W.P.(C) No.3769/2019. On 07.02.2019, this Court passed an interim order
directing the 1st respondent to permit the petitioner to operate the VRR. On 28.03.2019, this Court disposed of the writ petition holding that the dispute
is arbitrable and relegating the parties to the appropriate Forum. This Court, as per Ext.P5 judgment, directed that coercive action against the petitioner
should stand suspended for a period of 10 days.
The petitioner thereupon filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996, before the District Court,
Thiruvananthapuram. As per Ext.P6 order, the District Court, Thiruvananthapuram restrained the 1st respondent from obstructing the consumers from
entering and using the VRR till 04.05.2019. In spite of the order of the District Court pending invocation of Arbitration Clause, the 1st respondent
invoked the bank guarantee of around ₹65 lakhs for recovery of disputed amounts. It is aggrieved by the said illegal invocation of the bank guarantee
that the petitioner is before this Court.
The learned counsel for the petitioner contended that pending arbitration proceedings, the 2nd respondent cannot unilaterally invoke bank guarantee.
The dispute should be first adjudicated in arbitral proceedings. A bank guarantee is a separate contract. The additional 3rd respondent-bank is not a
party to the original contract. Similarly, the petitioner is not a party to the bank guarantee. Therefore, bank guarantee cannot be invoked pending
arbitral proceedings.
The learned counsel for the petitioner would further submit that the bank guarantee can be invoked if the petitioner fails to perform the agreement.
However, in Ext.P8 invocation letter, the Southern Railway has stated that since the petitioner has exited the contract on 05.02.2019, the entire
security amount is to be forfeited and transferred to Railways and therefore the bank guarantee is invoked. The learned counsel for the petitioner
urged that bank guarantee cannot be invoked claiming disputed amounts. The 1st respondent acknowledges that the petitioner has disputed the
amount. In the circumstances, invocation of bank guarantee is illegal and unsustainable.
The learned counsel for the petitioner relied on the judgment of the Hon'ble High Court of Patna in Hindustan Steel Works Construction v. State of
Bihar [2008 SCC OnLine Pat 1291] to contend that a writ petition against invoking bank guarantee is maintainable against an instrumentality of State,
in appropriate case. In the said judgment, the Hon'ble High Court of Patna held that the bank guarantee is conditional and contingent upon stated terms
and then becomes unconditional. It only means that if stated terms/conditions are satisfied and disclosed so to bank, then the bank will be bound to
unconditionally honour its promise to pay but not otherwise.
Relying on the judgment of Union of India and others v. Tantia Construction Private Limited [(2011) 5 SCC 697], the learned counsel for the
petitioner argued that the pendency of the arbitration proceedings does not act as a bar against this Court examining the issue of revocation of
guarantee in proceedings on its merits. Placing reliance on the judgment of the Apex Court in Gangotri Enterprises Limited v. Union of India and
others [(2016) 11 SCC 720], the learned counsel for the petitioner argued that when the 1st respondent itself stated that the amount is disputed by the
petitioner, then the 1st respondent should have invoked bank guarantee only after a proper adjudication by a judicial authority.
The learned counsel for the petitioner pointed out that in the judgment in Oswal Agro Mills Ltd. and another v. Assistant Collector of Central
Excise, Division Ludhiana and others [(1995) Supp (3) SCC 65], the Hon'ble Apex Court has held that when revenue had no powers to use their
executive powers to get such a bank guarantee encashed, the court can direct refund of money. In the judgment in Hindustan Steel Works
Construction v. State of Bihar (supra), the Hon’ble High Court of Patna has directed bank to refund the bank guarantee to the petitioner therein,
finding that the invocation of bank guarantee was illegal. The learned counsel for the petitioner strenuously contended that in the petitioner's case also,
this Court has to give appropriate directions.
The 1st respondent resisted the prayers of the petitioner, filing counter affidavit. The 1st respondent stated that under the Master Licence
Agreement executed on 15.06.2016, the petitioner was allotted 2250 sq. ft. area. Soon, the petitioner encroached upon nearby area. The petitioner
was orally required to vacate the encroached area. The petitioner took a stand that the petitioner require additional area for the conduct of their
business. The petitioner was required to pay additional licence fee for the encroached area. As the petitioner did not pay fee on request, the 2nd
respondent issued Ext.R2(a) written demand on 20.06.2016. Ext.R2(a) was also not responded to by the petitioner. Using additional area without
remitting requisite licence fee, is a material breach of contract, as per Clause No.15.1(e) of the Agreement. In such a case, Railway acted in
accordance with Clause No.16.1(a).
