Hindustan Petroleum Corporation Ltd. vs Uppal Engineering Company Pvt. Ltd. and Another

J.V. Gupta, C.J.—This is the defendant''s revision petition against which an ad interim injunction has been issued by both the courts below, restraining it from receiving payment of the amount from the Syndicate Bank guarantee, till the disposal of the dispute inter se between the arbitrator and also restraining the Syndicate Bank from making payment of the amount of the bank guarantees to the defendant-petitioner, the Hindustan Petroleum Corporation Ltd.

The case set up by the plaintiff company, i.e., Uppal Construction Co. Pvt. Ltd., is that it is carrying on the business of construction engineers having its registered office at Delhi and having one of its branches at Gurgaon whereas defendant No. 1, the Syndicate Bank, is a nationalised banking corporation and defendant No. 2, the Hindustan Petroleum Corporation Ltd., is a Government of India enterprise. The Hindustan Petroleum Corporation issued notice inviting tenders. The plaintiff-company, accordingly, entered into a contract for construction of an L.P.G. Bottling Plant at Unnao, with the Hindustan Petroleum Corporation, the brief particulars whereof are as under :--

Date of tender 14-7-1987 Date of award 9-12-1987 The stipulated date of completion 15-9-1988 Actual date of completion The work is still in progress.

It was further provided in the notice inviting tenders that the plaintiff deposit earnest money. On negotiations, the defendant Corporation required the plaintiff to furnish a bank guarantee to cover the agreed earnest money in the sum of Rs. 2,70,892 which was furnished by it, copy of the bank guarantee No. 46 of 1987 dated December 24, 1987, vide annexure P-2 to the plaint. According to the plaintiff, the Hindustan Petroleum Corporation represented in the notice inviting tender that the site for work was available, but later on, it turned out that the said site was not available. Thus, according to the plaintiff, the Hindustan Petroleum Corporation made a misrepresentation with regard to the aforesaid fact. Moreover, the Hindustan Petroleum had to obtain permission for the proposed construction from the Unnao Development Authority and the Environment and Pollution Board, Uttar Pradesh. According to the plaintiff, the notice inviting tenders was issued by the Hindustan Petroleum Corporation without obtaining permission from the aforesaid authority. Because of the aforesaid reasons, the construction could not commence or could not be completed within the stipulated date of completion despite the fact that the plaintiff organised its resources to commence, progress and complete the construction in question by the stipulated date of completion, i.e., September 14, 1988, under the impression that the requisite permission had been obtained from the concerned authorities. Without permission from the aforesaid authority, the starting of work would have involved civil as well as criminal liability for the plaintiff-company. Therefore, it was stated that the Hindustan Petroleum Corporation was guilty of misrepresentation of facts which it made in the notice inviting tender that the site was available for construction and the construction work will be completed by the stipulated date of construction as per drawings. It was further stated that the Hindustan Petroleum Corporation handed over to the plaintiff seven drawings for the work, but the work could not make any progress due to the changes made by the Hindustan Petroleum Corporation in the drawings. Thus, the plaintiff could not start work earlier till the finalisation of the drawings by the defendant company. It has also stated that the defendant-company recklessly or falsely misrepresented that the construction could go ahead in accordance with the seven drawings involving work of the value of about Rs. 8.2 lakhs. However, the work could not be commenced and progress further for the reasons that the competent authority, i.e., the Unnao Development Authority and the Environment and Pollution Board, Uttar Pradesh, had not been furnished with the said plans for the proposed construction, nor had they approved the same. Belatedly, on March 16, 1988, the defendant company admitted, vide letter dated March 16, 1988, that there were serious impediments in the way of the plaintiff''s construction as per the said seven drawings. It was further stated that the said impediments were because of the lack of approval by the competent authority which had been removed. Therefore, the plaintiff was required to start and progress with the works. The defendant company, consequently, unilaterally extended the date of completion up to November 15, 1988, to cover its own breaches. The plaintiff also alleged that some of the drawings involving work of the value of Rs. 10 lakhs had not been approved for implementation even on this date. Thus, the delay, if any, in completing the work was due to the entire fault of the defendant company. Moreover, the defendant company was under an obligation to furnish 12 mm. dia and 16 mm. dia torsel I, required for the construction of the foundation of columns, etc. As the defendant did not supply this material for a sufficiently long time, it also resulted in delay in completion of the work. Apart from the earnest money, the plaintiff also furnished two bank guarantees, i.e., bank guarantee No. 44 of 1987, dated December 24, 1987, for Rs. 10,83,929 and bank guarantee No. 2 of 1989 dated February 3, 1989, for Rs. 10,00,000. The bank guarantee dated December 24, 1987, was to cover mobilisation advance and that was to be adjusted by the defendant company at the rate of ten per cent. of the value of each running account bill payable to the plaintiff between the period December 24, 1987, to November 15, 1988. As regards the second guarantee for Rs. 10,00,000, it was towards the advance paid by the defendant company and the said advance was to be adjusted at the rate of 10 per cent. from each running account bill payable to the plaintiff.

