HIGH COURT OF MADHYA PRADESH JABALPUR ARBITRATION APPEAL NO.8/2010 Yograj Infrastructure Ltd Vs. [ENTITY] Engineering Construction Ltd. And another PRESENT: HON'BLE SHRI JUSTICE [ENTITY] HON'BLE SHRI JUSTICE [ENTITY] Counsel for appellant : Shri [ENTITY], Advocate Counsel for respondents : Shri [ENTITY], Sr. Advocate with Shri [ENTITY], Advocate ORDER
(20.8.2010) PER [ENTITY], J Controversy raised in this appeal under [SECTION] of the [ACT] (hereinafter to be referred as Act of 1996) lies within a narrow compass, as to whether, in the given facts of present case, the respondents are justified in invoking the mobilisation guarantee and the performance guarantee jointly amounting to Rs.11.05 Crores. And whether trial Court is justified in rejecting the application under [SECTION] of the Act of 1996 declining to grant injunction.
2. Challenge accordingly is to an order dated 4.3.2010 passed by First Additional District Judge in [CASE NUMBER].
3. Facts giving rise to the cause briefly are that, the National Highway Authority of India, New Delhi (referred to as NHAI) awarded a contract for the National Highway Sector II project Package ADB -II/C-8: Four Lanning of Jhansi Lakhanadon Sector KM 297 to KM 351 of NH 26 in the State of Madhya Pradesh to respondent [ENTITY] vide its letter of acceptance No. NHAI/PH 11/NHDP/ADB/GM-11/NS-
2 [CASE NUMBER] 1/746 dated December, 30, 2005 resulting in a formal contract on 12.4.2006.
4. Appellant, desirous of the work awarded and having requested the respondents for the same on the premise that it shall incur all the expenses on the said work order and shall be solely responsible for the profit and loss pertaining to said work order (this is how the agreement dated 13.8.2006 between the appellant and the respondent expresses). An agreement was entered between the appellant and the respondent on 13.8.2006 having usual terms and including the terms and condition like general responsibilities (clause 4), payments (Clause 13); default by the appellant/ termination of agreement (clause 23); indemnification (clause 24). Clause 27 incorporated the arbitration clause; stipulating that all disputes, differences arising out of or in connection with the agreement dated 13.8.2006 shall be referred to arbitration to be conducted in English at Singapore in accordance with [ACT]. Scope of work as per clause 1 read with Appendix of the Agreement dated 13.8.2006 to be performed by the appellant was to provide all adequate manpower, material, plant, machinery, construction equipment and all other resources financial etc. required in order to perform the work order under the project properly, as per the main agreement.
5. Performance security by way of Bank Guarantee was furnished by the appellant herein on 31.10.2006; whereby the Bank had undertaken to pay to the respondent on its first written demand and without cavil or argument any sum or sums within the limits of Rs.6,05,00,000/- without its needing to prove or to show grounds or reasons for the demand for the sum. The guarantor also waived the necessity of respondent demanding said debt from the contractor (i.e the Appellant herein) before presenting the demand. The guarantor further agreed that no change or addition or other modification of the term of the contract or of the work to be performed thereunder or of any of the contract documents which may be made between the respondent and contractor (appellant) releases the Bank from the liability under the guarantee. Similarly, three bank guarantees of one crore each 3 [CASE NUMBER] and one Bank guarantee of Rupees Three Crores was also furnished to secure the mobilisation advance.
6. It appears that some dispute cropped up between the appellant and respondent in respect of the work contracted at vide agreement dated 13.8.2006.
7. Consequent whereof, a notice of termination dated 22.9.2009 purported to be under clause 23.2 of the agreement dated 13.8.2006 was served on the appellant; whereby, it was stated that the appellant since had failed to assure that it is capable of meeting the obligation under the contract and execute the work without delay and the failure to submit the additional payments which the appellant allegedly entitled for under the contract which is the "back to back" with the main contract. The notice of termination further stated that in pursuance to clause 23.2 of the agreement the termination of contract would be effective in 14 days, enabling thereafter the respondent to draw on the performance bond and to seek recovery of the alleged loss and expenses. Issuance of notice dated 22.9.2009 led to holding of meetings between the appellant and respondent; however, as the record reveals, with no fruitful outcome.
8. Therefore, alleging that the respondent company is guilty of breach of mandatory terms and conditions of agreement which by making false representation and promises has entrapped the appellant and that on wrong premise the amount towards guarantee is being siphoned. With these allegations in the forefront, the appellant invoked [SECTION] of the Act of 1996, seeking directions that respondent be restrained from invoking/encashing performance guarantee as also the guarantee furnished towards mobilisation advance.
9. The Court before whom the application was moved, i.e., the first Additional District Judge Narsingpur, after considering the rival contention found no prima facie case and rejected the application by order dated 4.3.2010. This order is under challenge.
10. The trial Court observed no fraud or misrepresentation nor any kind of apprehension of irretrievable injustice to the appellant at the hand of respondent.
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11. Dwelling upon the arguments and counter arguments by the parties, the trial Court made various observation touching even the root cause of dispute between the appellant and the respondent. The trial Court while meeting out the allegation of "fraud" and "misrepresentation", as alleged by the appellant, observed that the parties entered into an agreement on 13.8.2006 with knowledge and full satisfaction about the work for which the contract was signed.
