IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 01.07.2011 CORAM THE HON'BLE MRS. JUSTICE R.BANUMATHI and THE HON'BLE MR. JUSTICE V.PERIYA KARUPPIAH O.S.A.NOS.9 and 10 of 2011 and M.P.Nos.1 of 2011 M/s.Omni Agate Systems Private Limited, Regd.Office at II Floor, Murugesan Naicker Complex No.99, Greams Road Chennai – 600 006 rep.by its Managing Director Mr.K.R.Elanghovan .. Appellant in both O.S.As Vs. 1.Southern Railway, rep.by the Senior Divisional Commercial Manager Commercial Department Chennai Division Southern Railways Chennai – 600 001. 2.The Manager IDBI Bank No.37, P.M.Tower Greams Road, Thousand Lights Chennai – 600 006. .. Respondents in both O.S.As Original Side Appeals in O.S.A.Nos.9 and 10 of 2011 are filed under Order XXXVI Rule 1 of Original Side Rules read with Clause 15 of Letters Patent against the Orders dated 15.11.2010 made in O.A.Nos.653 and 657 of 2010 respectively. For appellants : Mr.S.R.Rajagopal For respondents : Mr.Vellaisamy for R.1 Mr.Suresh for M/s.Sivakumar Suresh for R2 JUDGMENT R.BANUMALTHI,J. These appeals are filed challenging the order dated 15.11.2010 dismissing the applications - O.A.Nos.653 and 657 of 2010 filed under Section 9 of the Arbitration and Conciliation Act and declining to https://hcservices.ecourts.gov.in/hcservices/ grant injunction restraining the 1st respondent -Southern Railway from invoking the Bank guarantee given by the appellant for Rs.6,00,000/- and Rs.2,77,200/- respectively. 2. Brief facts are as follows:- The 1st respondent -Southern Railways had invited tenders for erection of 3 LED screens in Chennai Central Railway Station and 2 LED screens in Egmore Railway Station for a period of three years and the place of installation was notified. Appellant was declared as a successful tenderer and awarded the contract for three years - 2008- 2011 on payment of licence fee. The licence fee, security deposit and performance guarantee required to be furnished for the works at Chennai Central and Egmore are as follows: Name of the Place Licence fee Security Deposit Performance Guarantee Chennai Central Railway Station Rs.40,00,000/- per annum payable in 3 Instalments Rs.6,00,000/- Rs.6,00,000/- Egmore Railway station Rs.18,48,000/- per annum payable in 3 Instalments Rs.2,77,200/- Rs.2,77,200/- (ii) The tender notification was on 4.12.2007, technical bid was opened on 4.1.2008, financial bid was opened on 3.2.2008, contract was awarded to the appellant on 11.4.2008 and the Southern Railway issued a letter of acceptance to the appellant on 15.5.2008. By communication dated 17.6.2008, the first respondent informed the appellant about the sudden developments arising out the proceedings in W.P.No.7143 of 2006 and the Divisional Office is constrained to temporarily suspend the acceptance of the offer made in respect of the advertisement location on the facade of the Station Buildings, both at the Chennai Central as well as Egmore Railway Stations. In so far as Chennai Central Railway Station, for two other locations, the appellant was called upon to pay proportionate licence fee of Rs.32,72,227/-. The appellant sought to re-work the contract and requested the Southern Railway to facilitate speedy permissions to instal LEDs at suitable locations. After correspondences and discussions, the locations were re-fixed and for the Central, for 3 locations, the original licence fee of Rs.40,00,000/- was restored and the re-locations are as under: Sr .N o. LOCATION QTY 1 At the entrance to PF.Nos.12 & 11 facing MMC car park area Chennai Central 1 No. 2 At New concourse Facing booking counters near Luggage office Chennai Central 1 No. 3 At the entrance to PF No.6 (Instead of facade of the Station Building) 1 No. https://hcservices.ecourts.gov.in/hcservices/ In Egmore:- Sr.No. LOCATION QTY 1 On platform No.3 near SSE/AC coach office facing SMR room 1 No. 2 Near the exit of the car parking Area (Instead of facade of the Station Building) 1 No. (iii) The appellant remitted first year licence fee of Rs.40,00,000/- for Chennai Central Railway Station and Rs.18,48,000/- for Egmore Railway Station. For Chennai Central Railway station, the appellant furnished Bank guarantee for Rs.6,00,000/- (dated 22.9.2008) by the covering letter dated 24.9.2008. In so far as Egmore Railway Station, the appellant furnished Bank guarantee dated 7.2.2008. By the letter dated 24.9.2008, the appellant sought for permission to proceed with the work approved. By the letter dated 29.9.2008, the 1st Respondent - Southern Railway permitted the appellant to execute the work and informed the 1st respondent about the date of completion of work. (iv) The case of appellant is that the installation work has been delayed and that they have been sending communications to the Railways to extend the time for installation. By their letter dated 1.9.2008, the appellant informed the 1st respondent about the delay in execution of the work in Egmore and requested the first respondent to permit the appellant to carry out the work for erection of the structure for installation and operation. By