According to the plaintiff, the material terms of the three bank guarantees contained identical Clauses to the effect that the first defendant, at the request and on behalf of the plaintiff, agreed to pay to the second defendant without any demur, on first demand, an amount not exceeding the amount covered by the bank guarantee, against any loss or damage, costs, charges and expenses caused to or suffered by or that would be caused or suffered by the second defendant by reason of non-appearance and non-fulfilment of or for any breach on the part of the plaintiff. According to the plaintiff, to his utter disappointment, he received the letter dated June 9, 1989, informing the plaintiff that the defendant-company had invoked the bank guarantees which were furnished by the Syndicate Bank for and on behalf of the plaintiff. According to the plaintiff, this action of the defendant company was Void ab initio, non est, a nullity, illegal, arbitrary and did not adversely affect the right of the plaintiff in the said bank guarantees and that the defendant-company was not entitled to invoke, enforce and mobilise the said bank guarantees for the reasons given in the plaint. Along with the suit, the plaintiff also filed an application for ad interim injunction. On the receipt of the notice, the defendant company immediately moved an application for setting aside the ex parte ad interim order of injunction and simultaneously also moved an application for staying the proceedings in the suit u/s 34 of the Arbitration Act as there was an arbitration agreement between the parties and the arbitrator was already seized of the matter, which fact was never disclosed by the plaintiff. However, no written statement could be filed by the defendant company as it had invoked the provisions of Section 34 of the Arbitration Act. It was stated on behalf of the defendant-company that the plaintiff had procured the ex parte interim order without disclosing the true and correct facts. The suit was hit by the arbitration clause between the parties and the Syndicate Bank had no concern with the amount in dispute. The bank was liable to encash the bank guarantee without any excuse and irrespective of the existence of any dispute or arbitration proceedings between the parties and the defendant-company. It was further stated that the defendant had exercised its right to encash the guarantees and put up the demand to defendant No. 1 on June 12, 1989, and that the bank was liable to pay immediately on demand. The plaintiff had got no prima facie case or balance of convenience restraining the defendant from encashing the bank guarantee.

The trial court, after going through the various documents filed by the parties, came to the conclusion that in the present case the plaintiff has to recover Rs. 18,60,000 as due from defendant No. 2. The aforesaid pleas raised by the plaintiff have not been rebutted by defendant No, 2 whereas the defendant has to recover only Rs. 20.3 lakhs against these bank guarantees. If the defendant is allowed to recover the amount of bank guarantee, in that eventuality the plaintiff is bound to suffer irreparable loss and so the plaintiff has a prima facie case in his favour and balance of convenience lies in his favour. The defendant has suggested the names of three persons, out of whom the plaintiff had to opt one name as arbitrator as is clear from the letter dated July 9, 1989, issued by the defendant to the plaintiff. Since the arbitrator was going to be appointed as per terms of notice inviting tenders and the arbitrator will decide which party has committed the breach of conditions to the contract and will also fix the liability and will also decide the quantum of damages and so in view of the aforesaid position of the case, it will be proper if the defendant is restrained from receiving the payment of the amount of the aforesaid bank guarantees from defendant No. 1 till the decision of the dispute inter se between the parties by the arbitrator and, further, the defendant is also restrained from making the payment of the amount of bank guarantee to defendant No. 2 till the decision of the dispute by the arbitrator. In appeal, the learned district judge observed :

"After having considered the pros and cons of the case, I am of the view that respondent No. 1 had a plateful of difficulties which it had to encounter in the execution of the work for the most part of which the appellant must take the blame. Thus, the contract work due to the nonavailability of the site and requisite permissions of the Unnao Development Authority and the Environment and Pollution Board, U. P., proved a non-starter.

These were the biggest stumbling blocks in the way of execution of the contract work due to which a still-born venture on December 9, 1987, was not still alive till March 16, 1988."

After making these observations, the learned district judge further observed :

"Of course, the arbitrator/court will go into the merits of the questions involved in the case irrespective of the opinion expressed by me above which will not, in any way, prejudice the case of either of the parties."