12. The trial Court observed in paragraph 16 and 20 of the impugned order:
"16. So far as breach of clause 23.1 (1) is concerned, combined reading of clause 23.1 as well as 23.1 (1) reveals that any of the events mentioned is clause 23.1 on behalf YIPL shall amount to breach of the agreement. Reading of clause 23 also reveals if conditions laid down in clause 23.1 (a) to (m) of the above agreement are not followed by YIPL then it shall be treated as breach of main agreement by SYE towards NHAI. As a matter of fact both the parties the is SYE and YIPL had to try to get approval from NHAI. So far as the non payment of dues by SYE and breach of agreement is concerned, parties may resolve the same before the arbitrator. This court is meant for securing subject matter before adjudication by the arbitrator.
20. After considering the above all facts and circumstances since it cannot be said that the SYE kept YIPL in dark about their approval and played a fraud by concealing material facts as SYE forwarded applications time to time to NHAI and obtained approval twice for YIPL also made part payments and still not terminated the contract. Thus the YIPL failed to prove its case prima- facie, no balance of conveyance lies in favour of it and no irreparable loss has to suffered by it because money can be recovered through arbitration proceedings or any other judicial fora. so. Thus there is no force in the prayer and hence the application is liable to be rejected and hence rejected."
13. Alleging, perversity of approach by the trial Court, learned counsel for the appellant tendered lengthy arguments and also furnished written arguments whereon the reliance is placed on various clauses of agreement, the correspondences and the minutes of meeting held between the appellant and respondent which though in substance concerns with the dispute which has 5 [CASE NUMBER] arisen between the appellant and respondent. An aid, however, is being sought for from them to draw home the contention of fraud and misrepresentation leading to irretrievable injustice which could be caused in case of the encashment of bank guarantee in question.
14. Appellant has relied upon the following judgments in support of its contentions, viz, [PRECEDENT], [PRECEDENT], [PRECEDENT], [PRECEDENT] [PRECEDENT], M/s. [PRECEDENT], [PRECEDENT]; [PRECEDENT].
15. In respect of 'estoppel' and 'estoppel by conduct', the appellant relied upon [PRECEDENT], [PRECEDENT] and [PRECEDENT].
16. Countering the allegation, the respondents on their turn support the conclusions arrived at by the learned Additional District Judge in rejecting the application under [SECTION]. Besides referring to various facts on record indicating therein that the respondent in the event of there being a dispute has an absolute right to encash to encash guarantee and under no circumstances the appellant has any right to seek the stay of the same; has also relied upon the following judgment:
[PRECEDENT], [PRECEDENT] And another [PRECEDENT], [PRECEDENT], [PRECEDENT], [PRECEDENT], [PRECEDENT] [CASE NUMBER] [PRECEDENT] National Buildings Construction Corporation Ltd. And other 41 [PRECEDENT].
It is urged on behalf of respondent that there being no fraud or misrepresentation and the same having not been proved by the appellant, no interference is warranted.
17. After hearing the learned counsel for the parties, the singular question which crops up for consideration is whether the facts of present case warrants any order of interim measure under [SECTION] of the Act of 1996.
[SECTION] of Act of 1996 stipulates:
"9.Interim measures etc.by Court.- A party may, before, or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with [SECTION], apply to a court-
(i) for the appointment of a guardian for a minor or person of unsound mind for the purposes of arbitral proceedings; or
(ii) for an interim measure or protection in respect of any of the following matters, namely:-
(a) the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement;
(b) securing the amount in dispute in the arbitration; (c) the detention, preservation or inspection of any
property or thing which is the subject-matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any party or authorising any samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence;
(d) interim injunction or the appointment of a receiver;
(e) such other interim measure of protection as may appear to the Court to be just and convenient, and the Court shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it."
18. [SECTION] has delineated boundaries, carved out by the judgments rendered by the Supreme Court.
19. In [PRECEDENT], their Lordships were pleased to observe:
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11. The reading of [SECTION] clearly shows that the arbitral proceedings commence on the date on which a request for a dispute to be referred to arbitration is received by the respondent. It is in this context that we have to examine and interpret the expression "before or during arbitral proceedings" occurring in [SECTION] of the 1996 Act. We may here observe that though [SECTION] gives the arbitral tribunal the power to pass orders the same cannot be enforced as orders of a Court. It is for this reason that [SECTION] admittedly gives the Court power to pass interim orders during the arbitration proceedings.
13. Under the 1996 Act the Court can pass interim orders under [SECTION] Arbitral proceedings, as we have seen, commence only when the request to refer the dispute is received by the respondent as per [SECTION] of the Act. The material words occurring in [SECTION] are "before or during the arbitral proceedings." This clearly contemplates two stages when the Court can pass interim orders, i.e., during the arbitral proceedings or before the arbitral proceedings. There is no reason as to why [SECTION] of the 1996 Act should not be literally construed.
Meaning has to be given to the word "before"occurring in the said section. The only interpretation that can be given is that the Court can pass interim orders before the commencement of arbitral proceedings. Any other interpretation, like the one given by the High Court, will have the effect of rendering the word "before"in [SECTION] as redundant. This is clearly not permissible. Not only does the language warrants such an interpretation but it was necessary to have such a provision in the interest of justice. But for such a provision no party would have a right to apply for interim measure before notice under [SECTION] is received by the respondent. It is not unknown when it becomes difficult to serve the respondents. It was, therefore, necessary that provision was made in the Act which could enable a party to get interim relief urgently in order to protect it's interest. Reading the section as a whole it appears to us that the Court has jurisdiction to entertain an application under [SECTION] either before arbitral proceedings or during arbitral proceedings or after the making of the arbitral award but before it is enforced in accordance with [SECTION] of the Act.
