OMP No.569/2008 Page 1 of 18 * HIGH COURT OF DELHI : NEW DELHI + OMP No.569/2008 % Judgment reserved on : 26th February, 2009 Judgment pronounced on : 4th August, 2009 Maharashtra Seamless Ltd. ..... Petitioner Through : Mr. Sandeep Sethi, Sr. Adv. with Mr. V. Seshagiri, Adv. Versus Indian Oil Corporation Ltd. .... Respondent Through : Mr. V.N. Koura, Adv. with Mr. Rakesh Sawhney and Mr. P. Benipal, Advs. Coram: HON'BLE MR. JUSTICE MANMOHAN SINGH 1. Whether the Reporters of local papers may be allowed to see the judgment? No 2. To be referred to Reporter or not? Yes 3. Whether the judgment should be reported Yes in the Digest? MANMOHAN SINGH, J. 1. By this order, I shall dispose of the present petition filed under Section 9 of the Arbitration and Conciliation Act, 1996. The following are the reliefs sought in the petition:- “(i) Pass an ad interim order of temporary injunction restraining the Respondent and its officers and any one of them claiming through or under the respondent from, in any manner, giving effect to the impugned letter pending adjudication and disposal by an arbitral tribunal to be constituted of the various claims made by the petitioner against the respondent; (ii) Pass an ad interim order of temporary injunction restraining the Respondent and its officers and any one of them claiming through or under the respondent from, in any manner, giving effect to the impugned tender for awarding the contract OMP No.569/2008 Page 2 of 18 to a third party under the project pending adjudication and disposal by an arbitral tribunal to be constituted of the various claims made by the petitioner against the respondent; (iii) Pass an ad interim order of temporary injunction restraining the Respondent and its officers and any one of them claiming through or under the respondent from, in any manner, invoking the Performance Guarantee No. 316020213313-HP dated May 13th, 2008 issued by the Standard Chartered Bank at the instance of the petitioner for a sum of Rs. 8, 52, 79, 100/- in terms of the contract.” 2. The brief factual matrix of the case is enunciated in the following paragraphs. 3. The petitioner is a company incorporated under the Companies Act, 1956 and is engaged in the business of manufacture of seamless pipes and ERW pipes as well as in wind power generation. 4. The grievance of the petitioner arises out of the termination of the contract by the impugned letter dated 17th September, 2008 despite the purchase order allowed by the respondent in favour of the petitioner. The petitioner states that the respondent after following the due process issued purchase order no.PLM/CHBPL/14/1775018 (hereinafter referred to as PO) in favour of the petitioner. The letter of intent in that respect was also issued. The PO was in relation to the supply of bare pipes by the petitioner to the respondent in respect of the Chennai-Bangalore project. 5. The petitioner states that the PO draws the description, quantities and prices together with the delivery schedule of the bare pipes. The PO also classifies the supplies into two lots i.e. lot 1 and lot 2. The PO prescribes the time of delivery which is 4 months from the date of its issuance i.e. by 21st August, 2008 in relation to lot 1. In relation to lot 2, the time limit is seven months from the date of the order which completes by November 2008. OMP No.569/2008 Page 3 of 18 6. As per the terms of the general conditions of the contract, the petitioner was obliged to furnish the respondent with a performance guarantee after the receipt of the acceptance of its bid and the same was duly furnished to the respondent vide letter dated 27th May, 2008 under bank guarantee no. 3160202113313-HP dated 13th May, 2008 issued by the Standard Chartered Bank for a sum of Rs. 8,52,79,100/-. 7. The petitioner contends that during the currency of the arrangement between the petitioner and respondent, as per the PO, the petitioner had conducted the prequalification tests (PQT) upon the bare pipes as per the requirements of the respondent. It is further contended that there were delays in the manufacturing process due to lack of cooperation on behalf of the supplier of raw material, who had been nominated by the respondent. Thus, the petitioner has pleaded that the delay is not attributable to it and therefore should not affect its rights in continuing the contract. 