the letter dated 10.11.2008, appellant informed the 1st Respondent about the completion of LED installation at Chennai Central. (v) The case of appellant is that after series of deliberations, the screens could be installed much later and the screens could be put in place only in the 1st week of January 2009. Appellant has further averred that they have been sending communications that having regard to the flow of events to re-consider the agreement and "start date". The 1st respondent sent notice to the appellant stating that for Chennai Central, the contract period of three years commenced on 28.8.2008 and that the second year licence fee is payable on 28.8.2009. In so far as Egmore Station, it was informed that three years contract period commenced from 28.10.2008 and that the second year instalment of licence fee is payable on 28.10.2009. The 1st respondent issued show cause notice on 8.12.2009 alleging that the appellant has not paid the second year licence fee and that why the contract awarded should not be terminated for breach of the tender conditions. In response to the show cause notice, appellant had sent the reply stating that they have been making personal representations and sending various letters requesting for re-fixation of contract period and requesting them to condone the delay. The 1st respondent issued termination notice dated 17.3.2010 terminating the contract and informing the appellant that after deducting the Bank Guarantee the balance due to be remitted by the appellant is Rs.17,86,667/- for Chennai Central and Rs.4,52,760/- for https://hcservices.ecourts.gov.in/hcservices/ Chennai Egmore. On the same day, service connection is said to have been disconnected and also sought to invoke the bank guarantee. (vi) At that point, the appellant had filed Section 9 applications in O.A.Nos.653 and 657 of 2010 seeking for injunction restraining the 1st respondent from in any manner invoking bank guarantee issued by the 2nd respondent/IDBI Bank for Rs.6,00,000/- and Rs.2,77,200/- respectively. The appellant averred that without considering the request of the appellant to revise the terms of the agreement and without accepting any of the explanations given by the appellant, the 1st respondent threatened to invoke the bank guarantee and the 1st respondent cannot act unilaterally and there is a bonafide dispute between the parties and the said dispute is subject to arbitration. The appellant averred that due to the notices of termination, only appellant is entitled to rescind the contract and seek for appropriate damages. Appellant averred that taking advantage of their dominant position the 1st respondent threatened to invoke the bank guarantee without showing any actual loss or damage caused. Stating that the appellant is intending to initiate arbitration proceedings and that appellant has a prima facie case, appellant has filed applications under Sections 9 of Arbitration and Conciliation Act. (vii) The 1st respondent resisted the applications contending as follows: After the letter of acceptance was given, the appellant sought for permission for new locations and in the mean time the 1st respondent received notice in W.P .No.7143 of 2006 on 22.4.2008 directing to remove all hoardings covering the facade of historic buildings in Chennai including Chennai Central and Egmore Railway Stations and therefore the acceptance was kept in abeyance. It was further stated that suspension was only in respect of one location and in respect of other locations, the 1st respondent directed the appellant to pay licence fee. In respect of the said location (facade of the building), the alternative places were shown at the entry point in platform No.6 of the Chennai Central Railway Station and near the exit of the car parking area in Egmore Railway Station. A fresh letter of acceptance was issued with advice to pay the licence fee and therefore there was no loss caused to the appellant and the appellant should have commenced the work immediately. According to the 1st respondent, by virtue of change of one location due to the Order of the High Court, the commencement of contract in respect of other two locations was not affected and as per the terms of the tender conditions, only 30 days time was granted for the purpose of execution of the contract and therefore the contract period was fixed from 28.8.2008 to 27.8.2011 for Chennai Central and from 28.10.2008 to 27.10.2011 for Egmore. Due to non-payment of licence fee for the second year and non-signing of the copy of the agreement, the Administration issued show clause notice and the reply received was not acceptable and therefore the contract was terminated on 17.3.2010 and final notice was sent to clear the dues. After the contract was terminated, the administration took steps to enforce the bank guarantee by writing to the 2nd respondent – IDBI Bank on 12.4.2010, but the appellant requested for 14 days time for making payment and in view of the same, the 1st respondent requested IDBI https://hcservices.ecourts.gov.in/hcservices/ Bank to wait until further advice. Subsequently, the appellant requested 15 days time and finding that it was only dilatory tactics the 1st respondent sent a demand in writing to IDBI Bank to enforce the bank guarantee and credit the same into Railway account. The 1st respondent further alleged that the appellant has not given any proper notice of arbitration proceedings. According to the 1st respondent, that even after adjusting bank guarantee, amount of Rs.22,39,427/- is still outstanding for Chennai Central and Rs.8,77,200/- for Egmore. 