15. It will also be useful to refer to a somewhat similar provision in the [ACT]. [SECTION] of this Act gives the Court power which are exercisable in support of the arbitral proceedings. [SECTION] permits, in the case of urgency, the Court to make an order contemplated by sub-section (2) even on an application by a "proposed party to the arbitral proceedings." The expression used in this sub-section "party or proposed party to the arbitral proceedings" shows that where arbitral 8 [CASE NUMBER] proceedings have commenced then the application will obviously be of a party of the said proceedings but where the arbitral proceedings have not commenced a "proposed party" has been given the right to approach the Court. A proposed party to the arbitral proceedings would, therefore, be one who is party to an arbitration agreement and where disputes have arisen but the arbitral proceedings have not commenced. While referring to [SECTION] of the English Act in dealing with the question of grant of interim injunctions in support of arbitral proceedings Russell on Arbitration (21st Edition) at Page 386 has stated as under:-
"The Court may exercise its power to grant an interim injunction before there has been any request for arbitration or the appointment of arbitrators, provided that the applicant intends to refer the dispute to arbitration in due course.
The power to grant an interim injunction under [SECTION] of the Act extends to the granting of a Mareva injunction in appropriate cases. It may also include granting an interim mandatory injunction, although the Court will be slow to grant an injunction which provides a remedy of essentially the same kind as is ultimately being sought from the arbitral tribunal.
16. In our opinion this view correctly represents the position in law, namely, that even before the commencement of arbitral proceedings the Court can grant interim relief. The said provsion contains the same principle which underlies [SECTION] of the 1996 Act.
20. In [PRECEDENT], it was observed by their Lordships:
"13. The [ACT] is a long leap in the direction of alternate dispute resolution systems. It is based on UNCITRAL Model. The decided cases under the preceding Act of 1940 have to be applied with caution for determining the issues arising for decision under the new Act. An application under [SECTION] under the scheme of the [ACT] is not a suit. Undoubtedly, such application results in initiation of civil proceedings but can it be said that a party filing an application under [SECTION] of the Act is enforcing a right arising from a contract? "Party" is defined in [SECTION] of the [ACT] to mean "a party to an arbitration agreement". So the right conferred by [SECTION] is on a party to an arbitration agreement. The time or the stage for invoking the jurisdiction of Court under [SECTION] can be ; (i) before , or (ii) during arbitral proceedings, or (iii) at any time after the making of the arbitral award but before it is enforced in accordance with [SECTION].
9 [CASE NUMBER] With the pronouncement of this Court in [PRECEDENT], (supra) the doubts stand cleared and set at rest and it is not necessary that arbitral proceedings must be pending or at least a notice invoking arbitration clause must have been issued before an application under [SECTION] is filed. A little later we will revert again to this topic. For the moment suffice it to say that the right conferred by [SECTION] cannot be said to be one arising out of a contract. The qualification which the person invoking jurisdiction of the Court under [SECTION] must possess is of being a "party" to an arbitration agreement. A person not party to an arbitration agreement cannot enter the Court for protection under [SECTION]. This has relevance only to his locus standi as an applicant. This has nothing to do with the relief which is sought for from the Court or the right which is sought to be canvassed in support of the relief. The reliefs which the Court may allow to a party under clauses (i) and
(ii) of [SECTION] flow from the power vesting in the Court exercisable by reference to "contemplated", "pending: or "completed" arbitral proceedings. The Court is conferred with the same power for making the specified orders as it has for the purpose of and in relation to any proceedings before it though the venue of the proceedings in relation to which the power under [SECTION] is sought to be exercised is the Arbitral Tribunal. Under the Scheme of the [ACT], the arbitration clause is separable from other clauses of the partnership deed. The arbitration clause constitutes an agreement by itself. In short, filing of an application by a party by virtue of its being a party to an arbitration agreement is for securing a relief which the Court has power to grant before during or after arbitral proceedings by virtue of [SECTION] of the [ACT]. The relief sought for in an application under [SECTION] of the [ACT] is neither in a suit nor a right arising from a contract. The right arising from the partnership deed or conferred by the [ACT] is being enforced in the Arbitral Tribunal; the Court under [SECTION] is only formulating interim measures so as to protect the right under adjudication before the Arbitral Tribunal from being frustrated. [SECTION] of the [ACT] has no bearing on the right of a party to an arbitration clauses to file an application under [SECTION] of the [ACT].
17. There are two other factors which are weighing heavily with us and which we proceed to record. As per the law laid down by this Court in Sundaram Finance Ltd an application under [SECTION] seeking interim relief is maintainable even before commencement of arbitral proceedings. What does that mean? In Sundaram Finance Ltd. (supra) itself the Court has said:
10 [CASE NUMBER] It is true that when an application under [SECTION] is filed before the commencement of the arbitral proceedings, there has to be manifest intention on the part of the applicant to take recourse to the arbitral proceedings.
[SECTION] permits application being filed in the Court before the commencement of the arbitral proceedings but the provision does not give any indication of how much before. The work "before" means inter alia, "ahead of; in presence or sight of; under the consideration of cognizance of '. The two events sought to be interconnected by use of the term "before" must have proximity of relationship by reference to occurrence; the later event proximately following the preceding event as a foreseeable or "within-sight"
certainty. The party invoking [SECTION] may not have actually commenced the arbitral proceedings but must be able to satisfy the Court that the arbitral proceedings are actually contemplated or manifestly intended (as Sundaram Finance Ltd. (supra) puts it) and are positively going to commence within a reasonable time. What is a reasonable time will depend on the facts and circumstances of each case and the nature of interim relief sought for would itself give an indication thereof. The distance of time must not be such as would destroy the proximity of relationship of the two events between which it exists and elapses. The purpose of enacting [SECTION] read in the light of the Model Law and [ACT] is to provide "interim measures of protection". The order passed by the Court should fall within the meaning of expression "an interim measure of protection" as distinguished from an all time or permanent protection."