8. The petitioner in the month of August 2008 conducted the said prequalification tests whereby some inconsistencies came to light. Further, failure in the flattening tests gave the respondent a reason to believe that the performance of the contract would not be possible as per the schedule agreed upon. The respondent raised its concern vide letter dated 14th August, 2008 to the petitioner to devise corrective measures to cure the delay in the supply of the bare pipes. In its response, the petitioner assured the respondent about its technical capabilities and its commitment and also assured the timely completion of the project. Further on 26th August, 2008, the respondent asked the petitioner about the status of the coils and sought confirmation regarding the conducting of PQTs upon change in the manufacturing tests. OMP No.569/2008 Page 4 of 18 9. Thereafter various correspondences were exchanged between the parties. It was agreed that third party inspection was approved by the parties and consequent inspection release note dated 12th September, 2008 was issued by the said party appointed by the respondent. Further, by letter dated 16th September, 2008 sent by the petitioner to the respondent, the petitioner informed the respondent that PQT for lot 1 of 12.75 bare pipes with thickness 0.219” 30360 mtrs, 0.250” 1800 mtrs and 0.375” 748 mtrs. was scheduled for 24th and 25th September, 2008 at its plant at Nagothane. 10. Lastly, by letter dated 17th September, 2008 the respondent informed the petitioner that in view of the inconsistencies discovered during the several tests conducted and further considering the large number of rejections of pipes after inspections, there exist reasonable apprehensions as regards the quality of the pipes as well as the timely completion of the project and as the petitioner seems unable to meet the parameters prescribed in the contract, the respondent is left with no option but to procure the bare pipes from an alternative source as per the clause 4.23 of the general conditions of the contract. 11. In the meantime, the petitioner came across the impugned tender no. PLM/CBPL/07/14 R. By way of instant petition under section 9 of the Arbitration & Conciliation Act, 1996 the petitioner is seeking temporary injunction restraining the respondents from proceeding with the impugned tender. The petitioner is also impugning the letter dated 17th September, 2008 and is seeking a prohibitory injunction restraining the respondent from proceeding with the actions stated therein and from awarding the tender to any third party. Lastly, interim relief in the form of injunction is sought OMP No.569/2008 Page 5 of 18 restraining the respondent from encashing/ invoking the performance guarantee No. 3160202113313-HP dated 13th May, 2008 issued by the Standard Chartered Bank for the sum of Rs. 8,52,79,100/-. 12. The instant petition came up for hearing on 31st October, 2008 when one week‟s time was granted to the respondent to pursue the matter. The matter again came up for hearing on 24th November, 2008 whereby the court issued notice in the main OMP and granted 4 weeks time to file the reply and posted the matter for 2nd February, 2009. The petitioner on 24th November, 2008 informed the court that it had already invoked the arbitration clause between the parties by issuing notice to the respondent on 22nd November, 2008. 13. The said order was challenged before the Division Bench by filing of an appeal being FAO(OS) No. 473/2008 and vide order dated 2nd December, 2008 the respondent was directed to keep the amount in a „no-lien account‟ as the respondent received a pay order pursuant to the encashment of bank guarantee. 14. The said appeal again came up before the Division Bench on 15th January, 2009 whereby the order dated 2nd December, 2008 for keeping the amount in the non lien account was vacated. However, directions were issued that in case the petitioner succeeds before the Single Judge, the amount covered by the bank guarantee shall be transmitted to the petitioner within one week. Further, directions were issued to dispose of the said petition within 8 weeks. Accordingly, the matter came up before this court and was finally heard on priority basis. 15. Learned Counsel for the Respondent has apprised the court of further OMP No.569/2008 Page 6 of 18 developments and raised objections with respect to the reliefs claimed in the prayer clauses (i) and (ii) to the effect that the impugned tender for awarding the contract to a third party and the impugned letter dated 17th September, 2008 have already been given effect to after receiving the bid in response to the said tender. In the impugned tender, the respondent has already placed Purchase Order dated 29th November, 2008 for supply of X-70 grade 14” and 12.75” grade dia pipes of the value of Rs.102,90,17,136.85 on Welspun Gujarat Stahl Rohren Limited and thus, according to the respondent, the reliefs made in prayer (i) and (ii) have now become infructuous. 