3. After referring to irrevocable bank guarantee furnished by 1st respondent and extracting clauses 10(b) 10(e) of the Tender notification, the learned single Judge held that as per clause 11, failure on the part of the contractor in paying yearly licence fee will be treated as breach of contract and the Administration can either impose fine or terminate the contract forfeiting the amount without prejudice to the claim of damages. After extracting the terms of Bank guarantee and finding that Bank guarantee is irrevocable and unconditional, the learned single Judge further held that notwithstanding any dispute raised in the contract or suit, the liability of the Bank is absolute and unequivocal. After referring to the various decisions of the Supreme Court viz., MAHATMA GANDHI SAHAKRA SAKKARE KARKHARNE VS. NATIONAL HEAVY ENGINEERING CO.OP.LTD., ((2007) 6SCC 470) and VINITEC ELECTRONICS PRIVATE LIMITED VS. HCL INFOSYSTEMS LTD., ((2008) 1 SCC 544) and other decisions, the learned single Judge held that for granting injunction against encashment of unconditional bank guarantee, the two exceptional instances for granting injunction against invocation of Bank guarantee viz., (i) fraud and (ii) irretrievable injury are not made out by the appellant, the learned single Judge declined to grant injunction. The learned single Judge further observed that in the absence of any plea of fraud in obtaining Bank guarantee and when the terms of Bank guarantee are independent, the appellant is not entitled for the injunction claimed in the applications. 4. Being aggrieved by the refusal to grant injunction, the appellants have preferred these appeals. The learned counsel for the appellant strenuously contended that the 1st respondent has wantonly suppressed the order passed by the High Court of Madras in W.P.No.7143 of 2006 prohibiting the installation of LED display on the facade of the Station Buildings, which were heritage building. It was further contended that re-location of the place for installation of LED screens caused hardship and delay in commencement of installation and 1st respondent is guilty of suppressio veri and suggestio false and is not entitled to invoke the bank guarantee and encash the same. The learned counsel would further contend that the learned judge failed to note that the "start date" or date of commencement of the contract was never resolved between the parties despite several representations made by the appellant and 1st respondent arbitrarily fixed the contract period of three years i.e., from 28.8.2008 to 27.8.2011 for Chennai Central and from 28.10.2008 to 27.10.2011 for Egmore and fixed commencement of contract as 27.8.2008 for Central Station and 28.10.2008 for Egmore Station and thus the order of termination is unilateral and tinged with malafides. It was further contended that the learned Judge failed to note that the appellant has invoked the arbitration clause in the https://hcservices.ecourts.gov.in/hcservices/ contract to settle the dispute, but however, the 1st respondent, being the appointing authority, has not honoured the request and the 1st respondent has failed to appoint an arbitrator within 30 days and since the 1st respondent has failed to perform their obligation, the appellant is entitled to the interim injunction. In so far as encashment of bank guarantee, it was submitted that the appellant has demonstrated that fraud was played on them and in the event of bank guarantee is encashed, irretrievable injury would be caused to the appellant and therefore the learned single Judge ought to have granted interim injunction. 5. Contending that economic duress amounting to coercion and special equities, arisen from a particular situation like fraud, irretrievable injustice are some of the recognised exceptions available to the plaintiff seeking injunction, the learned counsel placed reliance upon a judgment of the single Judge of Bombay High Court in DAI-ICHI KARKARIA PVT.LTD., BOMBAY VS. OIL AND NATIONAL GAS COMMISSION, (AIR 1992 BOMBAY 309). It was further submitted that the Bank guarantee is a conditional one and unless the condition precedent for enforcement of the bank guarantee is satisfied, the appellant cannot be permitted to invoke the bank guarantee. Reliance was placed upon MAHATMA GANDHI SAHAKRA SAKKARE KARKHARNE VS. NATIONAL HEAVY ENGINEERING CO.OP.LTD., ((2007) 6 SCC 470). 