* IN THE HIGH COURT OF DELHI + FAO No.400/2007 National Highways Authority of India ........ Appellant through: Mr. Sandeep Sethi, Sr. Advocate, Mr. A.S.Chandiok, Sr. Advocate with Mr. Kishan Kumar, Mr. Lakshay Sawhney, Ms. Shikha Tandon and Mr. Amit Kumar, Advocates VERSUS ELSAMEX-TWS-SNC JOINT VENTURE ........ Respondent through: Mr. Dushyant A.Dave, Sr. Advocate, Mr. Rajiv Nayyar, Sr. Advocate with Ms. Kiran Suri, Mr. Purvesh, Mr. Anirudh, Ms. Aparna and Ms. Niharika, Advocates DATE OF DECISION: % 28.04.2008 CORAM: Hon'ble Mr.Justice Pradeep Nandrajog 1. Whether reporters of local papers may be allowed to see the judgment? Yes 2. To be referred to the Reporter or not? Yes 3. Whether judgment should be reported in Digest? Yes : PRADEEP NANDRAJOG, J. 1. Yet another instance of an injunction being sought against a beneficiary who sought to enforce it's right under bank guarantee(s). 2. NH-5 in the State of Orissa from Km 136.5 to Km 199.141 has run into a road block. Excluding a stretch of 3.799 Km covering major bridges, the work of 4/6 lanning was FAO No.400/2007 Page No.1 of 50 awarded by NHAI to ELSAMEX-TWS-SNC Joint Venture (hereinafter referred to as the contractor). The contract was awarded on 5.3.2001. 33 months was the completion time i.e. date of completion was 3.2.2004. 3. Under the contract the contractor was to furnish a performance guarantee and was entitled to receive mobilization advance and equipment advance but the same was to be secured under bank guarantees in favour of NHAI. 5 guarantees issued by various banks were submitted by the contractor favouring NHAI on various dates. 4. Work could not be completed within the completion period. On 19.8.2005 a supplementary agreement was executed modifying/substituting certain clauses of the original contract, contents whereof being not relevant for adjudication are not being noted. 5. The contractor justified delay on various factors not attributable to it, like non availability of land free from encumbrance, obstruction by local population, non completion of allied works by third parties etc. The contractor claimed escalation in prices of raw material consumed in the works and hence sought escalation in the price. NHAI denied the same. But the work continued without any consensus being reached. 6. The contract contained an arbitration clause. The FAO No.400/2007 Page No.2 of 50 contractor invoked the same. On 23.11.2005 arbitration commenced with the constitution of the arbitral tribunal. The work continued because parties agreed that pending resolution of the dispute by the arbitral tribunal the same should continue. 7. The month of April 2006 was reached. The arbitral tribunal made no headway. The contractor stated that it had no funds to continue with the work. It claimed complete drying up of resources. To facilitate the completion of the work a temporary solution was found. NHAI agreed to advance money to the contractor by labeling the same 'Discretionary Advance'. On 2.5.2006 a supplementary agreement was executed under which the scheduled date of completion was shifted to June 2007 and additional discretionary advance was agreed to be paid. The discretionary advance was agreed to be secured in favour of NHAI by and under bank guarantees. The period of recovery of all advances was deferred. 8. Notwithstanding additional funds flowing to the coffers of the contractor from NHAI, the work progressed at a snails pace. According to the contractor the escalation in the price of raw material was far in excess of the advances received by it and hence the slow pace. The contractor constantly demanded price revision. On 5.9.2006 a high level FAO No.400/2007 Page No.3 of 50 meeting was held in which it was noted that the engineer appointed to monitor the contract had recommended the estimated date of completion to be 31.12.2007 and that the arbitral tribunal had published an award in favour of the contractor allowing price escalation as per the award. In the meeting it was decided that every effort would be made to expedite the work and that NHAI would release additional funds as per schedule agreed. The schedule appended to the minutes of the meeting dated 5.9.2006 contemplated NHAI releasing Rs.24.1 crores as follows:- A. September 2006 Rs.10 crores B. January, Feb. and March 2007 Rs.2 crores each month C. April and May 2007 Rs.2.3 crores per month D. June 2007 Rs.1.9 crores E. July 2007 Rs.1 crores F. August 2007 Rs.60 lacs 9. NHAI did not make payment under the award published by the arbitral tribunal and challenged the same by filing objections under Section 34 of the Arbitration and Conciliation Act 1996. The said objections are still pending consideration on the original side of this court. 