16. Per contra, the Learned Counsel for the petitioner countered these submissions by stating that awarding of the contract during the pendency of the proceedings cannot take away the rights of the petitioner to challenge the impugned letter and impugned tender and more so when the earlier contract was not validly terminated. 17. At the outset, I find that the reliefs claimed in clauses (i) and (ii) cannot be granted because of the following reasons: (a) That the respondent has already granted the purchase order to a third party after following the due process wherein the petitioner itself has participated in the said bid process. The petitioner cannot be allowed to approbate and reprobate at the same time. Once the petitioner itself has participated in the fresh tendering process, it is not allowed to state that the said tendering is in contravention to earlier purchase order. (b) Even if the petitioner‟s contention of invalidity of floating of fresh tender during subsistence of the earlier contract is assumed to OMP No.569/2008 Page 7 of 18 be correct, the question regarding valid termination or subsistence of the contract can be determined by the arbitral tribunal after adjudication of claims and counter claims of the parties. At this stage, when grant of interim relief was sought, only consideration of this Court is, whether prima facie case is made or not. When the arbitral proceedings are in existence and fully operational and when the petitioner itself has participated in the fresh tender bid and after due process the tender is awarded to Welspun, the interim reliefs claimed in clauses (i) and (ii) cannot be granted. This court however, leaves it open to the arbitral tribunal to decide the question of validity of the termination of earlier contract and thereafter the claims of the parties may be settled there. 18. Once I have held in the preceding paragraph that the petitioner is not entitled to relief claimed in clauses (i) and (ii), the discussion is now narrowed down to the issue of grant of interim relief restraining the respondent from invocation of the performance bank guarantee. 19. Learned Counsel for the petitioner Mr. Sandeep Sethi has argued that the present case warrants an injunction against the invocation of the performance bank guarantee on the following grounds. The submissions of Mr. Sethi can be crystallized as under: (a) That there has been wrongful termination of the earlier contract as the procedure prescribed under clause 4.23 of general conditions of the contract was not followed and the contract was terminated hastily without properly invoking the said clause. Thus this case OMP No.569/2008 Page 8 of 18 becomes a case of fraud of egregious nature and warrants interference of this court by way of temporary injunction. (b) That the delay in performance is not attributable to the petitioner but to the respondent for the reasons stated in the petition, including the fact that the raw material supplier did not supply the same on time. (c) That the Respondent itself had conceded to the delay in various correspondences by accepting the supplies. The date of delivery was 21st August, 2008, however, the respondent itself requested the petitioner on 26th August, 2008 to furnish the coils for the purpose of the production of the pipes and to ensure that the petitioner would conduct the prequalification tests. After the conducting of tests, on 12th September, 2008, the release notes were issued and barely a week thereafter, i.e. on 17th September, 2008, the respondent issued the impugned letter. (d) Mr. Sethi strenuously argued that once there is wrongful termination of a valid contract, encashment of the bank guarantee during the validity of earlier contract is fraud and thus interim injunction can be issued by this court. (e) The petitioner has laid great emphasis on Clause 4.23.1 of the general conditions of contract and pleaded that the respondent‟s letter dated 17th September, 2008 does not carry any implicit notice of termination. The petitioner submits that none of the four conditions that had to be satisfied before the purchaser‟s termination of the contract were satisfied. Without prejudice, even OMP No.569/2008 Page 9 of 18 if any of these conditions as mentioned in Clause 4.23.1 were satisfied, as per Clause 4.23.1 (ii), the vendor‟s failure to deliver goods should have been of a delay of 30 days from the date of delivery, before the vendee‟s dispatch of the written notice of termination. Since the date of delivery of Lot-1 was 21st August, 2008 and the said notice was issued on 17th September, 2008, i.e. before the expiry of the mandatory period of 30 days, the said letter could not be carrying a valid notice of termination. (f) That since the delivery date for Lot-2 was 21st November, 2008, no termination in its respect could possibly be issued by letter dated 17th September, 2008. (g) That a bare reading of the letter dated 1st December, 2008 from the respondent to the bank proves that the respondent has misrepresented and misstated the material fact about written notice of termination being issued and since the bank guarantee was invoked on this basis, there is an element of fraud. 