6. Mr.Vellaisamy, learned counsel for the 1st respondent submitted that since the appellant has not paid the licence fee at the start of the second year nor had executed the agreement, as per clause 10(a) of General conditions of the tender and on account of failure of the terms, Railway Administration has rightly terminated the contract reserving its right to dispose of all the materials. It was further submitted that the appellant had issued two performance bank guarantees – BG.No.20080051BGPO321 dated 22.9.2008 for Rs.6,00,000/- for Chennai Central and B.G.No.20081291BGP0002 dated 7.2.2008 for Rs.2,77,200/- for Egmore Railway Station and the Bank guarantees were invoked by the 1st respondent and since no injunction was granted Bank had released the amount by way of Pay Order dated 29.12.2010 for Rs.6,00,000/- for Chennai Central and Rs.2,77,200/- for Egmore Railway Stations. The learned counsel would further submit that since the Bank guarantee amounts were already released to the 1st respondent and in view of the subsequent development the present appeals are not maintainable against the 1st respondent. 7. There is no denying that the agreement contains arbitration clause. Clause 21(1)(i) of the General Conditions of Contract deals with Demand for Arbitration. As per the said clause, in the event of any dispute or difference between the parties as to the construction or operation of the contract or the respective rights and liabilities of the parties on any matter in question, dispute or difference on any account, on demand, as stated in the said clause, the dispute or difference be referred to arbitration. 8. In the instant case, differences have arisen between parties as to the "start date" and as to the "validity of termination of the https://hcservices.ecourts.gov.in/hcservices/ contract". As pointed out earlier, the appellant offered for installation and operation of 3 Nos. of LED screens at Chennai Central Railway Station for a period of three years at a licence fee of Rs.1,20,00,000/- (Rs.40,00,000/- for each year) apart from security deposit of Rs.6,00,000/- and Performance Guarantee of Rs.6,00,000/- and the same was accepted by the Southern Railway by its communication dated 11.4.2008. As per the said communication, the contract period will commence from the date of actual display of advertisement or the 30th day from the date of acceptance of the contract whichever is earlier. In so far as Egmore, for installation of 2 LED screens, the appellant offered licencee fee of Rs.55,44,000/- (Rs.18,48,000/- for each year), security deposit of Rs.2,77,200/- and performance guarantee of Rs.2,77,200/-. 9. By its letter dated 15.5.2008, the appellant had sent "Letter of Acceptance". As stated above, the contract period will commence from the date of actual display of advertisement or the 30th day from the date of acceptance of the contract (15.5.2008), which ever is earlier. But by the letter dated 17.6.2008, the 1st respondent informed the appellant that owing to sudden developments arising out of the proceedings in W.P.No.7143 of 2006, the Divisional Office is constrained to temporarily suspend the acceptance of appellant's offer made in respect of the advertisement location on the top of the Station Buildings at Chennai Central and Egmore and calling upon the appellant to pay proportionate licence fee of Rs.32,72,727/- for two locations in Chennai Central. 10. Again by its letter dated 30.7.2008, the 1st respondent has re-fixed the locations as stated in paragraph No.2(ii). Likewise, for Egmore Station, the location was re-fixed i.e., instead of facade of the Station, it was relocated near the exit of the car parking area. After relocation of the area for Chennai Central, on 19.8.2008, the appellant has paid the first year licence fee of Rs.40,00,000/- for the period 2008-2009 and also the security deposit for the said period. Submission of Performance Guarantee as per Clause 10(b) of General Conditions of the tender reads as under: "The successful tenderer should give a Performance Guarantee in the form of an irrevocable bank guarantee amounting to 5% of the total contract value worked out for three years. The bank guarantee should be valid up to 6 months in excess of the expiry of the contract period." 11. In compliance with Clause 10(b), the appellant submitted Performance Bank Guarantee for Chennai Central dated 22.9.2008 issued by IDBI. In so far as Egmore, Bank guarantee dated 7.2.2008 was furnished by the appellant by its covering letter dated 14.2.2008. Thus, after the change of location, Performance of Bank Guarantee for Chennai Central was submitted by the appellant on 22.9.2008 and the 1st respondent – Southern Railway permitted the appellant to instal and operate 3 Nos. of LED screens at Chennai Central and 2 Nos. of LED screens at Chennai Egmore in the locations by its letter dated 29.9.2008. Since the appellants were permitted to execute the work and installation only on 29.9.2008, going by the earlier correspondences, https://hcservices.ecourts.gov.in/hcservices/ we feel from the said date i.e., 29.9.2008, 30 days time ought to have been given to the appellant to enable the appellant for installation of LED screens and execution of the work. We also feel that the date of expiry of 30 days from 29.9.2008 i.e., 28.10.2008 ought to have been fixed as the "start date". Notwithstanding the subsequent developments and change of locations, the 1st respondent appears to have fixed the "start date" for Chennai Central as 28.8.2008 itself. On the said date, Railways had not even given the permission to instal LED screens in re- fixed locations. Of course, for Egmore, the 1st respondent has fixed the "start date" as 28.10.2008, but according to the appellant, due to "natural force and certain unavoidable reasons", the work has been delayed and requested for extension of time for installation, which, of course, is a matter to be decided by the arbitrator. 