21. During course of hearing it transpired that the dispute is referred to the arbitrator who is in seisin with the matter and before whom an application under [SECTION] of the Act of 1996 is pending. [SECTION] provides for :
"17.Interim measures ordered by arbitral tribunal.- (1) Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, order a party to take any interim measure of protection as the arbitral tribunal may consider necessary in respect of the subject matter of the dispute.
(2) The arbitral tribunal may require a party to provide appropriate security in connection with a measure ordered under sub-section (1).
22. It was expressed by the parties that the arbitrator will consider the same only after the present case is finally decided.
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23. In Ashok Traders (supra) it was further observed by their Lordships:
"18. Under the [ACT] unlike the predecessor Act of 1940 the Arbitral Tribunal is empowered by [SECTION] of the Act to make orders amounting to interim measures. The need of [SECTION], in spite of [SECTION] having been enacted, is that [SECTION] would operate only during the existence of the Arbitral Tribunal and its being functional. During that period, the power conferred on the Arbitral Tribunal under [SECTION] and the power conferred on the Court under [SECTION] may overlap to some extent but so far as the period pre and post the arbitral proceedings is concerned, the party requiring an interim measure of protection shall have to approach only the Court. The party having succeeded in securing an interim measure of protection before arbitral proceedings cannot afford to sit and sleep over the relief, conveniently forgetting the "proximately contemplated" or "manifestly intended" arbitral proceedings itself. If arbitral proceedings are not commenced within a reasonable time of an order under [SECTION], the relationship between the order under [SECTION] and the arbitral proceeding would stand snapped and the relief allowed to the party shall cease to be an order made "before" i.e. in contemplation of arbitral proceedings. The Court, approached by a party with an application under [SECTION], is justified in asking the party and being told how and when the party approaching the Court proposes to commence the arbitral proceedings. Rather, the scheme in which [SECTION] is placed obligates the Court to do so. The Court may also while passing an order under [SECTION] put the party on terms and may recall the order if the party commits breach of the terms."
24. Therefore, in the case at hand though elaborate submissions were made from both the sides which in substance goes to the rout of the dispute raised now pending before the sole Arbitrator; however, in the present case we are confined to the question as to whether in the given facts of the present case an indulgence under [SECTION] is warranted, to prohibit the respondent from encashing the Bank guarantees in question and observe that the findings recorded herein will have no bearing upon the exercise of power under [SECTION] by the arbitrator.
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25. Regarding concept of restrainment from encashing of bank guarantee the same has come to be settled through various pronouncements by the Supreme Court.
26. In U.P. Co-operative Federation Ltd. (supra) it is held that :
"28 It is not the decision that there should be prima facie case. In order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties otherwise the very purpose of the bank guarantee would be negatived and the fabric of trading operation will get jeopardized."
27. In [PRECEDENT], it was held that:
9. The question is whether the Court was justified in restraining the Bank from paying to GETSCO under the bank guarantee at the instance of respondent 1.
The law as to the contractual obligations under the bank guarantee has been well settled in a catena of cases. Almost all such cases have been considered in a recent judgment of this Court in [PRECEDENT], wherein [ENTITY], as he then was, observed (at p. 189): that in order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise, the very purpose of bank guarantees would be negatived and the fabric of trading operations will get jeopardised. It was further observed that the Bank must honour the bank guarantee 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 case of fraud or in case of irretrievable injustice, the Court should interfere. In the concurring opinion one of us ([ENTITY], J.) has observed that whether it is a traditional bond or performance guarantee, the obligation of the Bank appears to be the same. If the documentary credits are irrevocable and independent, the Bank must pay when demand is made. Since the Bank pledges its own credit involving its reputation, it has no defence except in the case of fraud. The Bank's obligations of course should not be extended to protect the unscrupulous party, that is, the party who is 13 [CASE NUMBER] responsible for the fraud. But the banker must be sure of his ground before declining to pay. The nature of the fraud that the Courts talk about is fraud of an "egregious nature as to vitiate the entire underlying transaction". It is fraud of the beneficiary, not the fraud of somebody else.
28. In [PRECEDENT], their Lordships were pleased to observe:
"14. The High Court also committed a grave error in restraining the appellant from invoking bank guarantees on the ground that in India only a reasonable amount can be awarded by way of damages even when the parties to the contract have provided for liquidated damages and that a term in a bank guarantee making the beneficiary the sole judge on the question of breach of contract and the extent of loss or damages would be invalid and that no amount can be said to be due till an adjudication in that behalf is made either by a Court or an arbitrator, as the case may be. In taking that view the High Court has overlooked the correct position that a bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the primary contract between the person at whose instance the bank guarantee is given and the beneficiary. What the High Court has observed would be applicable only to the parties to the underlying transaction or the primary contract but can have no relevance to the bank guarantee given by the bank, as the transaction between the bank and the beneficiary is independent 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 is the same is unconditional and if there is a stipulation in the bank 14 [CASE NUMBER] 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 contract but also with respect to the amount of loss or damages, the obligation of the bank would remain the same and that obligation has to be discharged in the manner provided in the bank guarantee. In [PRECEDENT], while dealing with a case of bank guarantee given for securing mobilisation advance it has been held that the right of a contractor to recover certain amounts under running bills would have no relevance to the liability of the bank under the guarantee given by it. In that case also the stipulations in the bank guarantee were that the bank had to pay on demand without a demur and that the beneficiary was to be the sole judge as regards the loss or damage caused to it. This Court held that notwithstanding the dispute between the contractor and the party giving the contract, the bank was under an obligation to discharge its liability as per the terms of the bank guarantee. [PRECEDENT], and Hindustan Steel Workers Construction Ltd. v. G.S. Atwal and Co.