20. Clause 4.23 of the GCC contained in the PO deals with the termination of the contract and provides as under:- “4.23.0 TERMINATION OF CONTRACT 4.23.1 In addition to any other right or remedy of the purchaser, and in addition to any other event entitling the purchaser to terminate the contract, the purchaser shall be entitled to terminate the contract by written notice at any time during its currency if; (i) the vendor refuses to supply all or any of the products which the vendor is required to supply under the contract; (ii) the vendor fails within 30 days of the date of delivery in respect thereof specified in the delivery schedule to deliver the OMP No.569/2008 Page 10 of 18 whole or any part or installment of the products or any item thereof; (iii) the vendor becomes bankrupt or becomes insolvent or goes into liquidation or winding up; (iv) the vendor makes a general assignment for the benefit of creditors. 4.23.2 Upon termination of the contract, payment due to the vendor for the product supplied upto the effective date of the termination shall be calculated on the basis of contract, and the vendor shall not be entitled to any other payment or compensation. 4.23.3 Upon termination of the contract, the purchaser shall be entitled to purchase from any other source at the risk and expense of the vendor the undelivered products or any of the them covered by the contract, and to recover from the vendor (in addition to any other amount or compensation that it may be entitled to in terms hereof or otherwise) the difference between the amount payable to the vendor in respect thereof under the contract and the amount actually expended by the purchaser for obtaining the same from other sources. In the event of latter being in excess of the former; and insofar as the purchaser shall not exercise said right of purchase from other sources, the purchaser shall be entitled to recover from the vendor (in addition to any discount, other amount or compensation) the difference between the market price for the undelivered products and the price thereof under the contract, in addition to any other payment or compensation herein or otherwise provided for and reserving to itself the right to forfeit the security deposit, placed by the vendor against the contract.” 21. In order to support his submissions on the allegation of fraud, Mr. Sethi has relied upon several judgments wherein in appropriate cases, interim reliefs were granted once it was proved that the bank guarantee is vitiated by fraud. The judgments relied upon by the petitioner can be enlisted as under: (i) U.P. State Sugar Corporation v. Sumac International Ltd.: (1997) 1 SCC 568-paras 12 to 16. (ii) Larsen & Turbo Ltd. v. Maharashtra State Electricity OMP No.569/2008 Page 11 of 18 Board & Others: (1995) 6 SCC 68-para 5. (iii) BSES Ltd. v. Fenner India Ltd. & Anr.: (2006) 130 Com Cas 8 (SC)-para 28. (iv) U.P. Cooperative Federation Ltd. v. Singh Consultants & Engineers (P) Ltd.: (1988) 1 SCC 174-para 24 & 54. (v) Himadri Chemicals Industries Ltd. v. Coal Tar Refining Company: JT 2007 (9) SC 631-paras 10-13. (vi) Continental Construction Ltd. & Anr. V. Satluj Jal Vidyut Nigam: 2006 (1) ARBLR 321 (Delhi)-paras 14 to 21. 22. To counter the petitioner‟s submissions, Mr. Kaura appearing for the respondent submitted the following arguments: (a) That the arbitration clause has already been invoked and arbitration proceedings are ripe for disposal. In the said arbitral proceedings, the petitioner has made specific claim qua challenge of the invocation of the bank guarantee. The claim no. 6.3.5 reads as under : “6.3.5 In the above noted facts and circumstances, it is manifest that the invocation and subsequent encashment of the performance Bank Guarantee by the respondent is based on fraud, active concealment and material misrepresentation on the part of the respondent. In view of the above noted unlawful act on part of the respondent occasioning the said loss and damage, the claimant is entitled to be compensated/ restituted a sum of Rs.8,52,79,100/- (Rupees Eight Crores Fifty Two Lakhs Seventy Nine Thousand One Hundred only) and a further sum of Rs.39,95,267/-, aggregating to Rs.8,92,74,367/- (Rupees Eight Crore Ninety Two Lakhs Seventy Four Thousand Three Hundred and Sixty Seven only).” (b) That there is no wrongful termination of the earlier contract and the impugned