10. The contractor received further advances under the revised agreement as minuted on 5.9.2006 but claimed that FAO No.400/2007 Page No.4 of 50 the price escalation was so sharp that even within the increased funds it could not complete the work. Needless to state as and when further payments were advanced by NHAI to the contractor, bank guarantees were submitted by the contractor in favour of NHAI. On 26.4.2007 another agreement, supplementing the existed agreement was executed between the parties. It was recorded therein that Rs.10 crores would be further advanced as discretionary advance to the contractor by NHAI out of which Rs.6 crores would be in the form of secured material and Rs.4 crores in the shape of cash shall be paid. It was further agreed that recovery of discretionary advances shall be deferred up to June 2007. 11. By April 2007, 24 bank guarantees came to be furnished by the contractor in favour of NHAI. Recorded in tabular form, a birds eye view of the guarantees would be:- S.No. Purpose Bank Guarantee No. Amount (in Rs.) 1. Performance Security 31/2001 195185817 2. Mobilization Advance 52/2004 48796455 3. Mobilization Advance 53/2004 48796455 4. Equipment Advance 134/2001 48800000 FAO No.400/2007 Page No.5 of 50 5. Equipment Advance 176/2001 48800000 6. Payment against Price Escalation 28/2004 4100000 7. Payment against Price Escalation 11/2004 7550000 8. Payment against Price Escalation 54/2006 7824050 9. Payment against Price Escalation 92/2006 23485488 10. Discretionary Advance 42/2004 48800000 11. Discretionary Advance 43/2004 48700000 12. Discretionary Advance 69/2004 5250000 13. Discretionary Advance 239/2004 2600000 14. Discretionary Advance 93/2006 8270859 15. Discretionary Advance 151/2005 70000000 16. Discretionary Advance 202/2005 30000000 17. Discretionary Advance 154/2006 50000000 18. Discretionary Advance 155/2006 50000000 19. Discretionary Advance 52/2007 50000000 20. Discretionary Advance 53/2007 50000000 21. Discretionary Advance 0021707IFG000002 20000000 FAO No.400/2007 Page No.6 of 50 22. Discretionary Advance 20/2004 5000000 23. Discretionary Advance 46/2004 5830000 24. Discretionary Advance 111/2005 4147000 12. By April, 2007 the forth discretionary advance totalling Rs. 10 crores which had been sanctioned on 27.3.2007 was utilized in the form of Rs.4 crores being released directly to the contractor and Rs.4.9 crores paid on 7.5.2007 to various parties who had supplied raw material to the respondent. Unfortunately, not much work was performed even after April, 2007. On 16.8.2007 the contractor wrote a letter informing the appellant : now it has become impossible to further continue with the works unless NHAI makes escalation payments and consider revision of rates for the works carried out after the contract period..... 13. There was a stalemate. The contractor feared that the bank guarantees may be invoked. Since the arbitral tribunal had already been constituted to decide the dispute pertaining to escalation an application was filed under Section 17 of the Arbitration & Conciliation Act praying to the arbitral tribunal that NHAI be restrained from invoking the bank guarantees. FAO No.400/2007 Page No.7 of 50 14. It may be noted that on 5.8.2006 the arbitral tribunal had passed an award in favour of the contractor pertaining to one set of claims relating to escalation as per which approximately Rs.9.37 crores became payable by NHAI to the contractor. To put it differently, as per the award Rs.9.37 crores advanced by NHAI to the contractor under discretionary advance or under any other head would not be recoverable by NHAI and has to be adjusted for. 15. Vide order dated 25.10.2007 impugned in the instant appeal, the tribunal restrained NHAI from invoking or recovering any money under the bank guarantees. The finding by the arbitral tribunal is on the ground that special equities were shown entitling the contractor to a restraint order against the appellant. 16. Justifying a restraint order pertaining to the performance guarantee reason given by the arbitral tribunal is in para 11.2 of its order. It reads as under :- '11.2. Thus the validity of this performance security is upto the end of the defect liability period of 12 months after completion of the work. The work under the contract is not yet completed. Therefore the AT holds that it is premature at this stage to encash the bank guarantee given as performance security.' 17. Pertaining to the bank guarantees at Sr. Nos.2, 3, 4 and 5 of the chart reproduced in para 11 above, the relevant FAO No.400/2007 Page No.8 of 50 findings by the tribunal are as recorded in para 11.9 of the order which reads as under :- '11.9. In the light of the above facts, the AT finds that, having entered into supplementary agreement on 26.4.2007 and having fully known the stage of work on that date and the fact that the work could not progress during the ensuing months, there is no justifiable reason for the respondent as per the provision of the supplementary agreement and the contract to encash the bank guarantee at this stage such an action would be premature.' 