(Engineers) Pvt. Ltd., (1995) (6) SCC 76 : (1995 AIR SCW 3821), were also cases of work contracts wherein bank guarantees were given either towards advances or release of security deposits or for due performance of the contract. In both those cases this Court held that the bank guarantees being irrevocable and unconditional and as the beneficiary was made the sole judge on the question of breach of performance of the contract and the extent of loss or damages an injunction restraining the beneficiary from invoking the bank guarantees could not have been granted. The above referred three subsequent decisions of this Court also go to show that the view taken by the High Court is clearly wrong.
23. We are, therefore, of the opinion that the correct position of law is that commitment of banks must be honoured free from interference by the Courts and it is only in exceptional cases, that is to say, in case of fraud or in a case where irretrievable injustice would be done if bank guarantee is allowed to be encashed, the Court should interfere. In this case fraud had not been pleaded and the relief for injunction was sought by the contractor/respondent No.1 on the ground that special equities or the special circumstances of the case required it. The special circumstances and/or special equities which have been pleaded in this case are that there is a serious dispute on the question as to who has committed breach of the contract, that the contractor has a counter claim against the appellant, that the disputes between the parties have been 15 [CASE NUMBER] referred to the arbitrators and that no amount can be said to be due and payable by the contractor to the appellant till the arbitrators declare their award. In our opinion, these factors are not sufficient to make this case an exceptional case justifying interference by restraining the appellant from enforcing the bank guarantees. The High Court was, therefore, not right, in restraining the appellant from enforcing the bank guarantees.
29. In M/s. Sundaram Finance Ltd. (supra), it was observed by their Lordships
19. When a party applies under [SECTION] of the 1996 Act it is implicit that it accepts that there is a final and binding arbitration agreement in existence. It is also implicit that a dispute must have arisen which is referable to the arbitral tribunal. [SECTION] further contemplates arbitration proceedings taking place between the parties. Mr. [ENTITY] is, therefore, right in submitting that when an application under [SECTION] is filed before the commencement of the arbitral proceedings there has to be manifest intention on the part of the applicant to take recourse to the arbitral proceedings if, at the time when the application under [SECTION] is filed, the proceedings have not commenced under [SECTION] of the 1996 Act. In order to give full effect to the words "before or during arbitral proceedings" occurring in [SECTION] it would not be necessary that a notice invoking the arbitration clause must be issued to the opposite party before an application under [SECTION] can be filed. The issuance of a notice may, in a given case, be sufficient to establish the manifest intention to have the dispute referred to arbitral tribunal but a situation may so demand that a party may choose to apply under [SECTION] for an interim measure even before issuing a notice contemplated by [SECTION] of the said Act. If an application is so made the Court will first have to be satisfied that there exists a valid arbitration agreement and the applicant intends to take the dispute to arbitration. Once it is so satisfied the Court will have the jurisdiction to pass orders under [SECTION] giving such interim protection as the facts and circumstances warrant. While passing such an order and in order to ensure that effective steps are taken to commence the arbitral proceedings, the Court while exercising jurisdiction under [SECTION] can pass conditional order to put the applicant to such terms as it may deem fit with a view to see that effective steps are taken by the applicant for commencing the arbitral proceedings. What is apparent, however, is that the Court is not debarred from dealing with an application under [SECTION] merely because no notice has been issued under [SECTION] of the 1996 Act.
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30. In [PRECEDENT] it is held "28. Coming to the allegation of fraud, it is an admitted fact that in the plaint itself, there was no such allegation. It was initially only in the first application for the grant of injunction that in a paragraph it has been mentioned that the appellant herein had invoked the bank guarantee arbitrarily. This application contains no facts or particulars in support of the allegation of fraud. A similar bald averment alleging fraud is also contained in the second application for injunction relating to bank guarantee No. 40/47. This is not a case where defendant No. 1 had at any time alleged fraud prior to the filing of injunction application. The main contract, pursuant to which the bank guarantees were issued, was not sought to be avoided by alleging fraud, nor was it at any point of time alleged that the bank guarantee was issued because any fraud had been played by the appellant. We have no manner of doubt that the bald assertion of fraud had been made solely with a view to obtain an order of injunction. In the absence of established fraud and not a mere allegation of fraud and that also having been made only in the injunction application, the Court could not, in the present case, have granted an injunction relating to the encashment of the bank guarantees."
31. In [PRECEDENT], it was observed by their Lordships that:
"25. Once it is held that the bank guarantee furnished by the banker is an unconditional one, the appellant in our considered opinion cannot be restrained from encashing the bank guarantee on the ground that a serious dispute had arisen between the parties and on the allegations of breach of terms and conditions of the agreement entered between the parties."
32. "The level of proof required for proving fraud is extremely high" is what has been held in [PRECEDENT].
33. In the present case the Bank Guarantees towards performance Security is in the following terms:
17 [CASE NUMBER] "Whereas M/s. Yograj Infrastructure Pvt. Ltd.
having its registered office at B-63, basement, Vasant Vihar, New Delhi 110057 (India) (herein after called "the Contractor") has undertaken in pursuance of an agreement to execute "Rehabilitation and upgradation to four laning of Jhansi-Lakhnadon Section from K.M. to 97 (from end to grade separator at Rajmarg Chouraha) to k.m 351 on NH 26 in the State of Madhya Pradesh (herein after called the contract).