In the Tripartite Agreement, it was made clear that the 1st respondent will have the right over the payments pertaining to the petitioner’s unit,
which become due thereafter. The Tripartite Agreement also required in Clause No.8.8 that petitioner should produce a 'No Dues Certificate' from
the Railways to run the unit under IRCTC after 14.08.2017. The petitioner did not produce 'No Dues Certificate'. By letters dated 31.08.2017 and
30.09.2017, the petitioner required IRCTC for additional space. Even in these letters, the petitioner did not raise any dispute with regard to the demand
for additional licence fee.
The petitioner was given the option either to vacate the extra space or to pay proportionate additional fee. The additional area encroached by the
petitioner was 627.30 sq. ft. and the proportionate additional licence fee would be Rs.3,63,479/-. In WP(C) No.3769/2019, as per Ext.P5 judgment
dated 28.03.2019, this Court directed the petitioner to move under Arbitration and Conciliation Act, 1996. To enable the petitioner to do so, coercive
action by the 1st respondent was suspended for a period of 10 days. In OP(Arb) No.129/2019 filed by the petitioner, the Additional District Court only
permitted the petitioner to continue to operate the unit till 04.05.2019. Left with no other remedy, the security deposit was encashed by Railways on
03.09.2019 in exercise of Clause No.16 of the Master Agreement. In view of the above, the grounds urged by the petitioner are unsustainable.
The learned Standing Counsel for the 2nd respondent contended that since the petitioner has invoked the alternate remedy of arbitration pending
adjudication by the Arbitrator, a writ petition is not maintainable. The judgment in Hindustan Paper Corporation v. Keneilhouse Angami [(1990) 1 Cal
LT 20] relied on by the petitioner will not apply since in the said case there was no arbitration proceedings pending. In the judgment of the Apex Court
in Tantia Construction Private Limited (supra) also, there was no arbitration proceedings pending. Therefore, the petitioner cannot seek relief based on
those judgments.
The 2nd respondent has invoked bank guarantee due to violation of Articles 15.1 and 16.1 of Ext.R2(b) agreement. Non-payment of licence fee
for occupation of additional space contrary to the terms of the Agreement, is a material breach of agreement and the Railway is entitled to invoke
bank guarantee for additional licence fee for the area occupied by the petitioner additionally. The bank guarantee unequivocally states that the amount
would be paid without demur or objection, irrespective of any dispute that might crop up or might have been pending.
The learned Standing Counsel for the 2nd respondent relied on the judgment of the Hon'ble Apex Court in U.P. State Sugar Corporation v. M/s.
Sumac International Ltd. [AIR 1997 SC 1644], Himadri Chemicals Industries Ltd. v. Coal Tar Refining Company [(2007) 8 SCC 110] and BSES Ltd.
v. Fenner India Ltd. [AIR 2006 SC 1148] to content that if the bank were to go into the questions relating to dispute between the parties, the very
purpose of giving the bank guarantee would be defeated. The only two exceptions carved out to the well-known principles of non-intervention are: (a)
fraud and (b) irretrievable injury. As long as there is no allegation of fraud or irretrievable injury, this Court would not be justified in interfering with the
matter, contended the learned Standing Counsel.
The learned Standing Counsel further argued that the petitioner as well as the 2nd respondent are bound by Ext.P5 judgment. The petitioner has
invoked arbitration proceedings in compliance of Ext.P5 judgment. When the question as to occupation of additional space and liability for payment of
additional licence fee is pending consideration before the Arbitrator, the Award of Arbitrator will bind the parties. The petitioner is not entitled to get
refund of the bank guarantee at this stage.
I have heard the learned counsel for the petitioner, the learned Standing Counsel appearing for the 1st respondent and the learned Standing
Counsel appearing for additional respondents 2 and 3.
The 2nd respondent has invoked bank guarantee on the allegation of violation of Articles 15.1 and 16.1 of Ext.R2(b) agreement between the
Railway and the petitioner. As per Clause 15.1.(e), failure of the licensee to pay licence fee along with interest to the Railway on or before due dates,
would be deemed to be material breach on the part of the licensee. In such event, as per Clause 16.1, the Railway have the right of forfeiture of the
security deposit furnished by the licensee.