letter dated 17th September, 2008 clearly states the factum of OMP No.569/2008 Page 12 of 18 invocation of clause 4.23 of the general conditions of the contract. The contract thus stood terminated and the said termination was also accepted by the petitioner by its participation in the fresh tender bidding process. (c) Alternatively, the pleas regarding validity or valid termination of the earlier contract requires evidence and adjudication and the same cannot be operated against to injunct the bank guarantee which is an autonomous transaction. (d) That there has been failure on the part of the petitioner to meet the requirements of the earlier purchase order. The said failure on petitioners part to manufacture pipes according to the agreed specifications in the contract has been appropriately raised in the letter dated 17th September, 2008 and thus the said letter cannot be faulted with and is termination of the contract in all senses. (e) The respondent states that the relief of restraining it from invoking the Performance Bank Guarantee is infructuous as it has already by letter dated 1st December, 2008 invoked the said bank guarantee for Rs.8,52,79,100/- and the bank on 2nd December, 2008 has handed over a pay order to the respondent for the said amount. 23. Learned counsel for the respondent has referred various judgments, the details of which are as under:- (i) Vinitec Electronics Pvt. Ltd. vs. HCL Infosystems Ltd., JT 2007(12) SC 480; (ii) Dwarikesh Sugar Industries Ltd. vs. Prem Heavy Engineering Works (Pvt). Ltd. & Anr., (1997) 6 SCC 450; (iii) U.P. State Sugar Corporation vs. Sumac International Ltd.l OMP No.569/2008 Page 13 of 18 (1997) 1 SCC 568; (iv) Hindustan Steelworks Construction Ltd. vs. Tarapore & Co. and Anr., (1996) 5 SCC 34; (v) BSES Ltd. (Now Reliance Energy Ltd.) vs. Fenner India Ltd. and Anr., (2006) 2 SCC 728; (vi) Reliance Salt Ltd. vs. Cosmos Enterprises and Anr., (2006) 13 SCC 599 (vii) Himadri Chemicals Industries Ltd. vs. Coal Tar Refining Co., (2007) 9 SCALE 631; (viii) Tata Tele Services Ltd. and Ors. vs. Union of India, 1992 (2) Arb. Law Reporter 76 (Delhi); and (ix) HVS Technologies Inc. vs. Aeronautical Development Agency, 2001 (3) Arbitration Law Reporter 241 (Karnataka). 24. I have given careful consideration to the rival submissions of the parties and have also gone through the records. Before dealing with the submissions, I find it appropriate to discuss the law relating to grant of injunction against the invocation of bank guarantee. 25. In the case of UP Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. (1988) 1 SCC 174, it has been held by the Apex court that: “The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the fact of fraud and as to the bank's knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank's credit in the relatively brief time which must elapse between the granting of such an injunction and an application by OMP No.569/2008 Page 14 of 18 the bank to have it discharged.” 26. The same legal position has been reiterated in the case of State Trading Corporation v. Jainsons Clothing Corporation, (1994) 6 SCC 597, wherein it has been held as follows: “8. The grant of injunction is a discretionary power in equity jurisdiction. The contract of guarantee is a trilateral contract which the bank has undertaken to unconditionally and unequivocally abide by the terms of the contract. It is an act of trust with full faith to facilitate free flow of trade and commerce in internal or international trade or business. It creates an irrevocable obligation to perform the contract in terms thereof. On the occurrence of the events mentioned therein the bank guarantee becomes enforceable. The subsequent disputes in the performance of the contract does not give rise to a cause nor is the court justified on that basis, to issue an injunction from enforcing the contract, i.e. bank guarantee. Before issuing the injunction under Order 39 Rules 1 and 2, the court should normally insist upon enforcement of the bank guarantee and the court should not interfere with the enforcement of the contract of guarantee unless there is a specific plea of fraud or special equities in favour of the plaintiff. He must necessarily plead and produce all the necessary evidence in proof of the fraud in execution of the contract of the guarantee, but not the contract either of the original contract or any of the subsequent events that may happen as a ground for fraud.” 27. Recently, I had an occasion to examine the law relating to grant of injunction against the invocation of Letter of Credit in the matter of M/S GLOBAL STEEL PHILIPPINES (SPV-AMC) Vs. STC OF INDIA LTD & ORS decided on 8th May, 2009 wherein as regards a similar question, I