And whereas it has been stipulated by you in the said contract that the contractor shall furnish you with a Bank Guarantee by a recognized bank for the sum specified therein as security for compliance with his obligations in accordance with the contract.
And whereas we have agreed to give the contractor such a Bank Gurantee.
Now thereof we Syndicate Bank a Body corporate constituted under [ACT] having its Head Office at Manipal Karnataka (India) and having a branch office amongst other places at Nehru Place, New Delhi-110019 (hereinafter called the "Bank" which expression shall include its successors , administrators, executors and assigns) hereby affirm that we are the Guarantor and responsible to you, on behalf of the contractor up to a total of Rs.60500000/- (Rupees Six Crores five lacs only) such sum being payable in Indian currency and we undertake to pay you upon first written demand and without cavil for argument any sum or sums within the limits of Rs.60500000/- (Rupees Six Crores five lacs only) as aforesaid without your needing to prove or to show grounds or reasons for your demand for the sum specified therein.
We hereby waive the necessity of your demanding the said debt from the contractor before presenting us with the demand.
We further agree that no change or addition to or other modification of the terms of the contract or of the works to be performed thereunder or of any of the Contract documents which may be made between you and the contractor shall in any way release us from any liability under this guarantee and we hereby waive notice of any such change, addition or modification.
The liability of the Bank under this Guarantee shall not be affected by any change in the constitution of the Contractor or of the Bank.
Notwithstanding anything contained herein before our liability under this guarantee is restricted Rs.6050000/-(Rupees six Crores five lacs only) and the guarantee shall remain valid till a date 28 (twenty eight) days after the date of issue of the Defects Liability Certificate if informed to the bank or 30 th October 2007, whichever is earlier, unless a claim or a demand in writing is made upon us on or before a 18 [CASE NUMBER] date 28 (twenty eight) days after the date of issue of the Defects Liability Certificate as above or 30th October 2007 whichever is earlier all our liability under this guarantee shall cease.
This guarantee shall be valid until 28 (twenty eight) days after the date of issue of the Defects Liability Certificate as above or 30th October 2007 which ever is earlier. The confirmation of this Bank guarantee is available with our controlling office. The beneficiary in his own interest should obtain such confirmation from the controlling office of the following address enclosing a certified Xerox copy of the guarantee."
34. Similar is the term of three Bank Guarantees dated 28.11.2009 towards mobilization advance that:
" Whereas Ms. Yograj Infrastructure Limited having its Registered office at B-63 Basement Paschimi Marg Vasant Vihar, New Delhi-110057 (hereinafter called "the Contractor") has undertaken in pursuance of an agreement to execute "Rehabilitation and up-gradation to four laning of Jhansi-Lakhnadon section from KM 297 (from end to grade separator at Rajmarg Chouraha) to KM 351 on NH- 26 in the State of Madhya Pradesh (hereinafter called " the Contract"). And whereas it has been agreed between [ENTITY] Engineering & Construction Co Ltd. And M/s Yograj Infrastructure Limited that the contractor shall furnish you with a Bank Guarantee by a recognized Bank for the sum specified therein as security.
And whereas we have agreed to give the contractor such a bank guarantee.
Now thereof we Syndicate Bank, a body corporate constituted under [ACT], having its head office at Manipal, Karnataka (India), and having a branch office amongst other places at Nehru Place New Delhi-110019 (hereinafter called the "Bank" which expression shall include its successors, administrator, executors and assign) hereby affirm that we are the guarantor and responsible to you, on behalf of the contractor up to a total of Rs 1,00,00,000/- (Rupees One Crore only) such sum being payable in Indian currency and we under take to pay you upon your first return demand and without cavil or argument any sum or sums within the limits of Rs.1,00,00,000/- (Rupees One Crore only) as aforesaid without your needing to prove or to show grounds or reasons for your demand for the sum specified therein.
We hereby waive the necessity of your demanding the said debt from the Contractor before presenting us with the demand.
19 [CASE NUMBER] Notwithstanding anything contained herein before, our liability under this guarantee is restricted Rs 1,00,00,000/- (Rupees One crore only) and the guarantee shall remain valid till 28th November 2009. Unless a claim or a demand in writing is made upon us on or before 28th November, 2009, all our liability under this guarantee shall cease.
This guarantee shall be valid till 28th November, 2009."
35. Issue for consideration is whether the fraud as alleged had been played by the respondent company with the appellant.
36. The appellants were aware of main agreement between the respondent and NHAI is evident from various terms of contract dated 13.8.2006. As covenanted, the appellant represented to the respondent that it possesses the necessary expertise, resources (financial and otherwise) and experience to successfully complete the work under the work order as envisaged in the bid documents and can perform/execute the project as per the specifications, quality, standards and time period prescribed in the contract by the Employer/Engineer (as appointed by NHAI/Employer in the main agreement). It was agreed at by the respondent and accepted by the appellant the terms and conditions of the main Agreement along with Bill of Qualities rates on the basis of which the works have to be performed.
37. Clause 3.1 of the agreement dt. 13.8.2006 provides for furnishing of performance guarantee in the form of an irrevocable and unconditional Bank guarantee from a reputable bank which is acceptable to respondent. In terms whereof, the bank guarantee was furnished. Clause 3.2 provided for that the said bank guarantee can be invoked by the respondent at its discretion in case of termination of the agreement as and when the respondent is satisfied that any loss has been caused or might be caused to it because of any overt or covert act of appellant while executing the project.