Learned counsel for the petitioner submitted that, according to the arbitration clause in the agreement, the arbitrator was appointed, but he showed his inability to arbitrate and, therefore, in accordance with the terms of the said clause, a new arbitrator was appointed on May 2, 1990. The plaintiff never expressed dissatisfaction with the said arbitrator and filed the present suit without disclosing the fact that the arbitration proceedings were pending. Not only that, the plaintiff moved an application dated May 23, 1990, for staying the arbitration proceedings initiated at the instance of the defendant company. According to learned counsel, on the one hand, an ad interim injunction has been issued restraining the defendant company from receiving the payment of the amount till the decision of the dispute inter se between the parties by the arbitrator and, on the other hand, the plaintiff has filed the suit for declaration with consequential relief of a permanent injunction along with the application for staying the proceedings before the arbitrator. Thus, according to learned counsel, it shows the conduct of the plaintiff that he wants to delay the proceedings for one reason or the other. Not only that, the application filed by the defendant company u/s 34 of the Arbitration Act is still pending and has not been disposed of by the trial court. Thus, argued learned counsel, taking into consideration the conduct of the plaintiff, it was not entitled to any ad interim injunction, nor was there any equity in his favour. Learned counsel strongly relied upon U.P. Cooperative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd., , wherein it has been held that where, in a works contract, bank guarantee is executed by bank on behalf of the contractor in favour of the principal, the court cannot issue an injunction u/s 41 of the Arbitration Act read with Rules 1 and 2 of Order 39, Code of Civil Procedure, restraining the principal from invoking and encashing the guarantee except in cases of fraud or apprehension of irretrievable injustice to the contractor. Thus, argued learned counsel, there is no finding of any fraud on behalf of the defendant company, nor is there apprehension of any irreparable injustice to the contractor. No ad interim injunction could be issued in favour of the plaintiff.

On the other hand, learned counsel for the plaintiff-respondent submitted that time was of the essence in any contract, the defendant-company was at fault as no site was provided within the stipulated time and even the drawings were not supplied within the requisite period ; the defendant company was guilty of non-supply of water and power and construction material. Thus, argued learned counsel, in view of these omissions on the part of the defendant-company, it amounted to misrepresentation and fraud. It was next contended that, in any case, the letter invoking the bank guarantees was not in accordance with the terms of the bank guarantees as the amount of loss which the defendant-company suffered was never mentioned therein. According to learned counsel, if the amount of loss suffered by the defendant-company was not mentioned, the bank guarantee could not be invoked. In support of the contention, learned counsel relied upon Union of India (UOI) Vs. Rampur Distillery and Chemical Co., Ltd., , Banerjee and Banerjee Vs. Hindusthan Steel Works Construction Ltd. and Others, , Union of India (UOI) Vs. Raman Iron Foundry, , G.S. Atwal and Co. Engineers (Pvt.) Ltd. Vs. Hindustan Steel Works Construction Ltd., , Synthetic Foams Ltd. Vs. Simplex Concrete Piles (India) Pvt. Ltd., and Union of India (UOI) and Others Vs. Meena Steels Limited and Another, .

After hearing learned counsel for the parties at great length and going through the case-law cited at the Bar, I am of the considered opinion that the two courts below have acted illegally and with material irregularity in the exercise of their jurisdiction. The granting of ad interim injunction in such cases has been finally settled by the Supreme Court in Singh Consultants and Engineers (P.) Ltd.''s case [1988] 1 SCC 174 ; [1989] 65 Comp Cas 283. At page 297 of 65 Comp Cas, it has been categorically stated :

"On the basis of these principles, I reiterate that commitments of banks must be honoured free from interference by the courts. Otherwise, trust in commerce, internal and international, would be irreparably damaged. It is only in exceptional cases, that is to say, in cases of fraud or in case of apprehension of irretrievable injustice, that the court should interfere."

As regards the facts of the present case, there is no such finding of fraud by either of the courts, nor has any such finding been given of irretrievable injustice which may be caused to the plaintiff. On the other hand, irretrievable injustice, if any, is to the defendant-company which has to encash the bank guarantees, and has been restrained from doing so, irrespective of the clause in the bank guarantee to the effect, --

"We, the Syndicate Bank, further agree that the amount demanded by the Corporation as such shall be final and binding on the bank as to the bank''s liability to pay and the amount demanded and the bank undertakes to pay the corporation the amount so demanded on first demand and without any demur, notwithstanding any dispute raised by the tenderer or any suit or other legal proceedings including arbitration pending before any court. Tribunal or arbitrator relating thereto, our liability under this guarantee being absolute and unconditional."

The argument raised on behalf of the plaintiff-respondent that no loss was mentioned in the letter invoking the bank guarantees has also no merit and the authorities relied upon in this behalf, have no applicability to the facts of the present case. As regards the contention on behalf of the plaintiff that it was the defendant-company which was guilty of delaying the performance of the contract, that is a matter to be decided by the arbitrator. For the purpose of ad interim injunction, from the facts as alleged by the plaintiff in the plaint, it could not be successfully argued that it was a case of fraud in any manner or there could be apprehension of irretrievable injustice to the contractor. In case the plaintiff-contractor succeeds before the arbitrator, it will be entitled to realise the amount from the defendant-company whereas the defendant-corporation is suffering irreparable loss on account of the ad interim injunction issued against it. Thus, taking into consideration the facts and circumstances of the case and the terms of the agreement as well as the bank guarantees, the plaintiff was not entitled to any ad interim injunction by filing the suit without disclosing that already arbitration proceedings were in progress.

Consequently, this revision petition succeeds and is allowed. The impugned orders are set aside and the application under Order 39, Rules 1 and 2 of the Code of Civil Procedure, is dismissed with costs. The trial court is directed to dispose of the application filed by the defendant-corporation u/s 34 of the Arbitration Act expeditiously and, if possible, by the next date of hearing.