The contention of the petitioner is that since the amount allegedly payable by the petitioner is disputed, the 2nd respondent cannot invoke bank
guarantee without adjudication of dispute. This Court finds that there is no documentary material to show that when the respondents issued notices to
the petitioner demanding additional licence fee for the extra space occupied by the petitioner, the petitioner did dispute the fact of occupation of
additional space. Since the dispute is pending in arbitral proceedings, it would be for the Arbitrator to finally decide whether there was unauthorised
occupation of additional space by the petitioner and whether there was breach of agreement by the petitioner. The question to be decided in this writ
petition is whether the respondents can invoke bank guarantee pending arbitral proceedings. 22. In the judgment in Hindustan Steel Works
Construction (supra) of the Hon'ble High Court of Patna relied on by the petitioner, the Hon'ble High Court held that in an appropriate case, a writ
petition against State or instrumentality of the State arising out of a contractual obligation is maintainable. The said case was also relating to invocation
of bank guarantee. The Hon'ble Patna High Court held that a bank guarantee is conditioned and contingent upon stated terms and then becomes
unconditional. The Hon'ble Patna High Court interfered with the matter on a finding that the conditions for invocation of the bank guarantee therein
was confined to contingencies occurring during the period prior to agreement. Invocation of bank guarantee after the execution of agreement was
found to be vitiated by the court.
In Tantia Constructions Private Limited (supra), the issue was of termination of contract. The Hon'ble High Court of Patna found that the
termination was illegal and unwarranted and consequently directed the Railways to expeditiously clear the payments of the respondent-Company. The
Hon'ble Apex Court in its judgment held that notwithstanding the provisions relating to the arbitration clause contained in the agreement, the High
Court was fully within its competence to entertain and dispose of the writ petition. But, it may be noted that in the said case, no arbitration proceedings
were initiated or pending when the case was decided.
In the judgment in Gangotri Enterprises Limited (supra), the Hon'ble Apex Court found that invocation of bank guarantee was not proper and
granted injunction to the appellant under Section 9 of the Arbitration and Conciliation Act. That was a case where the appellant entered into two
distinct agreements with the respondent and had executed a bank guarantee in respect of the second work. The respondents invoked the bank
guarantee for violation of conditions in respect of the first work. The appellant sought injunction. The Hon'ble Apex Court found that since the
agreement in respect of which the bank guarantee was furnished was satisfactorily completed, the respondents should not have invoked the bank
guarantee for violation of agreement conditions in respect of the first agreement while arbitration proceedings were pending. The judgment of the
Hon'ble Apex Court is distinguishable on facts and would not be of any help to the petitioner herein.
In the judgment in Hindustan Paper Corporation Limited (supra), the Hon'ble Calcutta High Court held that the rights and liabilities in respect of
bank guarantee has to be decided not by the terms of the original contract. The bank guarantee is a contract separate from original contract pursuant
to which the bank guarantee is furnished. The learned counsel for the petitioner argued that the illegal invocation of bank guarantee by the 2nd
respondent cannot be adjudicated in an arbitral proceedings which is undertaken under the Master License Agreement. Therefore, this Court can
entertain the writ petition and grant relief to the petitioner.
The 2nd respondent has invoked the bank guarantee on the ground that terms of the Master Agreement have been violated by the petitioner. The
said issue is pending consideration before the Arbitrator. The bank guarantee in unequivocal terms provides that the amount under the bank guarantee
would be paid without demur or objection and irrespective of any dispute that might crop up or might have been pending. In view of the said specific
recital in the bank guarantee, this Court do not find any illegality or irregularity in invoking the bank guarantee by the 1st respondent.
The Hon'ble Apex Court has held in U.P. State Sugar Corporation (supra) that if the bank were to go into the questions relating to dispute
between the parties, the very purpose of giving the bank guarantee would be defeated. The exceptions carved out to the well-known principles of non-
intervention are fraud and irretrievable injury. The petitioner has no case that the 1st respondent or Railway has played fraud in obtaining the bank
guarantee. For intervention under the head irretrievable injury, the injury or injustice contemplated must be of such an exceptional and irretrievable
nature which will override the terms of the guarantee. The Hon'ble Apex Court held that for availing injunction on the ground of irretrievable injury,
the party seeking injunction would have to show that exceptional circumstances exist which make it impossible for the guarantor to reimburse himself
if he ultimately succeeds. The Hon'ble Apex Court specifically held that existence of any dispute between the parties to the contract, is not a ground
for issuing an injunction against invocation of bank guarantee.
Considering the facts and circumstances of the case and the law laid down by the Apex Court, this Court is of the view that the contentions urged in
this writ petition are not sufficient to interfere with the action of the 2nd respondent in invoking the bank guarantee. The writ petition therefore fails
and it is consequently dismissed.