18. Pertaining to the remaining guarantees the reasons given by the arbitral tribunal may be crystallized as under:- A. That an award had been published in favour of the contractor and that the issue of price escalation was pending further consideration before the arbitral tribunal and that the award pertaining to part period of escalation had not been set aside and was pending consideration before the court. B. Dispute being a subject matter of consideration before the arbitral tribunal no emergent cause existed to invoke the bank guarantees and hence invocation thereof was not justified. C. Under the last supplementary agreement, recovery of discretionary advances was deferred upto June, 2007 and the project engineer had recommended extension of time for completion of the contract upto 31.12.2007. That in April, 2007 when supplementary agreement was drawn on FAO No.400/2007 Page No.9 of 50 26.4.2007 it was in the knowledge of all that monsoon period was round the corner and that meaningful work could commence only after the monsoon was over. Thus the contractor could not be blamed for slow progress of work after April, 2007. D. That if bank guarantees were permitted to be encashed irretrievable harm would be caused to the claimants on account of the issuing banks liquidating collateral securities which would seriously impair the financial status of the contractor making it ineligible to participate in further tendering process and may even entail black listing of the contractor. 19. Shri Sandeep Sethi, learned Senior Counsel and Shri Amarjeet Singh Chandhiok, learned Senior Counsel who appeared for the appellant urged that entire process of reasoning of the arbitral tribunal is faulty and contrary to law. Learned counsel urged that it is settled law that a bank guarantee is independent of the main contract and enforcement of a claim under the guarantee has to be adjudicated upon with reference to the guarantee. Counsel urged that all the bank guarantees were unconditional, unequivocal and payable on demand, without protest or demur and hence unless it was pleaded and established that it was a FAO No.400/2007 Page No.10 of 50 case of a fraud of an egregious nature or that the money would be lost by the contractor irretrievably, the only 2 known exceptions to enforce a bank guarantee payable on demand, no injunction could be issued against the appellant. 20. Per contra, Shri Dushyant A. Dave learned Senior Counsel who appeared for the contractor urged that the power of the arbitrators under Section 17 of the Arbitration & Conciliation Act, 1996 is wider than the power of a Court under Order 39 Rule 1 and or Rule 2 of the Code of Civil Procedure, in that, pending adjudication of an arbitration claim the arbitrators can pass any order as an interim measure. Counsel urged that where a prima facie case exists, as held by the Hon'ble Supreme Court in the decision reported as 1990 (Suppl.) SCC 727 Wander Ltd. & Anr. Vs. Antox India Pvt. Ltd., an injunction must issue. 21. On merits, to show a prima facie case Shri Dushyant A. Dave learned Senior Counsel for the contractor referred to various letters written by the engineer (an independent agency) appointed under the contract who recommended not only price revision but even extension of time to the contractor to urge that it would be most unjust if the contractor was compelled to honour the bank guarantees. 22. Shri Sandeep Sethi, learned Senior Counsel for NHAI FAO No.400/2007 Page No.11 of 50 responded on the prima facie merits of the case by highlighting that the contractor having received further sum of Rs.10 crores in April, 2007 did no work in the months of April, May and June and hardly any work in the month of July and on 16.8.2007 notified the intention to abandon all works. Learned senior counsel highlighted, with reference to a letter dated 28.6.2007, that since November 2006 till April 2007 the monthly progress of work was virtually nil. Counsel pointed out that the said letter shows that as against an estimated value of work to be executed in said months in sum of Rs.41.34 crores, work worth only Rs.1.09 crores was executed. The letter dated 28.6.2007 is as under :- 'Date: 28th June 2007 To Mr.A.K.Parthy, Project Manager, Elsamex-TWS-SNC JV, Bidu Bazar, Balasore Sub: Shorfall in achievement of committed schedule during May and June 2007 Dear Mr.Parhy, The table hereunder shows the month-wise miserable achievements against the schedule from November 2006 to April 2007. It was dismal during November 06 to January 07 and Nill from February 07 to April 07. FAO No.400/2007 Page No.12 of 50 Nov' 06 