38. Clause 4.21 provided for that the appellant shall not correspond with NHAI in any capacity, not even as a representative of the respondent. It stipulates that all letter correspondence in connection with work order shall be done by respondent only and that default in any respect will be treated as breach of condition of the agreement.
20 [CASE NUMBER]
39. Thus, as apparent, from day one, the appellant were within their knowledge of the main agreement between the respondent and NHAI. Prima facie it cannot be said that the appellant were not aware of such main agreement. The appellant, therefore, were free to have inquired about the terms and conditions thereof. The contentions of the appellant that the main agreement were shown much later from the agreement dated 13.8.2006 has no substance; nor the same can be treated to be a misrepresentation or a fraud by respondent.
40. Clause 23 of the agreement provides for the consequences of the default by appellant. Clause 23.1 stipulated the events the happening where which could lead to the breach. It provides for:
"23.1 The occurrence of any of the following events shall be treated as breach of this agreement by [ENTITY] if the YIPL
(a) fails to perform or observe any of its obligations, covenants, conditions hereunder or in the Main Agreement or any other document, to be performed and observed.
(b) fails to execute and complete the work and remedy and defects in strict accordance with the Main Agreement to the satisfaction of the Engineer as appointed by NHAI,
(c) sub-contracts, assigns or part with any work allocated to it or the benefits or rights under this Agreement without prior written approval or consent of [ENTITY]
(d) fails to rectify the defects and deficiencies whatsoever as pointed out by the Project Manager.
(e) fails to follow the instructions, directions etc. issued by Project Manager.
(f) acts or conducts in breach of the Main Agreement conditions executed between [ENTITY] and Employer/Engineer.
(g) becomes bankrupt or insolvent or its progress payment from [ENTITY] attached by any third party or is made subject matter of a garnishee order.
(h) makes any Misrepresentation in pursuance of this Agreement or during the performance/execution of the work
(i) fails to furnish or renew the Bank guarantee under this Agreement.
(j) deals directly with NHAI directly/ indirectly - communicates will NHAI as a sub-contractor of [ENTITY] in writing 21 [CASE NUMBER] or otherwise of corresponds in writing with NHAI as a representative of [ENTITY]
(k) Fails to maintain confidentially of this agreement.
(l) is not approved as subcontractor by NHAI for this project. Both Parties shall try to get approval from NHAI.
(m) conforms to Clause 7.4 (c).
41. It is in the eventualities in clause 23.1. of the agreement which has led to invocation of clause 23.2 which provides for "23.2 In any of these events or circumstances [ENTITY] may upon giving 14 days notice to YIPL terminate this agreement without releasing YIPL of any obligation on liabilities or affecting [ENTITY]'s right and authority conferred by this Agreement and expel YILP form the site without prejudice to any other rights [ENTITY] may have under this Agreement or law.[ENTITY] may employ any third agency or entity to complete the works.The ownership of the plants, machinery and equipment , materials etc. purchased under the name of [ENTITY] and in the name of YILP, if any, shall be available to [ENTITY] for recovery of its dues or on termination of this agreement for any reason including those mentioned above as a means of indemnification of [ENTITY] losses damages etc."
The reasons for termination of contract is spelt out from the notice of Termination dated 22.9.2009 are:
"You requested payments additional to your entitlement under contract in order that you could progress the works and we paid the following amounts, without any substantiation from you, that you were so entitled:
1. Purchasing material (Cements, Steel, Bitumen) since 2007 November.
2. Loan to ameliorate your poor financial status.
3. Payment of your labor suppliers and salaries of your workers.
Your progress since that time, on highways and structures, is attached. In the light of this achievement it is clear that you have failed to execute your works without delay.
You then requested further extra payments without substantiation of any entitlement under our contract.
22 [CASE NUMBER] We convened a meeting on 21st August 2009 on site, where we required your attendance. Your deputy attended. After confirming with him that our contract was "back to back"
to the main contract and that he is required to substantiate additional entitlements under contract, he stated at the meeting, "No Money, No Works".
Since his statement your progress is as follows.
1. Achievement on structures- 0.32% (June), 0.32%(July), 032%(Aug) All progress is pile work, little other planned work has been executed.
2. Achievement on highway - 1.14%(June), 0.15%(July), 0.04%(Aug) There have also been strikes due, we are told, to your non payment of staff wages.
We have received at our site office, and in persons, requests from your suppliers for direct payment from us since you have not paid them.
This confirms your poor financial status.
We also record:
1. We have requested a program to completion.
2. We have requested submissions of what additional payments (if any) you are entitled to under our contract which is "back to back" with the main contract.
You have failed to respond to (1) and have failed to competently respond to (2).
We therefore have no assurances that you intend or are capable of meeting your obligations under our contract and your obligations to execute the works without delay. Pursuant to Cl 23.2, we hereby exercise our right to terminate our contract effective in 14 days to draw on your performance bond and to seek recovery of our loss and expense all without prejudice to any other right we may hold under law and under our contract."
42. Furthermore, the minutes of meeting dated 28.9.2009 delineates that it was agreed between the appellant and respondents that:
i. YIL shall unconditionally handover complete control of all its resources, infrastructure including but not limited to (Plants, Machineries, Staff, Quarries, sub agencies, lands and materials) to [ENTITY] for completion of balance works of Sub Contract.