12. According to the 1st Respondent, in W.P.No.7143 of 2006, and in the subsequent proceedings on 24.4.2008, the Madras High Court passed the orders for removing of hoardings covering facade of the historic buildings in Chennai Central and Chennai Egmore Railway Stations and Administration accordingly informed the Appellant of the developments. Further case of 1st respondent is that as the letter of acceptance for the other two locations remains unaffected by the orders of the High Court, it was only lawful for the 1st respondent to expect the appellant/licensee to execute the contract and complete the payment formalities as per the time frame given in the tender in respect of the other two locations. The merits of the contention of the 1st respondent is also a matter to be decided by the arbitrator. 13. After issuing show cause notice, by the letter dated 17.3.2010, the 1st respondent issued termination notice stating that:- (i) for Chennai Central, the contract period of three years has commenced from 28.8.2008 and that the second year of the contract period of three years commenced on 28.8.2009, but the appellant has not remitted the second year fee nor executed the agreement as per Clause 10(a) of the General conditions of the tender. (ii) The contract period for Egmore Chennai has commenced from 28.10.2008 and the second year of the contract period of three years commenced on 28.10.2009 and that the appellant had not remitted the second year licence fee and also not executed the agreement as per clause 10(a) of the General Conditions of the tender. 14. In response to the termination notice, the appellant had sent a detailed reply (dated 10.5.2010) stating that:- ➢In view of the flow of events and subsequent developments, appellant was repeatedly requesting the 1st respondent to revise terms of agreement and that hardship was caused due to the change of location and delay in issuing the letter granting permission. ➢The appellant could commence operations only on 29.12.2008 both in Chennai Central and Egmore stations. ➢Requesting to waive the charges for the period from 28.8.2008 https://hcservices.ecourts.gov.in/hcservices/ till 28.12.2008 in so far as Chennai Central Station is concerned and for the period from 28.10.2008 till 28.12.2008 in so far as Egmore Railway Station and to withdraw the termination notice. 15. Because of the change of location and the time taken in issuing the letter granting permission (29.9.2008), we are of the view that the appellant has genuine dispute as to:- (i) start date and (ii) validity of the termination notice, which are to be decided only by the arbitrator. According to the appellants, they had difficulties in erecting LED screens and that they have been corresponding with the 1st respondent seeking its guidance and compliance of further formalities and they have been requesting to revise the terms of contract. In our considered view, the appellant has made out a case for referring the matter to arbitration. 16. The learned single judge referred to various clauses in the tender notification and also referred to Clause 11, which deals with the termination and the said Clause 11 reads as under: "The Licence fee quoted for three years shall be divided into three equal parts and the first part should be paid for the first year in full, in advance before the commencement of the contract. The second part of the License fee shall be paid in full at the start of the Second year and third part should be paid in full at the start of the third year. Any failure in this regard will be reckoned as breach of contract on the part of the licensee and Railway Administration shall have the right to take action deemed fit including imposition of fine, termination of contract duly forfeiting the amounts paid in advance without prejudice to its rights to claim ascertained liquidated damages." Clause 16 deals with termination of the contract, which reads as under: "In the event of the successful Tenderer not complying with any of the conditions stipulated to the satisfaction of the Railway Administration, the Railway administration shall have the right to terminate the contract and take any action deemed fit including forfeiture of all amount paid in advance without prejudice to its right to claim damages from the successful Tenderer."