Dec' 06 Jan'07 Feb'07 Mar'07 Ap'07 Total Scheduled (Rs. Crores) 2.84 5.27 7.55 8.30 8.67 8.71 41.34 Achieved (Rs. Crores) 0.49 0.48 0.12 0.00 0.00 0.00 1.09 Even then the 4th Discretionary Advance was sanctioned amounting to Rs.10.00 crores on 27th March 07 and out of which Rs.4.0 crores were issued to the Contractor on 26.04.2007 as cash and Rs.4.90 crores on 07.05.2007 in shape of materials. The Contractor committed before NJAI to close 13 gaps on NCW at a cost of Rs.4.00 crores and gave a programme to work on ECW for an amount of Rs.1.00 crore by June end. To out utter disappointment only one gap is closed on NCW and work to the tune of only Rs.26.26 lakhs on NCW and only Rs.44.19 lakhs on ECW by 27.06.2007 have been executed.' 23. As held by their Lordships of the Supreme Court in the decisions reported as 2002 4 SCC 105 Bhatia International Vs. Bulk Trading SA & Anr. and 2004 3 SCC 155 Firm Ashok Traders & Anr. Vs. Gurumukh Das Saluja & Ors. a court, under Section 9 of the Arbitration & Conciliation Act, 1996 and an arbitral tribunal under Section 17 of the said Act are empowered to pass interim orders in the nature of interim measure till disposal of a dispute before an arbitral tribunal. Their Lordships of the Hon'ble Supreme Court held that recourse to Section 9 or Section 17 requires status quo to be possibly maintained having regard to the fact that the parties FAO No.400/2007 Page No.13 of 50 understood the workability of the agreement in a particular manner and that interim directions should normally precede findings of a prima facie case with further consideration of balance of convenience and irreparable injury. 24. The observations of the Hon'ble Supreme Court in the afore-noted 2 decisions which were strongly relied upon by Sh Dushyant A. Dave, learned Senior counsel for the contractor, in my humble opinion, cannot extend to consideration of bank guarantee for the reason, law relating to bank guarantees stands well crystallized. Further, as would be noted hereinafter the dispute between the parties is not whether the guarantees have been invoked in terms thereof but relates to recognized exceptions in law where notwithstanding a bank guarantee being enforced on its terms a court or a tribunal would still restrain the guarantor from paying under the guarantee. 25. I do not find anything in the language of Section 17 of the Arbitration & Conciliation Act, 1996 which confers a wider power on the arbitral tribunal to issue interim orders vis- a-vis the power of a court to issue interim injunctions either under Order 39 Rule 1 and 2 of the Code of Civil Procedure or Section 9 of the Arbitration & Conciliation Act, 1996. 26. Decisions pertaining to interim injunctions issued by FAO No.400/2007 Page No.14 of 50 courts or by arbitral tribunals in relation to interim measures to be adopted in contractual disputes not involving a bank guarantee are wholly inapplicable when injunction against invocation or realization of money under a bank guarantee is in issue. The reason thereof is that pertaining to bank guarantees right to receive money conferred upon the beneficiary is as per the guarantee and if the guarantee is invoked in terms of the guarantee the beneficiary would be entitled to urge that nothing else other than consideration of the bank guarantee should go into the decision making process, hence the argument of the beneficiary to adopt the hands of policy would be very strong, nay indefeasible. But, as would be noted hereinafter, in equity, certain exceptions have been carved out by courts and issue has to be settled and decided only with reference to the said exceptions. 27. Since I am dealing with 24 bank guarantees I do not intend to reproduce the language of all 24 bank guarantees but note that each guarantee enjoins upon the issuing bank to pay under the respective guarantee the sum demanded by the beneficiary. I note that the guarantees specifically record that each guarantee is an unconditional bank guarantee. Some of the guarantees use the expressions 'without cavil or argument', 'without any demur, reservation, contest, recourse FAO No.400/2007 Page No.15 of 50 or protest' etc. 28. A feeble attempt was made by learned Senior Counsel for the contractor to urge that since the guarantees made a reference to the principal contract, the guarantees were not to be read in isolation and that the same had to be read with reference to the main contract, meaning thereby, the defaults under the principal contract had to be kept in view. 29. The argument needs to be noted and rejected for the simple reason nearly all bank guarantees, which this Court has come across, in the recitals refer to it being executed pursuant to a condition under the main contract obliging the contractor to furnish bank guarantees drawn on nationalized or scheduled banks. A recital in the bank guarantee to the effect that it is being issued pursuant to a term in the contract requiring a bank guarantee to be furnished would not mean that all terms of the contract get embodied in the terms of the bank guarantee. Unless a condition of a contract is made an integral part of the operative part of a bank guarantee the same cannot be read as a condition of the bank guarantee. 