23 [CASE NUMBER] ii. YIL shall extend all the bank guarantees (Performance bond, Mobilization Advance etc) till the completion of Sub contract Works or as advised time to time by [ENTITY].
iii. Further YIL shall extend their unconditional support to [ENTITY] for completion of remaining Sub Contract Works.
And that:
1. YIL agreed to extend the validity of Performance Guarantee initially for 01 Year and submit the extended Bank Guarantee on or before 05th October 2009. YIL shall extend the Performance Guarantee further as per terms and Conditions of [ACT]. [ENTITY] agreed to withdraw notice of termination of sub Contract after receipt of extended Performance Bank Guarantee.
2. [ENTITY] agreed to maintain status of YIL as their Sub Contractor for C-8 project till completion of Project as provided in the Original [ACT].
3. YIL and [ENTITY] agreed for joint measurement of workdone by YIL till 30th September 2009 and finalize the quantities on or before 31st October 2009. Further YIL and [ENTITY] agreed to complete and finalise the account reconciliation till 30th September 2009, on or before 31st October 2009. after reconciliation of accounts [ENTITY] and YIL agreed to execute MOU on or before 15th November 2009 to resolve other pending matters like financial recourse of the facilities of YIL.
4. [ENTITY] requested YIL to clear all outstanding liabilities related to C-8 project which are approximate 3-4 crore as informed by YIL. YIL expressed their inability in arranging immediate finance for clearing these liabilities. Finally [ENTITY] and YIL agreed that after verification of liabilities [ENTITY] will clear only the necessary liabilities of YIL with the prior consent of YIL. Further YIL agreed that they will arrange the finance before 30th November 2009 and shall repay to [ENTITY] for liabilities cleared by [ENTITY] with YIL's Consent.
5. YIL will provide list of all equipments available at C-8 Project site on or before 29.09.09 to [ENTITY]. [ENTITY] will select the required equipments from the list and YIL agreed to provide these plants and equipments of [ENTITY] in good working condition. Further YIL shall ensure that payments of installments too financers for these equipments are done timely by their own resources to avoid any disruption in progress of works. YIL further undertakes unconditionally that any disruption of progress due to seizure of these machineries by finances will be treated as default by YIL in performing its obligation under the Sub Contract and entitle [ENTITY] for immediate encashment of Performance Bank Guarantee. [ENTITY]'s entitlement under this para will be in addition to the terms and conditions of Sub contract.
YIL agreed that it will not be allowed to shift any of the equipments provided to [ENTITY] till completion of Project or Prior Written permission of [ENTITY]
6. YIL agreed to provide base camp facilities including staff accommodations, Labs, workshops etc to [ENTITY] as much as it require for proper functioning of all activities.
24 [CASE NUMBER]
7. [ENTITY] will provide YIL the list of persons whom it wants to employ with [ENTITY] for completion of C- 8 Project. YIL agreed to relieve these persons and transfer them to [ENTITY]
8. [ENTITY] will try to get approval for YIL as Sub Contractor from NHAI.
9. YIL will execute Lease deed in favor of [ENTITY] for usage of Plants, Machineries, all other available resources and infrastructure as mentioned in Para 5 and 6 above as per requirement NHAI/engineer from time to time. The validity of such lease will be till completion of project.
10. If YIL is requested to operate the crushers it will ensure uninterrupted availability of aggregate for C-8 Project.
11. [ENTITY] and YIL expressed their willingness for continued cooperation to each other for completion of C-8 Project.
12. This Minutes of Meeting will neither relieve nor dilute the obligations of YIL under the Original sub contract. Contract mentioned above from para 1 to 10 shall be in addition of YIL's obligations under the [ACT]. In Case of failure to honor the contents mentioned in Para 1 to 11 above, Terms and Conditions of Original sub Contract Agreement will be applied automatically. All the disputes shall be decided and discussed within ambit of Original sub Contract Agreement only."
The Minutes of the meeting was recorded and minuted jointly by the [ENTITY] and YIL and were deemed true and accepted by all the participants, if not objected otherwise 03 days from the receipt of same."
43. It appears from the correspondence dated 9.10.2009 that the stipulation of the meeting dated 28.9.2009 were not adhered to, which led to invocation of condition of minutes of meeting Sl. No. 12, i.e. "12. This Minutes of Meeting will neither relieve nor dilute the obligations of YIL under the Original sub contract. Contract mentioned above from para 1 to 10 shall be in addition of YIL's obligations under the [ACT]. In Case of failure to honor the contents mentioned in Para 1 to 11 above, Terms and Conditions of Original sub Contract Agreement will be applied automatically. All the disputes shall be decided and discussed within ambit of Original sub Contract Agreement only."
44. Though strenuously it is urged that, the appellant from very beginning was kept in dark about the main contract and thus a fraud is played. However, as observed, no case of fraud or misrepresentation leading to an irretrievable injustice to the appellant at the hand of respondent is made out. Therefore, in the facts of present case the judgment in [PRECEDENT] (supra) relied upon by the appellant is of no help to the appellant. Similarly decision in Jainson Cloth Cooperation (supra) is not applicable as the same related to the non-performance of contract was due to frustration as a result of government policy and whereunder the contractor was not held responsible. Accordingly, it was observed that enforcement of bank-guarantee was not sought under the said circumstances.
45. The case at hand, depicts a different picture and the appellant having failed to establish a fraud or misrepresentation, the respondent was well within its right to seek encashment of Bank Guarantees in the event of termination of agreement.
46. In the result appeal fails and is hereby dismissed. However, no costs.
([ENTITY]) ([ENTITY]) JUDGE JUDGE VT and das