30. Holding that each and every bank guarantee is an unconditional bank guarantee I proceed to discuss the law relating to injuncting the beneficiary from receiving under the bank guarantee. FAO No.400/2007 Page No.16 of 50 31. The forensic battle fought at the bar centered on: what is the sweep of the expression special equity the span whereof entitles the guarantor to avoid payment under the guarantee. 32. 'Fraud', 'irretrievable injury' and 'special equity' are expressions found in a catena of judicial opinions penned by Learned and Honourable Judges and notwithstanding a plethora of case law on the subject, the debate goes on. 33. Where the guarantee is limited (on it's terms) we have no problem, for the enforcement of the guarantee has to be within the conditions (limitations) contained in the guarantee. But where a guarantee is couched in a language which makes it unconditional and the guarantor binds himself to give money to the beneficiary on demand, without demur or protest; and the guarantor is not even permitted to probe into the dispute between the parties, an area of fertile litigation has grown because most common law jurisdictions recognize primacy to justice as an integral part of law enforcement. 34. Though opinions on bank guarantees span half a century, since I do not intend to make a catalogue, I plunge mid-stream and commence my discussion with the celebrated decision of the Hon'ble Supreme Court reported as 1987 (2) U.P.Coop.Federation Ltd. Vs. Singh Consultants & Engrs. (P) FAO No.400/2007 Page No.17 of 50 Ltd. I do so, as said decision has noted the prior landmark decisions on the subject and throws considerable light on what would be special circumstances or special equity justifying issuance of an injunction to restrain the bank from paying under the guarantee issued by it. I also note that the decision has been constantly followed in all later decision of the Hon'ble Supreme Court. 35. 2 guarantees in sum of Rs.16.5 lacs and Rs.33 lacs, being a performance guarantee and security for monies advanced respectively were the subject matter before the Hon'ble Supreme Court in an action for injunction. The operative part of the 2 guarantees, inter alia, provided as under: (1 st Guarantee ) “NOW, THEREFORE, the bank hereby guarantees to make unconditional payment of Rs.16.5 lacs (Rupees sixteen lacs fifty thousand only) to the Federation on demand at its office at Lucknow without any further question or reference to the seller on the seller's failure to fulfil the terms of the sale on the following terms and conditions.” x x x x x x x x x x x x (2 nd Guarantee ) “Now, therefore, in consideration of the aforesaid advance of the said sum of Rs.33 lacs (Rupees thirty-three lacs only) to be paid by the PCF tot he seller as aforesaid the Bank hereby agrees and guarantees to make unconditionally immediate FAO No.400/2007 Page No.18 of 50 payment to the Federation as its office at lucknow of the sum of Rs.33 lacs (Rupees thirty three lacs only) or any part thereof as the case may be, due to the PCF from the seller at any time on receipt of the notice of demand without any question or reference to the PCF or to the seller on the seller's failure to fulfil the terms of the said advance on the following terms and conditions.” 36. Holding that the language of the 2 guarantees made it crystal clear that the guarantees were unconditional, the Hon'ble Supreme Court proceeded to note prior decisions and culled out the exceptions whereunder a Court would be justified in issuing an injunction restraining invocation or payment under an unconditional guarantee. 37. It was noted that the letter of credit has been developed over hundreds of years of international trade. It was most commonly used in conjunction with the sale of goods between geographically distant parties. That it was intended to facilitate the transfer of goods between distant and unfamiliar buyer and unknown customer. It was noted that it was difficult for a buyer to pay for goods prior to their delivery. The bank's letter of credit came into existence to bridge the gap. In such transactions, the seller (beneficiary) receives payment from issuing bank when he presents a demand as per terms of the documents. The bank must pay if the documents are in order and the terms of credit are satisfied. The bank FAO No.400/2007 Page No.19 of 50 was not allowed to determine whether the